Decommissioning WGEI 2nd meeting, Oslo, 21-23 September 2015

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Decommissioning of offshore facilities

DecommissioningWGEI 2nd meeting, Oslo, 21-23 September 2015

1Decommissioning Where does it start?Financial intentEnvironmental managementFinancial provisioningGuaranteed funds1. Preserving nature - Natural capital All renewable and non-renewable environmental resources and processes that provide goods or services that support the past, current or future prosperity of an organization. It includes:o air, water, land, minerals and forestso biodiversity and eco-system health.

(the capitals comprise financial, manufactured, intellectual, human, social and relationship, and natural) Integrated reporting framework

2. Relevant legislation in SA consist of -

No. 36 of 1998: National Water Act (NWA)No. 107 of 1998: National Environmental Management Act (NEMA)Mineral and Petroleum Resources Development Amendment Act,2008(Act No.49 of 2008)Any prospecting or mining operation must be conducted in accordance with generally accepted principles of sustainable development by integrating social, economic and environmental factors into the planning and implementation of prospecting and mining projects in order to ensure that exploitation of mineral resources serves present and future generations.

3. License agreements Environmental management programme and environmental management plan.Financial provision for remediation of environmental damage.Monitoring and visiting sites

4. Community commitments Local content sustainable community

This must then translate for the operatorFinancial intent in order to win the license to operate on a field there needs to be a proper analysis of the parties financial intent to remedy and sustain.Environmental management this is a daily discipline by qualified individuals who can compile relevant reports.Financial provisioning guided by the financial reporting frameworks and informed by the environmental impact studies an adequate financial provision should be raised in the financial accounts of the operator of the field.Guaranteed funds the financial provision should be cash backed. This can be in various forms namely a rehabilitation fund or guaranteed funds from financial institutions.

South African experience No previous offshore decommissioning to use as benchmarkEconomical life of the plant and operations has broad the need to decommission forwardOffshore and onshore installations together with pipelinesQuestion around the offshore installations what to do with it?Plugging wellsFinancial provisioning Expert involvement Financial reporting frameworkInternational expertise exchange rate dependent Valuation methods e.g. Discounted cash flow

Practical Application of the IFRS Framework and Accounting thereof in the Entity Records: Establish the Estimated Base Cost for decommissioning per the Expert Reports 2. Establish the lifetime of the Field and the Decommissioning Date. 3. Establish the Inflation Rate applicable to the base cost in order to project the total cost of the decom/total liability to the date of decommissioning.

Thus: Base Cost x Inflation Index as at date of decommissioning = Future Value of Liability 4. Establish an appropriate Discount Rate to calculate the Present Value of the liability as at the 1 April 2014 (First day of Financial Year - also known as adjusted Opening Balance):

Thus: Present Value = Future Value x (1 + Discount Rate)^-x

-x = the difference between the decommissioning date (eg. 31 March 2017) and 1 April 2014 (therefore 2017 - 2014 = 3) 5. Calculate the Change in Estimate that is to be capitalised to the corresponding asset of the decom provision:

Thus: Present Value (as calculated above) - closing balance per prior year Trial Balance (agreed to PY AFS) = change in estimate 6. Calculate the unwinding of the provision = the interest charge recorded in profit and loss for the financial year.

Thus: adjusted opening balance/present value (as calculated above) x discount rate = interest charge for the year 6. Calculate the closing balance of the decom provision.

Thus: adjusted opening balance/present value + interest charge for the year = closing balance.

2Decommissioning of offshore facilities3Seismic surveysOpening of new areasAward of licencesField developmentField operationDecommmissioningWhat do we mean by decommissioning: responsible disposal of offshore facilities when these reach their end of planned technical and economical life.

34Legal background for decommissioning in Norway

Act of 29 November 1996 No. 72 pertaining to petroleum activities (Petroleum Act), chapter 5Regulations to the Petroleum Act, laid down by Royal Decree 27 June 1997 (Petroleum Regulations), chapter 6OSPAR convention, decision 98/3 and IMO convention, 2009Norwegian Pollution Act 20

For decisions regarding how a facility on the Norwegian continental shelf shall be disposed of, both national and international regulations are applied:

Chapter 5 of the Norwegian Petroleum Act deals with the cessation of petroleum activities, for example the submission of a disposal plan, the decision relating to disposal and the licensees liability for damage caused in connection with cessation, which is in line with the strict liability provision for pollution damage in chapter 7 of the Petroleum Act.

