11 September 2024
The Twilight Era: Decommissioning Strategy in the Age of the Energy Transition
The global offshore decommissioning market to shut down oil and gas plants is expected to reach USD8.3 billion by the end of 2024 growing at a compound annual growth rate (CAGR) of 4.9%. Oil and gas facilities constructed in the last 50 to 60 years are reaching the twilight era of their productive lives, while some have already been decommissioned.
The ageing infrastructure translates into a growing burden on company balance sheets. Not only are these facilities less efficient, but the cost of maintaining them and ensuring they comply with stricter environmental regulations is rising. Decommissioning these assets becomes not just an environmental necessity but also a financial and regulatory imperative.
Offshore decommissioning projects are fraught with risks, such as third-party injuries, property damage, and environmental pollution. Removing wrecks from the seabed is a complex and expensive undertaking. While the immediate return on investment of decommissioning is not always readily apparent, corporate reputations rest on the ability of contractors to successfully execute this phase of the energy lifecycle.
In comparison, with wind and solar being relatively new technologies the renewable sector is only just starting to contemplate the need for decommissioning. A growing number of wind arrays are reaching their third decade of operation and starting to approach the end of their proposed lifecycle but advancements in technology may mean some wind farm lifecycles can be extended.
The rise in decommissioning can be attributed to three key drivers:
1. End-of-life assets
‘Traditional’ energy decommissioning, such as for oil and gas, has been around for years and the roadmap for this has been clearly defined. Offshore Energies UK (OEUK) anticipates that the decommissioning supply chain market is on track to reach the GBP20 billion mark by 2031.
Hydrocarbon energy facilities are designed with a specific lifespan that considers geology, reserves, economic feasibility, and other factors. Exceeding these limits can pose significant safety and environmental risks.
More than 12,000 offshore oil and gas platforms are in operation globally. Among these, over 1,500 platforms in the North Sea have an average age of 25 years. In the Gulf of Mexico, 1,500 platforms are over 30 years old. Even in Asia-Pacific, where platforms are somewhat newer, it is estimated that more than 2,500 platforms will have to be decommissioned within the next decade.
There is often a time limit attached. In the US, the federal government has mandated that energy companies operating offshore remove everything once the lease is terminated or the right-of-way (ROW) or right-of-use (RUE) grants have ended. This includes dismantling pipelines, cables, and other structures and obstructions that can harm marine habitat within two years of termination.
The renewables sector, in comparison, is only in its infancy of decommissioning. It was thought when the first 0.5MW wind turbines started to be deployed that these would be replaced with more advanced technology when available. However, planning challenges to repower older wind turbines with newer technologies have meant many wind farms are looking at lifespan extension instead of decommissioning.
2. Shift to green energy
The global push for cleaner energy sources necessitates decommissioning older, carbon-intensive plants and wells. As renewable energy sources like solar and wind farms gain traction, the reliance on traditional energy sources will continue to decline. Decommissioning these facilities will be essential in paving the way for the clean energy transition.
Global renewable electricity capacity crossed 4,000 gigawatts (GW) in 2023 and is expected to cross 7,000 GW in 2028, accounting for over 42% of global energy generation. Solar PV and wind energy will comprise 95% of the total renewable generation. This rapid growth translates to a future wave of decommissioning needs.
3. Regulatory pressures
Governments and international bodies are enacting stricter environmental regulations for decommissioning practices. These regulations mandate responsible decommissioning to prevent environmental damage and ensure public safety.
The regulations can vary depending on the facility's age, type, and location. Some countries allow partial removal or leave-in options, while others demand more thorough sea bed cleaning and restoration. Any residual pollution or environmental damage caused can lead to strict impositions. The regulations are getting more intense to ensure companies are not just leaving old assets, which in the past would have been a liability on insured balance sheets.
Conducting a thorough analysis and obtaining necessary permits is essential before starting decommissioning work. Failure to comply with prevailing regulations can result in hefty fines and penalties for energy companies, making proper decommissioning a critical aspect of responsible operation, not to mention a reputational imperative.
Why decommissioning matters now
In the oil and gas sector, many offshore old-age platforms and subsea infrastructure need removal. This will require significant investment over the next ten years and will vary across geographies. In comparison, there will be a small amount of renewable decommissioning, but it will be dwarfed by the number of oil and gas assets that need to come out of the operating space.
Nearly 2,800 fixed and 160 floating platforms will be decommissioned between 2021 and 2030. This equates to one-third of the total fixed platforms currently in operation.
According to the International Energy Agency (IEA), investment in clean energy initiatives will have to triple to around USD4 trillion by 2030 to reach the global net zero emission target by 2050. Net zero means rapid phasing out of coal, oil, and gas and decommissioning of unabated oil and gas power plants by 2040.
