Scotland's Independent Expert Commission on Oil and Gas: report

7. Decommissioning

Key messages:

• Government and the new Regulator should play a central role in developing a strategic approach to decommissioning with the aim of minimising costs to the operators and the taxpayer and achieving the maximum economic extension of field life.
• A clear strategy is required to mobilise investment by the supply chain to ensure that technology, capability and capacity is in place and that the TVA from decommissioning expenditure is optimised.
• To minimise the cost to both operators and the taxpayer, consideration should be given to encouraging a pipeline or cluster of decommissioning projects - creating economies of scale, sharing knowledge and techniques.

Introduction

1. Decommissioning is a key part of the lifecycle of UKCS assets. To some extent the challenges associated with decommissioning depend on whether other objectives outlined in this report are successfully achieved. This is particularly relevant with regards to the objectives of MER, extending production, maintaining asset integrity and maximising TVA.

2. Some UKCS assets have now lasted over three decades, which in many cases has considerably exceeded their original planned design life. This is a testament not just to the quality of the original build but the ingenuity and diligence of the operators in ensuring they have remained operational for such an extended period of time.

3. The longevity of these assets is in part attributable to the investment from industry in response to increasing expectations of recovery from the UKCS. This has been driven by the emergence of new technologies, which have been developed by the industry to extend the life of older assets, including; 3D and 4D seismic, 3D reservoir modelling, improved directional drilling technology and subsea tieback technologies.

4. The development of additional local or nearby resources, which are capable of being accessed through use of these new technologies, has created a further economic incentive to extend the life of UKCS assets through improved inspection techniques, more reliable structural analysis and modelling. Investment in these areas has enabled operators to plan and implement asset life extensions safely and with greater confidence.

5. The costs of decommissioning are known to be high and will fall on both operators and Government, impacting ultimately on the taxpayer. As a result every effort should be made to defer costs until there is no sound economic or structural reason for decommissioning to be deferred and thereafter to minimise costs wherever possible.

Maximising Economic Field Life

6. The importance of maintaining UKCS assets was recently highlighted in the Wood Review and in the work of PILOT. It is estimated that in the region of 0.5-2 Bboe could be at risk if these assets are decommissioned prematurely, whilst they still had the potential to act as part of the infrastructure of a new development.

7. The Commission believes that the new Regulator and Government should play a central role in developing a strategic approach to decommissioning, in order to minimise costs to the operators and the taxpayer and defer cessation of production.

8. A key feature of this strategic approach is the acceptance that infrastructure should not be decommissioned until it can be assured that its removal will not impact on any potential new developments or redevelopments.

9. Some assets could continue playing an essential role as part of a new or existing piece of infrastructure beyond their own planned decommissioning date. For example, it could be supporting an export pipeline that might be used to connect into a new field.

10. The new Regulator should have the authority to determine the potential consequences of decommissioning a viable asset in terms of how it might impact on other "local" projects whether active, in planning, or considered to have potential based on subsurface data.

11. One consequence might be the transfer of ownership in part or completely to another party(ies) and the new Regulator should assist in facilitating that transfer with Government providing appropriate guarantees on future decommissioning tax relief.

12. The approval of a decommissioning plan should only be granted once it is clearly proven that the operators have made best efforts to maximise the recovery of hydrocarbons in that field and ensure that all options to generate TVA are considered.

Recommendation 1: Government and the new Regulator should work with operators to reduce decommissioning costs and avoid premature decommissioning of UKCS assets.

Decommissioning Pipeline

13. The new Regulator should have the authority to:

a. scrutinise the decommissioning pipeline to determine technical and operational viability and whether cost savings might be achieved by clustering and scheduling decommissioning projects - creating economies of scale and enabling the sharing of knowledge and techniques; and

b. delay, refuse or amend a decommissioning project, where there is opportunity to make an economic contribution, with the power to influence the future ownership of an asset.

14. This pipeline or cluster approach should aim to maximise the opportunities for using existing infrastructure for new developments whilst recognising the need to give the supply chain a clear vision for the services required and within what timescale.

Recommendation 2: The new Regulator should have the authority to delay, refuse or amend a decommissioning application where assets have the ability to continue making an economic contribution.

The Supply Chain Opportunity

15. Decommissioning creates a huge economic opportunity for the supply chain, both within domestic and international markets, and through the export of expertise internationally.

16. Expenditure on decommissioning accounted for 3.5% of total spend in 2013 ^[40] . However, most estimates suggest that the total cost of decommissioning activity in the UKCS could be between £30 billion and £40 billion (in today's prices) over the lifetime of the UKCS production. If the objectives outlined in this paper are not achieved, these costs could exceed £50 billion.