The Oslo and Paris Convention for the Protection of the Marine Environment of the North-East Atlantic (OSPAR) forbids dumping and abandoning facilities in the sea: there are only a few exceptions to the general rule that facilities are to be removed (concrete facilities, steel jackets over 10000 tons as well as pipeline and cables unless hindering fishery and shipping activities)IMO (International Maritime Organization) The Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships

The responsibility of the Ministry of Petroleum and Energy: to approve cessation plans

The Norwegian Petroleum Directorate: processes the plans prior to the Ministrys disposal decision and oversees licencees compliance with the decision. Each year the NPD evaluates the licensees reporting on cost estimates for future disposal.

The Petroleum Safety Authority the Norwegian Environment Agency are also involved in this context.

4Legal background cont.Licensees have to submit a cessation plan to the Ministry of Petroleum and Energy (MPE), 5 to 2 years before the production licence expires or the use of a facility is permanently terminated. A cessation plan shall include i.a.: proposals for continued production or shutdownrelevant disposal alternatives with impact assessmentrecommended solutiontime schedule

Disposal alternatives:further use in petroleum activities, other uses, complete or part removal or abandonment.

5At the earliest 5 years / at the latest 2 years beforehand.The plan shall describe technical, safety related and economic aspects of the disposal alternatives.Impact assessments based on a proposed and approved programme shall show the environmental and economic effects of disposal.

5The Norwegian experience

In 2015 over 500 facilities in operation on the Norwegian continental shelf (subsea and different types of platforms)Up to date 13 cessation plans approved Significant increase in decommissioning activities to be expected as technical end of life will be reached/not prolonged or production terminated for economical reasonsCost for decommissioning of current facilities estimated by operators to NOK 170 billion (appr. USD 21 billion)78 per cent of this cost covered indirectely through tax deductions by the Norwegian state

6Over 500 facilities: Amongst these are 12 concrete facilities, some 20 floating steel facilities and about 90 steel facilities resting on the sea bed. Over 350 facilities are subsea.

Significant increase: technical end of life of 255 facilities by 2020, of over 170 by 2030 and of some 60 by 2040. However, some of these facilities may see their life prolonged.

6Potential decommissioning risksSafety and environmental security risk due to facilities awaiting offshore removal, during transport and on-shore decommissioning wells awaiting permanent pluggingDoes regulatory oversight by relevant authorities ensure adequate execution of disposal decision?

7Example the Yme platform: installed in 2011, decided disposed of in 2012 as being unsafe due to structural problems, removal was planned by 2015, now postponed to 2016.

Relevant authorities: the Norwegian Petroleum Directorate, Norwegian Petroleum Safety Authority and the Norwegian Environment Agency.

The OAG follows up on whether the Norwegian Petroleum Directorate ensures licencees compliance with the provisions in the disposal decisision.

78Examples of decommissioned facilitiesFrigg Industrial Heritage http://www.kulturminne-frigg.no/stream_file.asp?iEntityId=349

Source: NPD

Ekofisk Industrial Heritage http://www.nettmuseum.no/subindex.asp?iSelectedMenuItemId=1001&iMin=3&iMax=30&iContentMenuRootId=1001

The picture shows what is left of the treatment compression platform no 2. Permission to leave behind concrete installations was granted for the concrete substructure on the Frigg field and the Ekofisk storage tank. (Concrete base structures before 1978 were not designed for removal.) The Ministry of Petroleum and Energy has also accepted that pipelines and cables be abandoned or safely covered as long as these do not constitute a hindrance for shipping of fisheries.

