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Making decommissioning
easier to manage
GLOBAL REACH
Published by:
Petromall Limited
CentralPoint
45 Beech Street
London EC2Y 8AD
United Kingdom
Email david.bamford@petromall.org
+44 (0)20 3286 2556
www.petromall.org
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if they should provide insurance for it, have been decom projects insured in The oil majors divesting assets will per-
and what premium should be charged, London - but not the volume required form due diligence on any company aim-
Mr Giles says. for underwriters to have a good under- ing to acquire an asset from them and
standing of risk versus premium. That’s part of this due diligence (or by way of
The underwriters who are energy special- something that they are looking forward contract) may include specific insurance
ists have been insuring operational risk to seeing.” requirements. This due diligence is also
and construction risk for decades. supplemented by OGA approval.
In decommissioning, the underwriters’
The risk calculation can be made on a judgement of the contractors selected The main development required for
mix of professional judgement and as- is a major factor in their assessment of North Sea divestment/acquisition is
sessment of data, although the data may the overall risk. This is a little different that it should made easier for an exist-
not be fully available. to judging the risk during the operational ing operator to sell an asset to another.
life of the field, which comes down Insurance can play a role in this, because
“It is a lot harder to assess risk with an mainly to the integrity of the operator they (the existing operator) can have
offshore platform compared to a refin- and the quality and location of the asset, comfort in the knowledge that all of the
ery,” he says. “It is quite commonplace Mr Giles says. insurable risks are covered by insurance
for engineers to visit a refinery and issue during ‘late life’ and ‘decommissioning’.
an engineering report.” Whereas, many Broader industry The overall acquisition process is com-
operators own and operate offshore plex and the “numbers need to work” for
assets throughout the globe, meaning An interesting question is whether the both operator and the company making
it is not possible to survey and engineer availability of insurance packages like the acquisition, meaning that a host of
every offshore platform. this one will affect the broader industry. variables must be considered such as
asset value, asset cost (not necessarily
The underwriters will probably also want Oil majors may prefer to focus on new the same), late life operational costs,
to understand the maintenance regime territories, rather than mature assets, as ‘late life’ revenue/value of remaining
of the operator, the culture of the com- a key objective for them is to increase recoverable reserves, decommissioning
pany, and how the operator manages proven reserves, which is usually then costs, and tax relief.
and looks after assets. reflected in share price. Whereas mature
assets in decline will not impact share In summary, the bespoke Decommis-
“Underwriters like to meet the operators, price in either direction. Many majors are sioning product offered by KMD and
and listen to what the operator has to therefore divesting mature assets, which Energy Underwriters enables the ‘risks’
say about how they manage the plat- enables them to reduce their reserved associated with decommissioning to be
form,” he says. decommissioning costs within their an- managed by insurance, while at the same
nual accounts, which in turn frees up time providing a vehicle to ring fence de-
Decommissioning in the North Sea is still capital. Conversely, these mature assets commissioning costs should such costs
a relatively new area. can be of interest to junior UK start-ups, increase by way of an insurable fortuity.
who can focus on extending production
“It is something that underwriters need field life.
to learn and understand,” he says. “There
independently administrated, with legal time. The investments are made by the company might be willing to make
guarantees that the money can only organisation running the trust. more effort to keep the asset running.
be spent on decommissioning. It is also Or a smaller company might be more
developing decommissioning pollution One possible issue is if the comfortable at operating at the narrower
liability insurance policies. These products decommissioning turns out to cost more financial margins which are available
are explained in more detail in this article than expected, although Mr Spencer says towards the end of an asset’s life, while the
that it is possible to get comfortable oil major puts its energy into the big fields
Quatre is founded by oil and gas industry with this risk. The costs need to be and big games.
veteran Paul Jardine, covering insurance independently verified and agreed with
brokerage, investment management, legal, OGA. In the past some projects have Currently, the problem is resolved using
taxation, trust management and E&P turned out to cost more than anticipated, a mixture of due diligence and legal
operations. Duncan Spencer, a specialist but this should mean that the predictions agreements. A seller makes thorough
pollution insurance broker and consultant, are becoming more accurate. checks that a company buying the asset
works together with Quatre, and was has the financial standing and competence
interviewed for this article. The product would provide confidence to to carry out the decommissioning – and a
government and NGO’s that the funds are ‘letter of credit’ needs to be provided by a
The company had developed a similar available for when the works need to be bank with enough funds in it, stating that
policy for UK onshore fraccing operations, completed.
where there was a need to protect the Duncan Spencer,
landowner from any environmental liability Why the trust fund is specialist
due to the fraccing, for example if there needed pollution
insurance broker
was some contamination as a result of it. and consultant,
You can skip reading this section if you working with
Quatre is currently aiming to get the already have an understanding of the Quatre
word out about the new projects, talking UK decommissioning regulations and
to a number of clients, and running a market but otherwise a bit of background
number of clients through the process “to information might be helpful.
demonstrate it works,” Mr Spencer says.
