By Gordon Browne of AIG
The UK’s offshore oil and gas production facilities in the North Sea are facing a dual challenge. First, much of its infrastructure is aging and requires decommissioning or replacing. Secondly, although the basin still holds around 20 billion barrels of oil on current estimates, it is becoming more difficult to extract. Together, this presents a major industrial challenge, which will be expensive and span several decades. The solution lies in attracting fresh investment and the deployment of innovative technology and solutions by new market entrants.
However, there are a number of barriers to entry that are holding up the arrival of potential investors. One of these was addressed in the 2017 budget when the Chancellor announced transferable tax breaks on old oil and gas fields sold to new owners, making it more attractive to buy the fields and keep them running.
The second key issue is that when decommissioning is necessary, it needs to be performed in a way that achieves cost certainty while ensuring present and future liabilities are well defined, managed and protected. Due to historical cost overruns, potential investors are sceptical about the current cost estimates provided for the decommissioning of oil and gas assets. Many investors are not familiar with the UK oil and gas investment landscape; they are more comfortable with short-term investor finance. Moreover, they have concerns around the UK government’s ability to chase financial institutions for the cost of decommissioning oil and gas assets, and that this might impact future returns. Meanwhile, on the other side of the equation, existing operators in the North Sea have a perception that were they to sell their assets to a less-capitalised company, they could still end up paying for the cost of decommissioning.
With the aim of improving the understanding of these issues and examining the role insurance might play in overcoming them, AIG has been holding a series of decommissioning insurance workshops, bringing together all major stakeholders, including the Oil and Gas Authority, UK Government and UK continental shelf licensees of all sizes.
To date, the group has identified and explored three key areas where insurance policies may mitigate barriers to investment and concurrently increase liquidity in the UK oil and gas sector.
First, there is the possibility of developing an insurance solution to cover a company’s financial liability for its cost of decommissioning assets in the event that it becomes insolvent.
Second, Post Decommissioning Liability Insurance could serve to insure plugged and abandoned wells for liabilities tied to environmental and financial contagion. Under current UK legislation, post decommissioning liability for plugged and abandoned wells sits with the licensee. If the licensee becomes insolvent, this liability will transfer to previous licensees and ultimately to the government as the Operator of Last resort. So, this type of insurance would be an effective way to protect the UK tax payer against the difficulty of pursuing companies that no longer exist for the cost of environmental clean-up.
There are a number of approaches to this type of insurance that could be considered. An arrangement similar to the Offshore Pollution Liability Association (OPOL) pollution compensation scheme is one option. The key difference would be that where OPOL exists to cover a company in the event of a ‘Discharge of Oil from any Offshore Facility’ it does not cover pollution from permanently plugged and abandoned wells.
Another option is a well control policy, offered on the same basis as existing insurance policies, but with an extended duration. However, the potential duration for these policies is yet to be agreed and would depend on factors such as improved monitoring of plugged and abandoned wells and the creation of an independent body to validate the completion of decommissioning work, in preference to the current system of self-certification.
Third, a Decommissioning All Risk (DAR) policy could cover all aspects of risk associated with a decommissioning project from engineering to scrapping, and potentially beyond. It might cover all major exposures such as property damage, removal of wreck, operators’ extra expense, third party liabilities, environmental impairment liability, professional indemnity, marine liabilities, and cargo. By providing coverage across multiple sectors of the insurance market the aim is to provide clarity in coverage for operators, contractors, and interested parties and to provide economies of scale through price discounts, broader coverage, and multiple year policies than if policies were bought on a standalone basis.
At the moment, these ideas are still at the concept stage. The workshops have identified some key areas for which clients would like to purchase cover, and the insurance industry must consider what is within the realms of possibility. The most important thing at this point is that we keep moving forward. With such a complex and evolving framework, only by continuing the dialogue between market participants can we can come up with solutions and determine how insurance can support the industry to resolve some of the key challenges arising from the changing North Sea basin environment.