8Potential decommissioning risks cont.Financial risk for the state: Are licensees financial provisions sufficient to cover their decommissioning costs and liabilities?How do authorities ensure that operators estimates are realistic and thus made provisions sufficient? Even if owners are subsidiarily liable, how do authorities ensure that provisions are sufficent, e.g. in case of transfer(s) of licences?Do authorities ask for guarantees?

9There is a financial risk for the state if licensees should be unable to live up to their obligations of paying for decommissioning costs.Licensees report annually on their estimates for disposal costs to the authorities and make provisions. These estimates may prove to be too low (for example high prices in the decommissioning market due to high demand or the complexity of the task is underestimated: uncertainty)

The OAG follows up on whether the Norwegian Petroleum Directorate assesses licensees reported estimates of disposal costs as realistic.

Accounting according to IFRS no tax deduction for provisions 3 g) of the Norwegian Petroleum Taxation Act.

A licensee may go out of business and the remaining partners in the license have to cover the cost. There is a special challenge when licences are transferred, especially to smaller companies with less financial strength. The Norwegian Oil and Gas Association has issued guidelines for decommissioning security agreements in case of transfer of licenses.

In principle, the state can ask for guarantees but has not used this possibility so far.

Up to now no licensees have failed to meet their obligations. However, the extent of decommissioning costs to come in a few years may prove to be a challenge, especially for a number of smaller companies. Provisions may prove to be insufficient to cover liablities.

9The South African experience10

Performance audit of the rehabilitation of abandoned mines< Key observations and recommendations >Background: Department of Mineral ResourcesResponsible for formulating and implementing mining-related policies

Regulates mining industry: - Mineral and Petroleum Resources Development Act

2006: contracted Council for Geo-Science to develop national strategy:development and population of database of abandoned mines in South Africaranking of mines within database i.t.o. potential impact5 906 abandoned minesestimated cost of rehabilitation => R30 billion (USD2.3 billion) 1 730 High risk mines => R28.5 billion (USD2.2 billion) Primary government institution Directly

R 30 billion included as contingent liability in 2007-08 and 2008-09 financial years Contingent liability excluded costs (approximately) for:Long term treatment of acid mine drainage Construction and operating fees of plants12Findings on audit of abandoned minesWhat was the department NOT doing?

Problem statement:

Does the rehabilitation process for abandoned mines ensure timely, cost effective identification and rehabilitation of abandoned mines to ensure that the social and environmental impact is limited?

No approved strategy or plan

Unavailability of information to target high risk mines

Organisational structure not supportive

Communication channels not defined or structured

Poor project management and budget allocation Recommendations by the Auditor-General - Strategy(a) The DME should ensure that the national strategy is approved and implemented.(b) A business plan should be drafted with realistic, clearly defined objectives that are linked tospecific time frames and responsibilities. The business plan should take the prioritisation ofhigh-risk rehabilitation projects into account.(c) The DME should ensure that policies and procedures are implemented to provide guidance interms of the rehabilitation of abandoned mines in South Africa.(d) The rate of rehabilitation of abandoned mines should be increased to reduce the adverseimpact of abandoned mines on the environment.

Recommendations by the Auditor-General Information system(a) An integrated system for recording and reporting on the status of abandoned mines should beestablished.(b) Measures should be instituted to monitor the activities of active and inactive mines in good timeand to ensure that the database and the potential liability are updated accordingly.(c) The DME should find the capacity and funds to enable timely updating of database andpotential liability.

Recommendations by the Auditor-General organisation structure(a) An action plan should be put in place to ensure that a structure is established within the DME tosufficiently deal with the rehabilitation of abandoned mines.(b) The DME should capacitate the mineral regulation branch to ensure that the rehabilitation ofabandoned mines timeously done, measured and followed up.(c) Measures should be instituted to ensure continuity of the involvement of staff assigned to therehabilitation of abandoned mines.

Recommendations by the Auditor-General - communication(a) The DME should formalise communication channels with internal and external stakeholdersinvolved in the rehabilitation of abandoned mines in a way that would promote accountability andservice delivery.(b) An interdepartmental project steering committee should be established for all rehabilitationprojects to monitor the projects and take corrective action if and when required.(c) The rehabilitation of abandoned mines and related issues should be added as a standin...

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