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North Sea oil decommissioning
Image: Gary Denham

Decommissioning: the looming disaster in the North Sea

The biggest threat to the UK’s North Sea oil industry has nothing to do with Brexit or the current global oil glut according to Lianna Brinded at Business Insider:

“There is a ticking timebomb that could put off companies investing in the sector and prevent new projects being set up to drill for oil… It is all down to the decommissioning of infrastructure.”

To avoid an environmental catastrophe, a large part of the North Sea infrastructure – disused wells, rigs, pipelines, etc. – will have to be safely removed in the course of the next 5-10 years.  But there is a big question mark over who is supposed to pay.

The UK government generated – and spent – £330bn in tax income between 1976 and 2014.  This allowed Britain to avoid the worst of the 1980s recession, and to borrow its way to a temporary boom in the 1990s and early 2000s.  But the government is now providing tax reliefs and subsidies in order to maintain the remaining production.  With public finances under pressure, the government will be reluctant to make taxpayers pick up the tab for decommissioning.

But if not the government, then who?  While the big energy companies grew fat on the profits from the North Sea prior to the great recession of 2008 and the collapse in prices in 2014, most have since moved on:

“When huge corporates like BP and a range of other energy giants cut jobs and said they would pull out of the market, it gave opportunities to smaller petroleum companies or foreign investors to enter the sector. In August this year, China took over Scotland’s oil production and now controls two of the North Sea’s biggest oilfields.”

It is far from clear whether the decommissioning costs should fall on the companies that enjoyed most of the profits from North Sea oil and gas, or whether they should fall on the companies that took over their assets.  Dr. Dougie Youngson, research director in oil and gas for UK-based broker Finncap explained that:

“The companies coming into acquiring assets don’t have the balance sheet or appetite for new costs. There is also an issue over the level of fairness. If you pop into a field with only five years of life left, paying and dealing for decommissioning can be a big issue for people.

“However, on the other side, if you sold the assets to someone and then suddenly you are being asked to send a big cheque in the post 10 years later for decommissioning, this is problem too.”

No doubt the legal profession will experience an economic upswing as energy industry lawyers pour over the sales contracts and state licences in an effort to determine who has to pay the final bill for decommissioning.  The very real fear, of course, is that already hard-pressed British taxpayers will be left to pick up the pieces… or that the government will try to do the job on the cheap.

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