Consulting on the cost
  from: Offshore Engineer
  by: John Bradbury
  Wednesday, April 09, 2008

New decommissioning security agreements – DSAs – are being drafted which could help ease industry concern about covering the cost of removing UKCS infrastructure. John Bradbury reviews this and other current developments on the North Sea decommissioning front.

Back in July the successor to the UK Department of Trade & Industry, the Department of Business, Enterprise & Regulatory Reform (DBERR), launched the consultation over decommissioning liability, currently covered by section 29 of the 1998 Petroleum Act which obliges offshore operators to provide financial security for removing abandoned infrastructure.

Renewable energy devices, such as a offshore wind farms, wave and tidal energy systems, included in the UK’s 2004 Energy Act, could be added if new legislative changes are made.

The DBERR is seeking feedback on improvements to existing legislation to ensure money is set aside by offshore asset owners for decommissioning without leaving UK taxpayers to pick up the tab, or as the DBERR puts it: ‘To minimise the risk of liabilities falling to the exchequer in the event of default by an offshore operator.’

Following the launch of the consultation process, Keith Mayo, head of the decommissioning unit at DBERR in Aberdeen, says subsequent presentations attended by more than 70 in Aberdeen and London generated keen interest among companies, lawyers, and banks. ‘The events were useful in explaining our proposals and hearing some initial comments for us to consider,’ he notes.

Mayo says work is under way on a number of related decommissioning issues in preparation for the next UK Energy Bill. DBERR officers are working on a transparent financial assessment process to identify higher risk decommissioning projects, while tax treatment for abandonment is being discussed with the Treasury, and Revenue & Customs.

Consideration is being given to an industry submission for a ‘clean break’ from decommissioning liabilities, together with a widening of financial security options.

‘Apart from these, we are rolling out an interactive electronic portal system for serving legal notices to enable companies and ourselves to keep track of liabilities more easily,’ says Mayo.

Liabilities

Financial liabilities for offshore decommissioning have been handled for some years by decommissioning security agreements – DSAs – to ensure an asset owner has funds to meet legislative obligations.

Oil & Gas UK argues section 29 stifles asset dealing because decommissioning liability falls on a new licence owner, while companies selling out also remain liable for abandonment costs. Consequently asset owners have sought DSAs from their partners.

‘There are a number of reasons why someone may want a DSA in place, and not simply in the context of asset deals,’ explains Judith Aldersey Williams, a partner at Aberdeen solicitors Cameron McKenna, who is drafting a new DSA on behalf of a working group established under the UK Pilot Brownfields initiative.

Under section 29, all those served with a notice under that section – operators and licensees – are jointly and severally liable for decommissioning costs. Effectively, a single UK asset owner is liable for the entire platform decommissioning costs if other owners default, Aldersey-Williams points out. Also, section 29, does not automatically release companies from decommissioning liability even when licence equity is sold either.

Consequently each licence equity owner will want to be sure all their partners have sufficient capital to meet decommissioning costs for field assets, in their entirety, if necessary.

‘Anyone within the licence can be made by the DBERR to carry out all the decommissioning. Therefore if you are in a licence with a smaller company – perhaps – you are going to be seeking security from them for that,’ explains Aldersey-Williams.

‘If you sell out but the DBERR declines to withdraw your section 29 notice because it is concerned about the ability of the remaining licensees to pay for decommissioning, then you are just as liable as the remaining licensees to carry out decommissioning. If you have not already agreed a DSA with your coventurers you hope all the others do their bit, but you will usually try to get security from the purchaser for your share of the costs,’ she adds.

‘Even if you are able to get your section 29 notice withdrawn you are not totally off the hook because the DBERR has the power under section 34 of the Petroleum Act 1998 to bring you – and even your affiliates – back into the liability net if all of the people with section 29 notices default in their obligations.’

Convincing

Also, DSAs could be required from new asset owners if the DBERR needs convincing about a company’s ability to meet its financial obligations under section 29. However this is rare. ‘I can only think of about 10 cases where it has been done,’ Aldersey-Williams recalls.

‘On the DSA template which is to be launched this autumn, we have done a lot of work on thinking through all the potential pitfalls and to make sure we have closed them off.’

The new draft DSA is seeking to take the best of all others which has meant trying to satisfy everybody, meeting the concerns of the DTI, asset purchasers and vendors whose priorities are not necessarily the same. ‘We have tried to create a draft DSA that is all singing and all dancing,’ offers Aldersey-Williams. ‘In particular, former licensees which have sold their interests can remain party to it and enforce the agreement and so can the DBERR, so that they do not need to take their own separate security – or at least not so much security – from purchasers.’

Getting it right is crucial as the North Sea matures, and deals are being done on more marginal fields where costs are finely balanced. ‘A DSA can have a significant impact on the balance sheet for a field development,’ says Aldersey- Williams.