When an oil major wants to sell an asset,
Special purpose trust under current UK regulations, it is liable to the bank is able to provide funds for the
pay for decommission if the company it decommissioning. (The funds of course are
The Special purpose trust holds the sells it to is not able to pay. provided by the company which buys the
money to pay for decommissioning. It is asset).
independently managed, ensuring that the The government brought in this rule
funds can’t be claimed by (for example) because it did not want the government But this doesn’t give the seller complete
other creditors in a smaller oil company to be liable (as it would ultimately be, if piece of mind – because even healthy
which goes bust. none of the companies involved were able companies go bust, and if the company is
to pay). bankrupt, there are all kinds of calls on its
The fund is held in Guernsey, and managed cash – so no guarantee that the funds for
by Saffery Champness, an independent From the government’s perspective, you decommissioning would still be available.
“fiduciary service provider,” and regulated can see the need for such a regulatory
by the Guernsey government. The provision from the story of the BHS Insurance
company has been offering similar services pension fund in the UK. The former owner
of the BHS retail chain, Philip Green, sold The pollution insurance aims to cover the
for 40 years.
the chain to another company. The buying risk that there could be an environmental
The funds can be invested in shares so can company proved unable to keep the retail liability during or after the asset is
actually grow in value the longer it is left chain in financial health. As a result it decommissioned.
there. The investment decisions are made went bankrupt, which meant that all of
For example, there could be oil leaking
by Saffery Champness. the BHS pensions of former employees
out of a well which is not sealed properly,
could not be funded by BHS. This meant
There is a guarantee that the funds can or there is a decaying in the cement used
there was a call on government funds to
only be spent on decommissioning the to cap the well over time. Perhaps the
fill the hole. The government could have
asset. This gives the selling oil company pollution won’t be noticed for a while, for
made a requirement that any seller of a
security that any money put aside for example is it stays on the seabed.
company with a pension fund attached
decommissioning could not be claimed
must guarantee the pensions if the buying There could also be a future change in
by any other creditors, even if the buying
company is unable to. legislation leading to a requirement to
company goes bust. The funds are no
spend more money on assets which were
longer an asset of the operator. “Were But this creates an obstacle to selling already decommissioned, such as a change
the operator go to bust, the funds would assets. You can see why a company might in allowed concentration of a pollutant
remain ring-fenced and creditors can’t take want to get an older asset off its hands, from 5ppm to 1ppm, or substances being
their slice of it before decommissioning but the sale looks less interesting when you considered contaminants which are not
happens,” Mr Spencer says. may still be retaining a liability. known about or worried about today.
The funds can be invested (for example And the government is quite keen that Perhaps there has been some
in shares), so they can grow in value over asset sales can happen, because a smaller environmental damage associated with rig
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operations over its decades of operation, The policy lasts for 10 years, and is paid for Standard public liability insurance does not
which was not known about. as a one off fee by the owners of the asset usually include pollution cover – as the
after they have decommissioned, so can be name indicates, it covers risks to the public
The post decommissioning insurance also
included in the decommissioning budget. (i.e. people). “If no- member of the public
covers risks that the decommissioning
This is a reasonable time for issues to be of the damaged theoretically there’s no
process wasn’t successful and
realised, Mr Spencer says. liability,” Mr Spencer says.
environmental issues start to be discovered
after the work was thought to have been If the platform is owned by an oil major, The insurance would come into play at the
finished. then the authorities can normally assume point that everybody considers that the
that if something goes wrong after the decommissioning is completed.
Having the insurance allows people to step
decommissioning, the oil company will
away and investors to exit the company,
have the resources to fix it. But this doesn’t
Mr Spencer says.
apply so much if it as smaller company.
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government has confirmed that relief The issue of decommissioning tax relief Supplementary Charge are calculated for
can be available in this scenario. But one is now coming up frequently in the the whole company.
of the main reasons a company might North Sea merger and acquisition deals
want to sell an asset is to get the messy CMS is involved with, Mr Reid says. Legislative options
decommissioning liability off its books. “People are live to the issue that you
need to be sure tax relief is available The government, after a public
The hope is that the government will and sits in the right place.” consultation with interested parties,
change the legislation so that a buyer is aiming to come up with a way to
of an asset will end up in the same Different sorts of tax manage tax reliefs which balances the
tax situation as the seller with regards needs and interests of sellers, buyers
to decommissioning the asset, or at A complexity to the issue is that it is and the government.
least as close as possible in practice. tricky to calculate exactly how much
This could be through transferring the tax has been paid on the profits of It also needs to provide certainty for
tax history of the seller, or some other the asset, and at what rate, so the tax fields which are undergoing transactions
mechanism. history can be calculated accurately. during the period the legislation is being
introduced.