17. Whilst the feedback received by the Commission suggests that the UKCS supply chain are aware of the commercial benefits associated with decommissioning activity, this has yet to translate into sustained investment in developing the capability required to exploit this market effectively.

18. Significant investment is required to advance the design and production of large, heavy lift vessels, and other marine assets and services that are essential to facilitate decommissioning activity. This will account for a large part of the operator's decommissioning budgets. In order to optimise TVA, the supply chain must be aware of the opportunities and be encouraged to develop and quantify a business case for investing in this capacity.

19. Government has a role to play in developing this overarching strategy with industry and providing certainty about the investment opportunities.

20. Recommendations 1 and 2 will maximise the opportunities available for using existing infrastructure for new developments. This will have a positive impact on the supply chain as it will provide a clear indication of the services required and the timescale for future activity.

21. As experience of decommissioning activities grows it is likely that both operators and the supply chain will begin to develop new technology concepts and new operational solutions. It will therefore be important that Government works with industry - the operators and the supply chain, R&D providers (including universities and organisations such as the Scottish Oil and Gas Innovation Centre as well as supply side companies) in order to develop appropriate proposals for new technology development.

22. Government should consider whether it may be appropriate to co-fund these proposals where necessary.

Recommendation 3: Industry, supported by Government, should develop a clear strategy for the investment in the development of new technology and capability to ensure the UK supply chain is able to optimise the TVA from future expenditure on decommissioning.

Alternative use of UKCS structures

23. The Commission received a substantial body of evidence indicating that the removal of offshore jackets and the transfer of these structures onshore for scrapping may not necessarily be the correct approach in every case.

24. In some cases it could be appropriate for structures to remain in place and be used for other purposes, such as the development of artificial reefs that act as a marine habitat. This has proved successful elsewhere, in the Gulf of Mexico for example, and the concept has the support of some influential environmental NGO's - who argue that this represents a pragmatic solution.

25. This could lead to a reduction in overall decommissioning costs, which will generate savings for both the industry and the taxpayer. Removing the need to dispose of one of the largest physical components would also widen the choice of disposal yards available to operators.

26. The OSPAR Convention ^[41] currently rules out such an approach. However, the regulations are reviewed every five years and the Commission believes that there is merit in considering whether a change to the current regulations may be appropriate.

27. The relative costs and benefits of such an approach should be given careful consideration, especially given the importance of the marine and fishing industry to the Scottish economy.

Recommendation 4: Government should give further consideration to whether it may be appropriate for selected parts of UKCS oil and gas structures to be left in place and used for other environmentally advantageous purposes.

Tax Relief on Decommissioning Expenditure

28. The current fiscal regime allows for around 60% of decommissioning expenditure to be paid for by the Government in the form of tax relief. Furthermore, in order to improve industry confidence about the long-term availability of this relief the UK Government has now entered into contracts with some operators to guarantee the basis on which tax relief for decommissioning will be available - these contracts are known as Decommissioning Relief Deeds ( DRD's).

29. The Scottish Government has confirmed that it will honour this commitment by providing the same level of contractual certainty for tax relief in the event of Scottish independence. This approach provides the highest degree of certainty over the treatment of tax relief on decommissioning activity under any constitutional arrangement.

30. In effect, a DRD reduces the cost of acquiring financial security for decommissioning by virtue of the fact that it is based on the post-tax cost of the decommissioning work as opposed to the pre-tax cost. The difference between these two scenarios can be as much as 50% of the cost.

31. The cost of acquiring financial security tends to be in the form of a fee paid to a bank for a Letter of Credit ( LOC). The reduction in this fee enables the company to invest more and the contingent liability of the cost of the bank guarantee is reduced and as a result this increases the company's borrowing capacity and releases any additional capital for other investment opportunities.

32. Despite the introduction of these contractual commitments, evidence suggests that escalating decommissioning cost estimates and caution from the industry and lenders are still impeding negotiations on the transfer of assets. However, the Commission envisages that as the industry and lenders become more comfortable with the Deeds then the sale and transfer of assets to new owners is likely to become a less cumbersome process. This should help to facilitate increased investment by both existing and new operators, in existing infrastructure.

33. Recent developments with regards to decommissioning tax relief and contractual certainty are largely positive changes. However, as outlined in Chapter 4, the fiscal regime and tax treatment of decommissioning activity should be guided by the principles of stability and predictability, whilst remaining responsive to the changing dynamics of the decommissioning market, its challenges and opportunities.