Financial capability and security for petroleum decommissioning

Permit and licence holders must show they have the financial capability to cover the cost of decommissioning. They must also have a financial security arrangement in place and approved by the Minister to cover these costs.

Financial capability assessment

A financial capability assessment reviews a permit or licence holder’s financial circumstances against the expected costs of decommissioning. Its purpose is to assess whether the permit or licence holder is highly likely to meet these costs when decommissioning is required.

The outcome of a financial capability assessment informs decisions about the level and type of financial security a permit or licence holder may be required to provide through an acceptable financial security arrangement.

The type of information gathered and considered as part of a financial capability assessment could include the permit or licence holders:

overall financial health and performance
current cashflow
anticipated financial position.

The Minister may carry out a financial capability assessment at any time during the life of a permit or licence. Assessments may also be repeated if circumstances change, such as change of control of the permit or licence if the company is sold.

The financial capability assessment process

When carrying out a financial capability assessment, the Minister may consider a range of information to understand the current financial position of the permit or licence holder and their ability to generate sufficient funds over time to meet their decommissioning obligations.

This can include:

field development plans
asset registers
decommissioning plans
decommissioning cost estimates
financial performance monitoring information
any other relevant information the Minister may consider relevant.

The assessment considers both quantitative and qualitative factors to assess financial capability.

It applies a quantitative scoring method, which combines:

point-in-time financial metrics (such as solvency ratios, liquidity, profitability, debt coverage, and operating margins) to assess whether the organisation has sufficient cash and is financially stable.
cashflow generation over the remaining life of the permit.

These measures help identify current risks or weaknesses that could affect the permit holder’s ability to meet its future obligations.

The assessment may then be adjusted, based on qualitative factors and information. These can include factors that may affect the permit holder’s ability to meet its financial and non-financial forecasts (such as audit findings, emerging risks, financial disclosures, parent company support, forecast accuracy, and changes in reserves, costs, or pricing assumptions or any other information that is relevant).

The outcome of a financial capability assessment is used to inform decisions about whether financial security is required, and if so, the appropriate level and form of that security.

Monitoring financial capability

MBIE continually monitors the financial capability of permit and licence holders to ensure they can meet their decommissioning obligations over time.

This monitoring helps determine whether a full financial capability assessment is needed, and how frequently it should be carried out. Where monitoring indicates that a holder is highly likely to maintain sufficient financial capability, a full assessment is typically undertaken every 3 to 5 years. Where risks or potential weaknesses are identified, assessment may be undertaken more frequently, including annually.

For further information, descriptions and specific examples of the metrics used to assess financial capability, see the full guidelines:

Financial capability guidelines — Petroleum decommissioning [PDF 896KB]

Financial security arrangement

A financial security arrangement refers to one or more financial securities that the Minister can impose to provide sufficient assurance that a permit or licence holder can meet their obligations when needed.

A financial security arrangement can:

include one or more types of financial security, such as a parent company guarantee and cash held in escrow
cover one or more permits or licences
be provided by one or more parties, such as permit holders, participants, or other persons
combine different types of financial security so they work together as part of one overall arrangement.

Acceptable financial security arrangements

The Minister assesses a proposed financial security arrangement to determine whether it provides an acceptable level of security.

Once approved, it becomes an acceptable financial security arrangement. An acceptable financial security arrangement may not always cover the full estimated cost of decommissioning, as long as it gives the Minister confidence that decommissioning costs will be met when required.

The amount required is usually based on the estimated cost of decommissioning. This amount can be changed to take account of the holder’s financial strength, any tax or royalty refunds, and decisions made by the Minister. Permit or licence holders can ask to use some or all of the security money to help pay for their decommissioning work.

An acceptable financial security arrangement must:

be established, and held, in a way that meets legislative and programme requirements
be tailored to the specific circumstances of each permit or licence, rather than applying a one-size-fits-all approach
take into account the results of any financial capability assessment.

The Minister is likely to accept one or more of the following types of financial security:

escrow accounts
bank securities
investment funds
parent company guarantees
Section 97(5) securities.

Escrow accounts

Escrow accounts are managed by a Custodian such as a bank or a law firm, independent of the permit or licence holder and the Government. The Custodian looks after the money but doesn’t own it or decide how it gets spent.

Funds held in an escrow account may be invested in other things such as

Cash investments – like fixed interest deposits.
Government debt securities – including things like Treasury and local government bonds.
Managed investment schemes – that invest in a mix of schemes rather than just one.

For further detail and more information see the full Financial securities guidelines — Petroleum decommissioning.

Bank Securities

Bank securities are issued by a bank or financial institution, such as an insurance company. A permit or licence holder may apply to the financial institution, which assesses the financial strength of the company against their expected decommissioning costs.

If the financial institution is satisfied, it issues a binding legal agreement that acts as the financial security. Examples of bank securities include:

letters of credit
performance bonds
bank guarantees
surety bonds.

Investment funds

As decommissioning can occur decades after petroleum production begins, the Government may accept an escrow account invested in low risk, approved investment funds as part of a financial security arrangement. Regular contributions must be paid into the account over time, with the objective of maintaining or growing its value while protecting principal.

These funds must be:

held by an independent custodian
legally separated from the permit or licence holder’s assets
protected if the permit or licence holder becomes insolvent.

Parent company guarantees

A parent company is an entity that ultimately owns or controls a permit participant or permit operator, usually through majority shareholding or management design.

A parent company guarantee is a legally binding commitment given by the parent company to the Crown that it will meet the decommissioning obligations of the permit or licence holder if required. Parent company guarantees are usually provided alongside another form of financial security.

Bonds and Monetary deposits security under Section 97(5)

Bonds and monetary deposits can be paid to MBIE on behalf of the Government and be used to provide financial security.

These funds must be:

paid in cash to MBIE by the permit or licence holder
held in trust by MBIE and not used as revenue
ring-fenced and only used if the permit holder fails to meet their decommissioning obligations or otherwise under Ministerial direction.

The funds will be managed in accordance with the Public Finance Act 1989 and relevant sections of the Crown Minerals Act 1991.

For further details and more information see

Crown Minerals Act 1991 — New Zealand Legislation

Other securities

Other kinds of financial security may be considered on a case-by-case basis by the Minister using criteria outlined in the Crown Minerals Act and Programmes.

Holding, calculating and using financial security

Information on how Financial Securities should be held, the determining amounts, use of financial security during decommissioning and release of financial security after decommissioning is further detailed in the Financial security guidelines:

Financial securities guidelines — Petroleum decommissioning [PDF 1MB]

Financial Securities for Petroleum Exploration Permits

The amount of financial security required for a petroleum exploration permit depends on whether decommissioning is needed:

if decommissioning is not required, a nominal level of security is usually adequate
if decommissioning is required, the financial security is assessed in the same way as for a petroleum mining permit.

For more information and further details see