Decommissioning concerns voiced as Scottish referendum nears

Bankers and lawyers have warned of legal battles and delays to decommissioning projects in the North Sea if Scotland votes for independence in Thursday’s referendum.

At issue would be tough negotiations over how the costs of decommissioning are split between the UK and newly-independent Scotland.
“We certainly will have a dispute. The liabilities are just too large,” Andrew Moorfield, Europe-based head of origination at Canada's Scotiabank, a lender to the North Sea oil industry, told Reuters.

And there could be delays with the consents needed for decommissioning if officials are pre-occupied with those negotiations, said Stephen Murray, partner at law firm Herbert Smith Freehills.

Scotiabank’s Moorfield said investment in new production could even migrate to other areas, such as Norway’s North Sea, if uncertainty grows over the eventual decommissioning bill.

“Future investment flows are likely to be negatively impacted or deferred until there is a clarity on decommissioning,” Moorfield told Reuters.

There are an estimated 300 platforms in the UK North Sea and the cost of decommissioning these, plus pipelines and related infrastructure, has been put at £40bn ($65bn) between now and 2040.

The Scottish National Party has vowed to uphold the UK’s commitment to providing tax relief for decommissioning, estimated to be worth £20bn to operators between now and 2050. But it also insists it will press for contributions from the UK for the decommissioning bill because the UK had so far enjoyed £300bn in tax revenue from oil and gas in Scottish waters.

“The over-riding question of which administration pays what would need to be sorted out first and that is an item on the ‘to-do’ list facing post-Yes negotiators,” Richard Heard, managing director of Strategic Decom, a consultancy specialising in decommissioning, said in the Reuters article.

Another issue to be resolved is the exact North Sea boundary between Scotland and England. While something like 90% of known offshore hydrocarbons lie in what would become Scottish waters, differences in existing administrative boundaries could lead to competing territorial claims, Professor John Paterson from the University of Aberdeen’s School of Law in an interview with DecomWorld in November.

In the short term this could deter investment in disputed areas, but also be used as a weapon in negotiations over decommissioning costs, a legal expert said.

“It is to be hoped that the two governments could come to a decision quickly and avoid a dispute, which does have the potential to stall investment in the disputed area,” Judith Aldersey-Williams, partner at law firm CMS, told Reuters. “However, it’s perhaps more likely that the question of the boundary will be used as a negotiating weapon and only resolved as part of a package of contentious issues.”

BP’s CEO Bob Dudley has given the need for fiscal certainty over decommissioning as one reason why Scotland would be better off remaining in the UK.

“We face the challenges of extending the productive life of existing assets and managing the future costs of decommissioning,” he said in a statement on 10 September. “Much of this activity requires fiscal support to be economic, and future long-term investments require fiscal stability and certainty.”

Arguing for independence, Scotland’s energy minister Fergus Ewing told DecomWorld last year that the decommissioning sector would benefit from the much deeper engagement an independent Scottish government could offer compared to a ministry run from Whitehall in London.

“We would want to capitalise on that direct relationship with industry to tackle what are huge challenges because decommissioning is one word but it encapsulates a whole range of different processes and industrial and commercial activities, financial expertise, engineering expertise, storage of waste, the deployment of hugely expensive equipment,” he said.

“There needs to be a wide debate about decommissioning again, and there should be a calm, rational debate about the practicalities of what decommissioning actually involves,” said Mr Ewing.