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The growing importance of clearer decommissioning costs for the UK offshore industry

Lifecycle stage
Decommissioning

THE NEED TO SORT AGREEMENTS

To add to the data uncertainty, there has been a growing trend of operator agreements failing to cover the costs of decommissioning, and even worse still, operators not knowing what they are liable for – a trend highlighted in a recent article on Oil Voice.

For most UKCS assets one or more Joint Operating Agreement (JOA) will have been applied meaning liability for decommissioning would have been shared. With a complex history of mergers and transfers in the UKCS alone, the question of who is now solely reliable for decommissioning costs has become a challenge to trace back.

In an attempt to grasp control, the introduction of decommissioning security agreements (DSAs) have been implemented to all operators and rig owners in an attempt to share the costs of decommissioning and provide mutual protection.

Despite this initiative to ensure that guaranteed funds would cover decommissioning projects, “it remains to be seen whether this objective will be attained. Certain industry commentators are concerned that there has been a failure to adequately monitor amounts paid by participants under DSAs” according to oil and gas legal experts.

HOW THE GOVERNMENT COULD HELP

It is very clear that work is needed to make decommissioning costs simpler for operators, as well as ensuring they have the necessary funds in place to carry out the projects. Is this something the Government could help with?

With their new found arms-length status, the UK Government’s Oil & Gas Authority are in prime position to help operators maximise economic recovery from the UKCS, but also encourage knowledge sharing and accurately review decommissioning costs in the region.

PwC has suggested in their latest report, A Sea Change, that the Government should consider supporting operators in their attempt to raise capital to complete decommissioning projects, after the failure of POAs and Decommissioning Security Agreement’s (DSAs). PwC says:

“The Government should consider setting up a decommissioning fund or a guarantee scheme which helps smaller companies cover their letter of credit requirements for decommissioning. In this case, the Government would effectively underwrite the letter of credit based on contributions to the fund.”

Other suggestions made by PwC, after interviewing key industry experts for their report, include:

  • The Government becoming an equity player in decommissioning to share risk but help squeeze maximum recovery from maturing basins
  • Establish a ‘Decom plc’ owned by the Government that would acquire late life assets at zero cost but charge operators for the decommissioning process

The hope with these ideas is that the Government can become the central point for decommissioning in UK waters and begin to standardise the work and capital required to make these projects happen.

With this information, not only will operators benefit for knowing just how much they are expected to pay to abandon old assets, but they can begin to build a transferable, exportable and scalable skillset within the supply chain that could see UK expertise being shared around the world once more – but this time for decommissioning.

NEXT STEPS

While the suggestions from the PwC seem to be a step in the right direction for the UK industry, the question as to whether the Government would support such schemes, and whether the Oil & Gas Authority has the expertise to carry this out, remains to be seen.

With the oil price steadying following the collapse in 2014, and the UK seeing a spurt in technological advancements, this could lead the way for not only more decommissioning projects but exploration projects too.

The introduction and powers of the Oil & Gas Authority will also do a lot to bring decommissioning expertise together as they try and figure out how best operators can plan ahead for asset abandoning costs. But with long lead times, in some instances, before decommissioning can commence on the UKCS, there has never been a better time to establish what the true costs operators will face.

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