Australian taxpayers on the hook to pay Chevron more than $500m to clean up oil wells | Oil and gas companies

The Australian government faces having to pay hundreds of millions of dollars to the American oil and gas company Chevron to help it clean up oil wells on Barrow Island, in Western Australia, under a deal made in the 1980s.

The Western Australian government also faces a hefty bill – estimated to be $129m – to help repair an offshore nature reserve where about 900 wells have been drilled over the past six decades.

Chevron says it has paid more than $1bn in royalties – about $3 a barrel – for oil and gas extracted from beneath the island, which is about 70km off the state’s north-west coast. Under state legislation written especially for the project, federal and state taxpayers will have to pay them back about nearly half that amount to help cover remediation costs.

A WA government minute obtained by independent news site Boiling Cold under freedom-of-information laws suggests it will cost Chevron and its venture partners more than $2.3bn to fix the site, which has produced 335m barrels of oil.

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The legislation stipulates that the company would pay 40% of the difference between Chevron’s sales revenue and operational costs, with 75% of the payment going to the federal government and 25% to WA.

The legislation stated that once production ended at the site the calculation would operate in reverse. Chevron and its partners, ExxonMobil and Santos, would be refunded 40% of what they spent on decommissioning the oilfield infrastructure for the following three years, with the federal and state governments again splitting what they paid back 75%-25%.

Oil production at the site stopped in May. According to the newly released documents, the WA Department of Mines, Industry Regulation and Safety did not have an estimate of the expected cost until Nine’s WA Today reported on the issue in 2022. That report suggested Chevron could spend $1.3bn on the clean-up in the covered timeframe, triggering a cost to the state of about $129m.

Officials said they intended to “approach Chevron directly to request cost estimates”. The documents do not show what those discussions yielded.

Under the terms of the deal, the commonwealth would be required to pay three times as much as the state government, implying it could face a bill of $387m. It suggests a total payment to Chevron and its partners of $516m. The final sum could be higher if Chevron spends more on the clean-up before 2028 to maximise its royalty refund.

In response to questions about the expected cost, a WA department spokesman said the refund cost was not included in the state budget forward estimates – covering the next four years – but the potential liability was recognised as “a non-quantifiable contingent liability” in an annual report on state finances. The finances report acknowledged that “a significant amount of royalties will need to be refunded” after Chevron paid the costs and the state verified and audited them.

The federal Department of Industry, Science and Resources declined to comment. It is waiting on a WA government assessment of what refund is required under state law.

The clean-up cost may include dealing with a gas leak near old Barrow Island oil wells that Chevron reported to the state regulator in May. The company said an unknown amount of gas was seeping to the surface near its old Barrow Island oil wells.

A Chevron spokesman said data analysis had indicated “an environmental risk from the subsurface migration of hydrocarbons, primarily gas, to groundwater and the surface”. They said the company had informed regulators and would work with them to “develop and implement a comprehensive investigation program”.

The spokesperson said the company took its stewardship of Barrow Island seriously and was “committed to the responsible management of environmental impacts and risks at our sites in accordance with relevant laws and regulations”.

Mark Ogge, from the Australia Institute, said the revelation showed the “extraordinary scale of the mismanagement of Australia’s gas resources by our governments”.

“Not only have our governments been giving our resources away for free and failing to tax these foreign-owned corporations properly but they are also handing back much of the meagre royalties they have collected,” he said.

“This is entirely the responsibility of the Australian and WA governments. They had 40 years to fix this terrible deal but they have chosen not to. They need to be held to account.”

A WA government database sets out the scale of the required clean-up. About 700 of the wells on the island are more than 40 years old. Up to four drilling rigs will be used to plug the wells before they are abandoned. The procedure is designed to permanently seal the oil and gas underground, usually using cement. Remediation will be needed at 16 sites contaminated with hydrocarbons.

The Gorgon liquefied natural gas plant, also operated by Chevron, will remain on the island after the wells are decommissioned.