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Global WarmingHow Do We Dismantle Offshore Oil Structures Without Making the Public Pay?

How Do We Dismantle Offshore Oil Structures Without Making the Public Pay?

How Do We Dismantle Offshore Oil Structures Without Making the Public Pay?

Martin Lockman and Martin Dietrich Brauch
|September 6, 2023

Image courtesy U.S. Bureau of Ocean Energy Management

As pressures construct for the energy industry to maneuver away from fossil fuels, two latest reports examine the chance that fossil-fuel corporations will default on future obligations to decommission offshore oil and gas infrastructure and pass the prices on to the general public. The reports lay out recommendations to avoid such a scenario. They were just published by the Sabin Center for Climate Change Law and the Columbia Center on Sustainable Investment (CCSI), as a part of their broader Climate Law and Finance Initiative.

Greater than 12,000 offshore oil and gas installations straddle the globe, and industry analysts anticipate annual offshore oil and gas investments to achieve $173 billion by 2024. Various oil corporations are expected to significantly expand their offshore drilling activities in the approaching years.

At the identical time, many jurisdictions face a growing must dismantle offshore infrastructure, whether since it is aging, the resources are depleted, or mandated net-zero strategies require some installations to be decommissioned sooner than expected—a process that’s could be laborious and expensive. A 2021 forecast by the financial evaluation firm IHS Markit estimated that globally, offshore decommissioning could cost nearly $100 billion between 2021 and 2030, a period that S&P Global Commodity Insights has described as a possible “decade of offshore decommissioning.” Some experts have predicted that decommissioning costs may increase significantly. in coming years.

The Intergovernmental Panel on Climate Change projects that greenhouse gas emissions from existing and planned fossil-fuel infrastructure will push global warming past the Paris Agreement’s 1.5°C threshold. A separate study of detailed regional projections estimates that almost 60 percent of known oil and gas reserves must remain in the bottom to maintain inside that budget.

Increased public deal with reducing greenhouse emissions, coupled with the worldwide push for electrification and declining prices for renewable energy, may cause a rapid decline in oil and gas demand that forces the mass closure of offshore installations. Even without policy changes or concerted climate motion, the increasing adoption of renewable energy systems and energy-efficient technologies is prone to depress demand for fossil fuels.

These combined dynamics may create serious risks for the general public in a rapid phase-out scenario. Most countries with significant offshore oil and gas resources have laws, regulations, and contracts that require corporations to bear the associated fee of decommissioning. A proper project of legal liability, nevertheless, doesn’t guarantee that decommissioning will occur, or that funds will likely be available when obligations arise. Governments often sit because the “decommissioner of last resort,” and if oil corporations default of their obligations, the general public will likely be left footing the bill.

The legal and economic tools that states have used to be certain that oil corporations pay up were often adopted without much, if any, consideration to climate change or the transition to wash energy. In consequence, a rapid phase-out of offshore oil and gas could cause a series of defaults and create a serious risk of immense financial burdens for governments of oil- and gas-producing jurisdictions. In turn, delayed, inadequate or nonexistent decommissioning could cause enormous environmental harm to the world’s oceans and marine life.

A joint framing report by the 2 centers identifies risks in decommissioning regimes world wide and provides recommendations to strengthen them. To guard the general public and be certain that oil corporations meet their obligations, the report recommends that governments, policymakers and industry participants take 4 key steps.

First, jurisdictions should create and repeatedly update comprehensive decommissioning plans. Some jurisdictions prepare such plans only when an installation or field is approaching the top of its usable life. This may increasingly create bottlenecks in a rapid phase-out scenario, where facilities may have to be quickly taken down long before the ends of their previously anticipated lifespans.

Second, jurisdictions should reexamine the mechanisms geared toward assuring that corporations can pay. Legal mechanisms like collateral packages, guarantees and funding structures are sometimes predicated on assumptions that oil and gas assets will remain precious, and that oil corporations will remain solvent. With the transition away from fossil fuels, these assumptions could also be incorrect.

Third, policymakers and industry participants who’re planning for decommissioning expenditures should be certain that they’re aware of, and ready for, the tax implications of a rapid phase-out affecting the complete oil and gas industry.

Finally, governments needs to be aware that stabilization clauses in investor-state contracts may shift or create additional burdens related to offshore decommissioning. Governments should consider modifying such clauses consistent with international best practices to permit them to mandate early decommissioning if offshore assets turn into legally impaired or otherwise “stranded” by the transition away from fossil fuels.

The second report, by the Columbia Center on Sustainable Investment, assesses decommissioning provisions in investor–state oil and gas contracts in 24 international jurisdictions. To avoid a scenario where the federal government must cover decommissioning costs, the report recommends making a dedicated fund sufficient to cover all costs, prefunded by the oil and gas company as a part of its capital and operating expenses; contributions could be assured by the final word parent company starting before project construction. It also recommends including provisions governing decommissioning as an integral stage occurring at the top of the project, not as a post-project activity. These provisions would consider health, environmental, safety, and financial risks throughout the project’s life cycle.

Individually, the Sabin Center submitted an August comment letter in response to a rule proposed by the U.S. Bureau of Ocean Energy Management, which governs offshore activities. The bureau is considering a rule that may revise the financial mechanisms that the US uses to secure offshore decommissioning obligations. While the comments are broadly supportive of the Biden administration’s efforts to strengthen the bureau’s mechanisms, it provides several technical recommendations to guard the general public against oil company defaults related to  climate motion.

The 2 reports were supported partly by the Institute for Energy Economics and Financial Evaluation.

Adapted from an article published by the Sabin Center for Climate Change Law.


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