Risks associated with decommissioning projects
Decommissioning offshore oil and gas assets plays a crucial role in transitioning towards a more sustainable energy landscape. Closing aging facilities and removing the assets is not just about meeting regulatory requirements; it ensures the lifecycle of an energy project is brought to a successful conclusion which protects the environment and your business’s reputation.
In contrast, the renewable energy decommissioning era is still being explored. Energy operators need to make decisions whether to extend the operational life of their renewable plants or to decommission them. The former is more attractive if power can still be generated, and revenues earned.
To execute the process with confidence, the plugging and abandoning (P&A) of wells and dismantling of equipment requires energy operators to proactively identify and mitigate potential pitfalls.
1. Environmental Damage
Decommissioning activities can lead to accidental spills of oil, gas, or other hazardous materials. Leaks from pipelines, equipment malfunctions, or human error during removal can also lead to pollution and environmental damage.
Further, incomplete removal of pipelines, rigs, or other structures can leave debris scattered on the seabed, impacting marine ecosystems.
Offshore windfarms have similar considerations during the construction and decommissioning stage, which vary depending on distance at sea, whether an array is built on floating foundations or sea-bed mounted turbines, and the requirements of submarine cables (whether these are buried in the seabed and in proximity to reefs and other coastal ecosystems).
2. Safety Risks
Decommissioning involves working at heights, handling heavy equipment, and performing complex underwater activities. It has inherent dangers and poses a significant risk of accident and personal injury.
The presence of multiple vessels, barges, and support structures increases the risk of collisions, potentially resulting in injuries, property damage, and environmental damage. Flammable materials and pressurised equipment can also pose a danger during such projects.
Sometimes viewed as an investment without a clear ROI, past decommissioning works may have cut corners to complete projects as quickly and cheaply as possible. And this is still a concern within the insurance market as decommissioning doesn’t generate revenue.
A solution to ensure projects are carried out with due care and attention is the involvement of marine warranty surveyors. These specialists visit decommissioning projects at various stages to ensure contractors adhere to safety protocols and established plans. Their presence helps mitigate risks and provides peace of mind for insurers and project stakeholders alike.
3. Financial Risks
The cost of decommissioning varies depending on the geographical location, type of energy facility, and what can be salvaged from a project.
The North Sea Transition Authority (NSTA) estimate that it could cost nearly GBP40 billion to decommission the remaining oil and gas infrastructure on the UK Continental Shelf.
In comparison, we expect one of the financial challenges for the renewables sector to be managing end-of-life waste. Whilst the majority of wind turbine assets are recyclable, the wind turbine blades are not. The use of condition monitoring has helped energy operators predict rather than react to issues, which has comforted insurers that the existing wind turbine generator can be kept going. Although the breadth of insurance cover will shrink towards the end of life, key covers such as weather risks and critical components (if they can still be sourced) can remain insured.
BNP Paribas has estimated renewable energy will be the second most expensive sector to decommission going forward, with 19% of all decommissioning costs globally.
4. Reputational damage
Failure to decommission a facility properly due to financial or logistical challenges can be damaging to a company’s brand and reputation. Improper handling of hazardous materials, spills during platform removal, or any kind of environmental damage not only attracts regulatory fines or legal action but also negative press coverage.
During the dismantling of a platform in the North Sea, an employee fell 15 metres and sustained life-threatening injuries when one of the platforms unexpectedly collapsed. The UK Health and Safety Executive prosecuted the civil engineering company for failing to complete the platform's structural appraisal before decommissioning.
Energy firms need to be sensitive while engaging with local communities, as decommissioning can impact jobs and local communities. Accidents and injuries can raise questions about companies' commitment to health and safety. Moreover, regulatory fines and penalties issued due to breaches of health and safety legislation will not be covered by insurance.
Case Study: Placing a decommissioning policy in Thailand
A major global energy client was looking to carry out some offshore decommissioning work in Thailand. It had not taken out a decommissioning liability policy before and wanted to understand how the coverage would support the project.
Experts from Gallagher, alongside underwriters, a marine warranty surveyor, and a loss adjustor, met with the insured to talk them through the policy's main coverages and stress test how it would respond to a loss.
In such an ecologically sensitive environment as the Gulf of Thailand, it is critical that end-of-life infrastructure is removed in a safe and careful manner and that all assets have been flushed of all hydrocarbons so that there aren’t any unexpected releases. Whilst there is rarely any residual value associated with decommissioned property, Decommissioning Insurers are acutely concerned with losses such as Removal of Wreck; Clean-up expenses; Damage to Third-Party Property or Existing Property that is deemed to be Third-Party; or Bodily Injury claims.
