‘Mechanism’ for ending decommissioning liability predicament a priority, top professor says

Alex Kemp, professor of petroleum economics at Aberdeen University.
Alex Kemp, professor of petroleum economics at Aberdeen University.

Alex Kemp is currently exploring ways of taking the sting out of North Sea decommissioning costs and protecting taxpayers.

Alongside colleagues who help deliver Aberdeen University’s MSc in decommissioning, he will look at the benefits of creating a “trust fund” to cover oil field dismantling costs.

And they hope to come up with a solution to the issue of “residual liability”.

The UK continental shelf is one of the world’s most mature oil and gas producing basins. About 100 platforms and 4,600 miles of pipeline are expected to be removed from the North Sea over the next 10 years.

The Oil and Gas Authority estimates decommissioning costs will amount to about £58 billion by 2050, but has set a target of lowering that figure by at least 35% to less than £40bn.

For operators, decommissioning is an expense, with no profits to be made. It is in their interests to work with peers and oil service companies to reduce costs.

Meanwhile, the Treasury is expected to have to cover about 45% of the final bill through tax reliefs.

Prof Kemp said: “One of the things we look at is when companies should cease production. For most, it’s when they start making a loss, but they could also consider mothballing larger platforms to save money.

“We also consider financial security for governments in the event that a company disappears or goes broke before it has a chance to decommission its assets.

“You could have a decommissioning trust fund into which companies put some money to help cover the cost.”

Prof Kemp and his fellow academics also intend to come up with a “mechanism” which would bury the problem of “residual liability”.

When an oil field is decommissioned, companies are liable in perpetuity for infrastructure they leave behind, such as giant concrete legs and storage cells.

Companies find the idea of being liable for something “forever” quite difficult to stomach, and the government doesn’t want to take the responsibility out of their hands.

“We are considering ways of companies getting out of their residual liability while keeping the government happy,” Prof Kemp said.

“We are looking at insurance schemes but insurance companies are not keen to accept liability in perpetuity.

“For 10 years is one thing, but perpetuity is a step too far, so we are trying to find answers.”

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