They Say Nothing Lasts Forever, but What If Decommissioning Does?

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BSEE_logo-300x214The looming decommissioning liabilities of offshore energy producers have been a focus of the federal government in recent years. One recent case out of the U.S. Court of Federal Claims, Taylor Energy v. United States, highlights the tension between the federal government’s desire to maintain financial security for decommissioning activities, and that of an operator whose security is tied up indefinitely while the government awaits technological advances to allow for safe decommissioning.

The case relates to a trust agreement between Taylor Energy and the United States, established to secure Taylor’s decommissioning liabilities for 28 wells in the Gulf of Mexico. Taylor completed certain decommissioning work for which it was reimbursed by the trust. However, with over $400 million remaining in the trust, Taylor and the Bureau of Safety and Environmental Enforcement (BSEE) concluded that the ecological benefits of further decommissioning would be outweighed by the ecological risks. But despite recognizing that the limitations of current technology made the environmental impacts of further decommissioning work unjustifiable, the BSEE declined to release Taylor from its decommissioning obligations and instead decided to await “changes in technology and a better understanding of the undersea environment.” Because Taylor’s decommissioning obligations remained in place, the U.S. refused to release the remaining funds in the trust.

Taylor claimed that the United States should release the remaining funds in the trust because “decommissioning the remaining wells is not ‘currently technologically feasible.’” Taylor asserted that Louisiana law applied to the trust agreement, and that under Louisiana law every contract must be completed within an ascertainable term. By holding the trust funds until decommissioning was complete, Taylor argued that the government was essentially holding the funds in perpetuity given the technological infeasibility of completing decommissioning. Taylor also asserted that the agreement was premised on an impossibility (the full decommissioning of the wells), and/or a mutual mistake of the parties (that the wells could be decommissioned).

The Court of Federal Claims dismissed the case for failure to state a claim, finding that to the extent Louisiana law applies (a question that the Court did not decide), it is Louisiana trust law, and not contract law, that controlled. Under Louisiana trust law, a trust with an indefinite term does not expire until 50 years after its creation. The Court also dismissed Taylor’s claims relating to mutual mistake and impossibility. The Court said that the U.S. did not find that decommissioning was an “impossibility,” but rather, stated that more studies were needed. And, the Court said that Federal law, not Louisiana law, applied to the underlying decommissioning obligations that the trust agreement was intended to secure, and therefore Taylor could not state a Louisiana law claim for impossibility or mutual mistake regarding performance of the decommissioning obligations.

While Taylor’s claims before the Court of Federal Claims were limited to the trust agreement terms and application of Louisiana law, the implication is that a party’s federal decommissioning obligations (and security as well) may be owed indefinitely while the government awaits advances in technology to allow for decommissioning.

The case is Taylor Energy Co LLC v. United States, No. 1:2016cv00012 (Fed. Cl. April 9, 2019).

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