Renewable projects approach retirement age
Looking ahead, the renewables sector will face a significant challenge in managing costs and optimising operations and maintenance processes to minimise downtime and reduce the overall levelized cost of electricity (LCOE). Innovations in maintenance and component replacement, such as utilising drones to deliver equipment directly from a ship's deck to each wind turbine generator nacelle—positioned high above the sea—could lead to considerable cost savings compared to traditional deliveries using smaller marine vessels.
In 2015, Sweden's Yttre Stengrund wind farm became the first to be decommissioned after 27 years of operation. Decommissioning wind farms is an ongoing process, and the industry will gain valuable insights—much like it did with oil and gas decommissioning—from the initial phase of these projects. These lessons will shape the procedures and designs of future generations of equipment deployed in the field.
It is estimated that by 2035, over 3.5 GW of offshore wind farms will reach the end of their operational life. At present, the reality is that decommissioning of renewable energy assets is more a case of “managed throwing away” as the pace of technology is so fast and older parts are no longer refurbished. From an insurance perspective, this is preferred over upgrading older equipment, which is associated with wear and tear.
The extension of renewable projects is primarily constrained by two factors:
- Operating permits, which depend on planning permission being maintained or extended.
- Obsolescence, where the availability of spare parts from original equipment manufacturers (OEMs) for older generation machines becomes limited.
Unlike oil and gas, the sources of energy tapped into by renewables are not finite. In theory, the lifecycle of wind arrays and solar plants can be extended indefinitely so long as operators are maintaining and upgrading their machinery and equipment. The main factors influencing the lifecycle of a renewable energy facility are more likely to be dictated by the length of generation licenses and planning permission remaining in force or being extended.
Over time, the deterioration of renewable energy systems is inevitable, necessitating the replacement of certain components to maintain efficiency. The process might also require reapplication in the future due to evolving public opinion, planning permissions, and heightened environmental concerns that complicate the matter further.
Technological innovation is also playing a critical role in transforming the decommissioning process of renewable energy assets. Energy storage solutions are improving, which may facilitate the repurposing of batteries from solar and wind operations.
Onshore wind projects face challenges beyond the rapid pace of technological advancements. Planning constraints have historically been difficult to overcome, leaving operators who expected to decommission existing technologies and replace outdated turbines with larger, more efficient ones unable to secure the necessary approvals. While a shift in political stance could potentially ease this issue, the next challenge to overcome will be the insufficient grid infrastructure available to support newer technologies. Tackling this issue will require significant time and investment. As offshore wind energy progresses from fixed-bottom installations in shallow waters to floating platforms in deeper waters exceeding 60 meters, it faces even more significant challenges related to technology and grid connections. However, while still complex, the planning process is likely to receive strong support from governments across the political spectrum. The most unpredictable and emotive issues will likely revolve around protecting biodiversity and the natural environment.
Plan now for future decommissioning
As assets get closer to the end of their lifecycle, there is a requirement for owners to demonstrate that funding is being maintained for the decommissioning process.
Securing finances for decommissioning can be challenging, however. Traditional methods, such as letters of credit or trust funds, are not feasible because of their tax implications. Gallagher’s Decommissioning Security Insurance (DSI) is a type of surety bond that mirrors the functions of a letter of credit. DSI offers tax advantages and an ‘evergreen structure’ that ensures continuity without the option for cancellation.
“Today, DSI is a well-established solution in the oil and gas industry and has opened the market for smaller companies to provide security for decommissioning projects without damaging their balance sheets. We are pioneers in making decommissioning a more manageable financial challenge and identifying and addressing complex industry needs with creative solutions.”
Robert Choppen, Executive Partner, Gallagher Specialty
Moving forward with confidence
Constructing offshore oil and gas platforms is a feat of engineering, and so too is their safe removal at the end of a facility’s lifecycle.
Decommissioning has come a long way, with the adoption of new technologies being leveraged in the first instance to increase operational lifespan by refurbishing existing structures.
As projects enter decommissioning, appropriate use of technology can help reduce costs, retrieve wreck and debris, and minimise environmental impact.
Remote-operated vehicles or unmanned submersibles are revolutionising underwater decommissioning, particularly for offshore platforms and pipelines. They allow intricate tasks, such as cutting pipelines, inspecting structures, and collecting data to be performed without jeopardising people’s safety.
Meanwhile, advanced waste processing techniques ensure hazardous materials, such as asbestos, lead, and other pollutants, are disposed of responsibly. Drones and laser techniques help contractors and decommissioning teams map out the physical characteristics of the surroundings and the facility’s structures, systems, and components accurately and quickly.
AI is also being used to predict the likely lifespan of energy systems better and execute decommissioning projects more efficiently. The technology can help identify the most valuable materials involved in a wreck removal project, and the best way of recycling them.
Partnering with the right broker is essential regardless of which phase of the journey a you are on. Experienced brokers are ready to advise and support through each phase of the energy lifecycle, from construction and operation through to decommissioning and wreck removal.
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