Most licensees meet their DSA obligations by obtaining letters of credit from banks, which can require lodging considerable sums as a surety. Figures around £50 million are not uncommon for that surety. For smaller companies, this challenges their cash resources. ‘It has a significant impact on a smaller company’s ability to invest in a field,’ the solicitor says.

Sizing

While asset owners contemplate their cost liabilities for decommissioning, contractors are also sizing up the expected volume of work they can expect from abandonment. In July Mayo’s unit launched a new forecast of the expected level of decommissioning activity in the UK North Sea, up to 2035.

Mayo’s team suggests three structures will be decommissioned this year, with a gradually rising activity curve peaking between 2015 and 2020.

‘Traditionally decommissioning activity gets deferred and the graph moves to the right,’ notes Mayo. ‘The latest graph shows some fields moving to the right and some to the left; overall the average change is less than a year. In previous years the drift was greater.’

These new estimates make several assumptions about capabilities, among them that only one large steel structure will be removed a year, the DBERR believes.

According to Mayo, the industry is getting better at handling the technical side of decommissioning: ‘The engineering complexities and consequent high costs are becoming more widely understood, leading to better estimates and forward planning,’ he says. ‘Clearly this is important to me from the security point, but I expect it will also get companies thinking harder about their options.

‘I expect the growth of the independents to continue, and am aware of a number of initiatives being developed for innovative handling of [decommissioning] liabilities; we aim to encourage and support those efforts wherever possible as the longerestablished companies are very conservative.We are recognising the need to balance public interest in the timely removal of redundant facilities with the possibilities for re-use of infrastructure – both for oil and gas or for carbon capture and storage. I expect there will be more discussion with industry in future on managing the costs and liabilities of infrastructure retained for potential third party use.’

Progress on major UK decommissioning projects –Total’s Frigg MCP-01 platform and BP’s North West Hutton – is satisfactory, with both operators reporting regularly, Mayo points out, ‘although there are the usual timing issues with big projects due to weather, vessel availability, engineering issues, etc.’

Inventory

Figures compiled in 2005 by the Oslo & Paris Commission – Ospar – which regulates decommissioning in the North East Atlantic area including the North Sea – indicated an inventory of 1131 offshore installations which are liable for eventual removal. Of those, 57 have already been decommissioned.

Ospar counts 543 structures in the UK, 369 in Norway, 148 in The Netherlands, 53 in Denmark, eight in Ireland, five in Spain and five offshore Germany.

Currently the scope for decommissioning on the UKCS is put at up to 470 installations. Ten per cent are floating – FPSO – assets. Another 30% are subsea structures; 50% are small steel platforms less than 10,000t, and 10% are large steel or concrete structures, plus around 10,000km (6250 miles of pipelines). In addition, piles of drill cuttings below platforms need to be handled.

Between 1998 and 2006 the UK DTI approved 31 decommissioning programmes, comprising nine fixed steel platforms, four floating structures, two concrete structures, one steel gravity platform (Maureen), four offshore loading facilities, three subsea systems, and eight pipelines.

Apart from MCP-01 and North West Hutton, other ongoing UK projects are Kittiwake, Indefatigable and Brent. Discussions over another 16 fields, involving eight operators, are under way. Total UK decommissioning costs are put at between £15 and £20 billion.

Following a recommendation by Ospar, work is advancing to define the contents of offshore drill cuttings piles. Some may need action immediately, others may be left alone, and some could be left until platform decommissioning takes place.

At the same time work is under way to capture knowledge from evolving decommissioning experience, and in discussing abandonment, operators are being asked by DBERR to present important records.

A UK archive has been established at the University of Aberdeen since March 2006, and work is in hand to record the history of MCP-01 and the Frigg Transportation System, complementing the Norwegian history of Frigg. OE

Meanwhile . . .

Offshore Norway, the removal of the 2/4T Ekofisk tank topsides was completed by ConocoPhillips in May, after two years, 20,000 crane lifts, and 26,000t of steel were shipped ashore for recycling by AF Decomm at Vats, Rogaland.

Later this year a major tender is due to be decided by ConocoPhillips Norway for the removal of remaining platforms in the Greater Ekofisk field.

In the Netherlands, according to the Dutch State Supervision of Mines, there has been a ‘very low level’ of decommissioning activity with only three platforms removed in recent times. The last, in 2006, involved removal of the K12a platform operated by Gaz de France.

‘Because of the average water depth of 30m on the Dutch continental shelf the risks of decommissioning are not that high as in other parts of the North Sea – like the UK or Norway,’ explains Frans Markesteijn, an inspector at the State Supervision of Mines. He says a lot of Dutch platform topsides are easily lifted, and can be reused for other facilities on the Dutch shelf. ‘Substructures, such as risers, caissons, shall be removed in their entirety.’

In Denmark, as government plans involve increasing field recovery from an average of 25% to 35% for more intensively developed fields, the prospect of platform removal appears a long way off.

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