Nicholas Ross-McCall, Huw Thomas

6.6 Environmental issues

The Equator Principles are frequently invoked as a condition precedent and/or
covenant requirement in borrowing base facilities, although there is some debate
over whether they technically apply to portfolio financings with more than one
asset. They seek to regulate the approach of financial institutions to environmental
issues and are a voluntary code of conduct; however, most commercial banks active
in the reserve-based lending market have agreed to abide by them. They are in effect
a recognition that lenders are able to influence the environmental aspects of a
project. They are substantially based on World Bank/IFC policies and apply to
projects with a total capital cost of more than $10 million.
The Equator Principles divide projects into three categories based on their likely
environmental impact and, depending on categorisation, an environmental impact
assessment (EIA) may be required. The environmental impact assessment examines
potential negative and positive environmental impacts and recommends measures
to prevent, minimise, or compensate for them and to improve environmental
performance. Affected groups including indigenous people and local NGOs must be
consulted as part of the process and the final report must be published. In addition,
an environmental management plan (EMP) may be required, which must draw on
the conclusions of the environmental impact assessment and address mitigation,
action plans, monitoring, management of risk, and time schedules.
Lenders may impose documentary requirements such as proof of compliance
with the environmental management plan and may require an independent
environmental expert to be appointed to report on compliances.

6.7 Decommissioning
In certain petroleum basins, particularly in the UK continental shelf, the costs of
decommissioning has become a major issue on debt financings, especially acquisition
financing given that vendors, co-venturers or governmental authorities may require
security to be given by new parties to the licence or production sharing contract.
The decommissioning of UK oil and gas assets is primarily governed by the
Petroleum Act 1998. Section 29 entitles the Department for Business, Enterprise and
Regulatory Reform (BERR previously the Department for Trade and Industry, but
whose relevant functions are in future to be carried out by the new Department of
Energy and Climate Change (DECC)) to serve notice on all parties then associated
with an asset, requiring them to submit a decommissioning programme for approval
and implement it. Under Section 34, BERR/DECC can also require a wider group,
including recalling any former Section 29 holders or associated companies of Section
29 holders, to share the responsibility. As past licensees can be brought back to share
liability for decommissioning, the regime appears tough, but the politically
unacceptable alternative is that the cost could fall on the taxpayer. The regime has
become a serious barrier to asset trading in the UK continental shelf despite
initiatives to encourage new entrants, such as fallow field and promote licences.
Many commentators believe the regime is unjustified, as the costs of securitisation
to the UK continental shelf industry is far greater than any potential default
liabilities which might arise in relation to decommissioning costs.

83