Decommissioning

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Decommissioning Deposit, Bond or
Insurance? BWEA Offshore Wind 2003 27 March
2003 Ian Culley Aon Risk Consulting
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Perspective

• There are in excess of 6,500 offshore
  installations worldwide
• predominantly oil gas related
• Estimated cost of removal in excess of US20
  billion
• North Sea
• 5 of installations
• 60 of total cost
• Offshore Wind
• UK 1,350MW installed by 2006
• UK 2,500MW installed by 2010

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International Regulatory Requirements

• Decommissioning is not a recent issue
• Covered by a framework of
• Global conventions and guidelines,
• Regional conventions and
• National legislation
• The London Convention
• Signed by 50 countries governs the disposal of
  waste and material at sea
• Installations with substructures weighing less
  than 4,000 tonnes situated in less than 75 metres
  of water be completely removed from the site at
  time of disposal

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International Regulatory Requirements

• Geneva Convention on the Continental Shelf 1958,
  Article 5(5)
• UNCLOS 1982
• IMO Guidelines and standards for the removal of
  offshore installations and structures on the
  continental shelf 1989
• Oslo Paris Convention OSPAR (93/3)

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Local Regulatory Requirements

• UK
• Petroleum Act 1987
• Requires government approval of abandonment plans
• DTI
• Responsible for all licensing
• Crown Estates
• Responsible for offshore installations up to 12
  miles
• Germany
• Federal Mining Law
• Requires complete removal of installation and
  submission of an abandonment plan

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Regulatory Requirements

• Underlying premise
• The taxpayer should never be required to bear the
  cost of decommissioning offshore installations
• The Government ordinarily requires companies to
  guarantee liability by way of
• Letter of Credit
• Cash deposit
• Where there is more than one party involved then
  Government also seeks joint and several liability

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Regulatory Requirements

• Issues
• Government requirements are expensive and
  financially inefficient for large companies
• Crippling when small companies are involved
• Become even more inconvenient if original
  investors are seeking to refinance and are
  seeking full transfer of all liabilities
• Joint Ventures
• Government insists that Joint venture investors
  have joint and several liability with regard to
  decommissioning costs
• Greatly increased credit risk exposure especially
  for small companies

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Oil Industry Experience

• Insurance Structures
• Do not work contested by the Inland Revenue
• UK provides capital allowances to enable
  developers to offset decommissioning provisions
  against profit
• Therefore no tax deductibility for premiums
• Numerous attempts, no known successes
• Tax deductibility always an issue

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Insurance Structures

• Duration is a major problem, 20 - 25 years
• Insurers have difficulties with policies lasting
  10 years
• Continued solvency of operator
• Ability to pay premiums
• Security of insurer
• Ability to pay claim
• Government perspective
• No tax deductibility of premiums

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Insurance Concept

• Endowment
• Regular payments made during the life of the
  project, building up a fund equal to anticipated
  decommissioning cost
• Not accepted as an insurance product by Inland
  Revenue
• Ultimately proved unsuccessful

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Financial Structures

• Bonds / Guarantees
• Specialised markets
• Duration a major issue
• Difficult to achieve durations in excess of 10
  years
• Would not provide any form of protection other
  than guaranteeing payment of decommissioning
  liability exposure
• In the case of bonds, there is an automatic right
  to recourse
• Requires supporting traditional insurance
• Any guarantee would not preclude the Government
  from recourse to the original licensees in the
  event of shortfall

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Offshore Wind

• UK - Crown Estate
• Requires the most thorough and acceptable removal
  of foundations possible
• Seeking to require that all wind farm developers
  must show a net asst value of 50 million to
  provide for decommissioning liability
• Greatly impacts dynamics of wind farm finance
  models and potential entrants
• Oslo Paris Convention OSPAR (93/3)
• Requires that oil and gas structures above the
  seabed are wholly removed to land for disposal
• There is no equivalent requirement for wind
  energy infrastructures, but UK government
  departments have indicated that they will follow
  the spirit of this agreement

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Offshore Wind

• Current estimates by developers that approx
  150,000 per MW installed is required to cover
  decommissioning costs
• Based on current projections of wind farm
  capacity this means current decommissioning costs
  for UK offshore capacity of around 375 million

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Offshore Wind - Issues

• Provisions for decommissioning are affected by
• Increased costs due to unforeseen technical or
  engineering problems
• Fortuitous events leading to premature
  abandonment
• Changes in governmental regulation
• Changes in the prevailing tax regime
• Continued solvency of joint venture partners

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Offshore Wind - Issues

• Large developers tend to be vertically integrated
• Design, Build, Finance and Operate
• Able to capture full value of ROC values
• Developers reliant on project finance must secure
  borrowing via long term Power Purchase Agreements
• Environmental revenues are discounted to reflect
  perceived risks
• Regulatory / Legislation

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Options

• Pure insurance is unlikely to offer solution on a
  stand alone basis
• Lateral approaches required
• Maximising short term revenues through enhanced
  recognition of full value of ROCs etc
• Revenues from environmental values can secure
  financing for decommissioning

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Lateral Approaches

• Insurance / finance hybrids that improve or
  enhance revenue streams enabling greater cover
  for decommissioning costs through
• removal of risk such as weather related
• Wind is free, but it does not always blow
  according to expectations
• provide security of future revenue streams
• enhance credit status of long term offtake
  agreements
• guaranteeing value of green credits and other
  incentives received to build wind
• Volatility and probability of non-energy revenues
  amount to 60 of total revenue

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Lateral Approaches

• Where a Joint Venture exists
• Decommissioning exposure is currently joint and
  several
• Possible approach may be to seek a a single bond,
  whose costs and recourse are shared equally
  amongst the JV partners
• Does not remove the issue of individual JV
  solvency

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Lateral Approach Examples

• Structured Finance
• Contingent Capital
• Insurance/finance hybrids
• Factoring / Securitisation of receivables
• Hedging
• Weather
• electricity prices
• Credit Related
• Credit enhancement
• Guarantee of debt service
• Revenue stream protection

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Lateral Approach Realities

• Realities
• Insurers are as complex to deal with as banks
• They also need to go through a due diligence and
  approval process that is as involved as any
  lenders
• Under certain structures they are lenders
• We obtained quotes for contingent capital for one
  organisation developing wind farms where the fee
  structure was
• Working Fee - US100,000
• Structuring Fee - US300,000
• Break-up Fee - US300,000

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