‘Bad Bank’ Created For Aging Oil Rigs
The UK’s North Sea oil explorers should spin off older assets into separate companies to defuse the “decommissioning time bomb” that threatens to send costs spiralling by the end of the decade.
The UK’s North Sea oil explorers should spin off older assets into separate companies to defuse the “decommissioning time bomb” that threatens to send costs spiralling by the end of the decade.
Independent producers can expect to pay $3bn (£2.1bn) annually to dismantle old platforms and pipelines as North Sea reserves decline, but by pooling aging assets in a separate company – similar to a ‘bad bank’ – the operators could save $7.5bn.
In the past operators have offset their decommissioning liabilities against tax payments. But a report from consultancy Oliver Wyman has warned that costs are rising just as tax receipts plunge, meaning “radical” measures must be taken to defuse the decommissioning crisis.
“The bad banks create strategic options. They can work with many different buyers or consolidation partners, and make use alternative forms of capital or risk transfer. An oil and gas decommissioning company could see similar benefits,” a report from the advisory said.
By spinning off end-of-life assets into a new company, explorers would boost investor confidence through a clear investment thesis, improving their share prices and ability to raise capital, the report said.
“The new decommissioning company can explore the best approach to unwind its holdings, develop true world-class decommissioning capabilities, create economies of scale from resources, equipment and technology, and influence the supply chain, regulators and governments,” Oliver Wyman added.
Government data shows that dismantling work to date has been delivered 40pc over budget. According to the analysis, operators could reduce their costs by more than 25pc by pooling resources to increase their purchasing power in the supply chain, streamlining planning and skills, and improving financial control.
The recommendation comes amid fears that depressed oil prices and stubbornly high production costs in the super-mature basin could push North Sea operators to dismantle their assets sooner than expected and at a higher cost.
Oil experts at Wood MacKenzie have said that the oil price collapse could lead to the closure of 140 fields in the North Sea over the next five years, even if prices recover before then.