This may encourage more asset Most companies have more than one
transfer deals to take place, which is North Sea asset so you can’t just use One question under discussion is
in the national interest, since a smaller the company’s overall tax history. whether the ability to transfer a tax
company may take more effort to history is optional or mandatory. “Our
extract the last barrels out of the The taxation system changed in the view is that it is probably preferable for
reservoir, and a few more years use early 1990s. Fields with development it to be optional, to avoid a situation
from the infrastructure, than a larger consent granted before March 1993 in which people do a deal today and
company. were subject to Petroleum Revenue Tax you get an unexpected consequence
(PRT) unless its “effective abolition” last as a result of the law changing [in the
“This could be another step towards year. Profits from all ields are subject to future],” Mr Reid says.
encouraging assets to go in the right “Ring-fenced Corporation Tax” and the
hands and maximizing economic “Supplementary Charge”. “Also, it allows the parties some
recovery in the North Sea,” Mr Reid flexibility as to where they want the
says. PRT was calculated for specific decommissioning liability to sit.”
fields, but Corporation Tax and the
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with the latest information and that models evolve over the course of the training. Virtual environments let people
there is a single version of truth. ‘What project as more information is added. experience dangerous and hazardous ac-
if’ scenarios can then be explored to vir- Over time the models become increas- tivities – without any risk to themselves
tually validate and plan project work. ingly accurate digital representations of or others. Learning in the virtual world
the reality. means people can fully understand pro-
The solutions ensure that gaps in know- cesses and practice safely while gaining
ledge are revealed and rectified to reduce Linking to Enterprise Resource Plan- the confidence and experience that is re-
risk during physical decommissioning. ning (ERP) and Industrial Internet of quired when operating in the real world.
Things (IIoT) data sources brings fur-
Stakeholders collaborate at all stages on ther efficiencies, better equipment and “The primary benefits of operating with
tasks that drive the innovation and effi- contractor utilisation, and increased fi- a unified and universally accessible sin-
ciencies that are crucial to maximising nancial rigour throughout the extended gle view of physical assets and associ-
the economic recovery of the North Sea supply chain. ated work breakdown structures is that
industry. people can collaborate together to plan,
3D models are used to collaboratively simulate and optimise decommissioning
In many cases, virtual asset models in- solve engineering issues related to dis- tasks and campaigns, validate their deci-
corporate current and legacy engineering mantling equipment in the most effect- sions, and to essentially deliver cost effi-
data. These often include laser scans, 2D ive way, and to plan work, safety and ciencies,” says James Rosenshine, Senior
drawings, photos, videos and computer waste management procedures. Industry Executive Oil and Gas at Das-
aided design (CAD) models.
sault Systèmes.
Virtual models can also be used for
Used as a single reference point, the
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The challenges encountered in German nu- “In oil and gas, as in nuclear decommis- Oil and gas liabilities
clear power plant projects are similar to the sioning, you have to think clearly about
ones oil and gas companies are facing now. where the money will be coming from, A major challenge with oil and gas decom-
particularly if you have to liquidate other missioning is managing the liabilities, which
One of the biggest challenges was imple- assets in order to pay for it, and so need a is perhaps less an issue in the nuclear sec-
menting a new mind-set for the operators strategy for that. tor, if the liabilities are ultimately covered
turned decommissioners. The German nu- by the state.
clear engineers had spent their lives in an Here, Roland Berger offers its business de-
environment focussed on safety. “Cost effi- velopment financing expertise, together “I think where oil and gas companies can
cient asset management was never part of with its project management and imple- use help and support - operationally, pol-
their quality and safety-driven philosophy,” mentation experience, to a decommis- itically, financially - is in developing op-
says Ingmar Kohl, partner energy and util- sioning project, to help get the project tions to efficiently manage and reduce the
ities with Roland Berger. running”, Mr Kohl says. amount of liability and transfer at least
some of the risks to capable contractors,”
“If you tell these guys they now have to Another similarity between oil and gas and Ms Ruf says.
look at the costs, because the funds are not nuclear decommissioning is that both occur
unlimited, it is really a big challenge.” in a very political environment, with pub- Oil and gas companies would prefer to be
lic concerns about the environment, safety focussed on their core business, rather than
In the nuclear industry, as in oil and gas, and the loss of jobs and local tax revenues. worrying about liabilities.
there is a difficult question to answer, of This may make politicians more open to the
whether to keep on the bulk of the existing idea of looking at different options.
