IAC March 2003 1

Decommissioning …Decommissioning …Deposit, Bond or Deposit, Bond or

Insurance?Insurance?BWEA Offshore Wind 2003 BWEA Offshore Wind 2003

27 March 200327 March 2003

Ian CulleyAon 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 US$20 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 - US$100,000

• Structuring Fee - US$300,000

• Break-up Fee - US$300,000

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