Solving the Riddle of Aging Iron

The debate over offshore decommissioning is almost as old as the first ever offshore platform—if you’re going to install it, you will need a plan to remove it once its work is done. Decommissioning liabilities have historically been the responsibility of the facility’s operator. However, sometimes iron outlives its owner. A bankruptcy or merger (or multiple) can and have muddied the waters of just who is responsible for removing a structure once it is beyond its useful life. If there is no traceable line of ownership once the operator is gone, the responsibility can fall to the host government. A good example? The Northern Endeavour—a 274-m FPSO in the Timor Sea. The Australian government took responsibility for the decommissioning of the Northern Endeavour after the liquidation of its owner. This includes the associated Laminaria and Corallina oil fields in the Timor Sea, 550 km northwest of Darwin. The government is now the owner of the FPSO, all associated assets, and is responsible for its safe disposal. Costs for the decommissioning of the vessel and associated fields will be recovered via a levy on the oil and gas industry. As larger companies high-grade their portfolios and shed noncore and aging assets, it has typically been smaller, independent operators that come in and squeeze the last few drops of production out of these fields. Ironically, these companies are also the least prepared for the decommissioning burden, so there are instances where that burden is specifically addressed as part of any transaction. “Many smaller operators that have acquired assets over the years will have agreed some level of retention of decommissioning liability with the seller. BP retaining a percentage of decommissioning liability at Bruce (acquired by Serica) and Thistle (acquired by EnQuest) are examples of this,” said James Reid, senior research analyst, North Sea, at Wood Mackenzie. “However, that won’t apply to all companies/assets. Decommissioning Security Agreements between joint venture partners should protect operators and partners from financial issues when the time comes to cease production and decommission.” He added, “The transferable tax history mechanism will also help smaller operators as it will allow them to carry back losses generated during the decommissioning phase against past taxable income (as far back as April 2002). That said, smaller operators tend to operate on tighter financial margins, and funding decommissioning from the balance sheet could be problematic for some. Thus, we do tend to see smaller operators looking at incremental investments to extend the operational life of assets and delay decommissioning. In the UK Continental Shelf (UKCS), private or PE (private equity)-backed operators will shoulder around 30% of the total decommissioning bill, which we estimate at $58 billion (in real terms).” There are instances of operator-based delays as well as governmental ones. Some countries have not done an adequate job of policing the structures that need to be removed. In regions like the US Gulf of Mexico (GOM), where over 7,000 platforms have been installed since the 1940s, a January 2024 report by the Government Accountability Office (GAO), said that more than 75% of end-of-lease and idle infrastructure in the GOM was overdue for decommissioning under the US Bureau of Safety and Environmental Enforcement’s (BSEE) own deadlines as of June 2023—over 2,700 wells and 500 platforms.