Yvonne Ruf,
staff for a decommissioning project or bring principal at
in a new team with a different mind-set but “A lot of large operators are still trying to Roland Berger
related skill set, he says. find ways to getting their heads around it,”
says Yvonne Ruf, principal at Roland Berger.
Another learning from nuclear decommis-
sioning, which could be applied to oil and “Roland Berger’s overall approach is to try
gas, is the need to think very carefully about to break the complex question down to
your overall strategy and get the questions something which is easier to decide on, giv-
right at the start. ing different options, and attaching num-
bers to them”, she says.
There are two basic options in nuclear de- There is probably a market for different
commissioning – to decommission the “In order to make it possible for staff to management approaches and insurance
whole thing in one go, or to remove the reach a decision, you have to structure the products which can take on some of the
nuclear fuels, lock down the reactor, and let problem. You break the big difficult ques- risk, she says.
the radiation naturally decay over time, so tions into chunks that can be understood
you can decommission it with lower con- and addressed. In doing so you can break If the oil and gas company has a large finan-
tamination levels a few decades in the fu- down the risks”, explains Ms Ruf. cial liability, that is money which cannot be
ture. invested in other projects, which may be
Another issue connecting nuclear and oil seen as worthwhile. Also decommissioning
If you decommission it now, you will be and gas decommissioning is that in the projects bind experts and other valuable
able to deploy your existing workforce, who UK (although not in Germany) it is pos- resources that would better on areas with
have in-depth knowledge of the plant. sible for a company to set itself up as a more value creation such as exploration
‘turnkey’ (start to finish) decommissioning and production.
“If you look at a typical decom roadmap for contractor for the nuclear industry. It takes
a nuclear power plant - you see the same full responsibility for the task, with permis- According to the UK Petroleum Act, an oil
things that you would also look at for oil sion from the Office of Nuclear Regulation and gas company will always remain partly
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liable for the assets. But there may be ways and early life production curve,” Ms Ruf data which the oil and gas companies don’t
to reduce the financial, organisational and says. “You can save a lot of cost. necessarily have.
legal burden, she says.
About Roland Berger The firm also has a proven track record of
“There’s limited expertise for management supporting the implementation of these
of the decommissioning liability.” In infrastructure, incl. the oil and gas in- strategies.
dustry, Roland Berger is able to work with Roland Berger has been working with pri-
Ownership of assets and senior managers to develop their decom- vate and public project developments,
missioning road map, then take it to a more
equipment operational level, helping to set up the pro- Ingmar Kohl,
partner energy
“A big strategic question is whether it is ject organisation, and supporting the pro- and utilities with
possible to pass ownership and operator- curement process, which can involve very Roland Berger
ship of a late life platform from the current long term contracts.
owner to a smaller independent specialist”,
Mr Kohl says. “If it proves to be a model The company looks at both the financial
that can deliver cost reduction and effi- and operational risks – of getting projects
ciency, that’s something that should be running. Operational risks can include pro-
rolled out on a larger scale.” curement and execution of the work.
Roland Berger can also help looking at other Roland Berger focusses on asset intensive getting infrastructure projects to ‘final
possibilities – for example converting an industries – including oil and gas, other investment decision’ (FID) stage, with a
old drilling rig to be used to install offshore energy sectors such as renewables and nu- workable financing model.
wind farms. clear, automotive and manufacturing, as
well as transport infrastructure, roads, rail, The infrastructure practise has done a lot of
Managed slow down and in across Europe and the Middle East. “early stage work,” with a focus on “infra-
structure projects that are not yet -or are in
Another possible area of improvement is The company has also been involved in the process of being proven,” says Yvonne
having a more managed slow-down of an large offshore windfarm projects, including Ruf, principal at Roland Berger.
offshore platform, to reduce operations permitting and licensing, something not
costs, rather than giving it the same level usually associated with a strategy consult- The work is especially interesting “when
of maintenance for its whole life-time. ancy. the market and the business models are not
“It is a different management philosophy quite clear yet.”
rather than greenfield project development So the company can bring in expertise and
Decommissioning in action: the Allseas Pioneering Spirit vessel connects its lifting ‘yokes’ to the 24,000 tonne Shell Brent Delta platform topsides in the North Sea on April
28, 2017, setting a world lifting record
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