In the next 30 to 40 years in the North Sea alone over 450 platforms, 10,000km of pipelines and 5,000 wells are expected to be decommissioned, and it is estimated that decommissioning in the North Sea could cost more than $80 billion by 2040. This infrastructure will, however, require insurance coverage as it approaches the end of its operation life, and during the decommissioning process. That gives rise to two broad questions: do ageing structures require a different insurance approach and does decommissioning entail the same risks as construction/operation, or is a bespoke insurance solution required?
Over 50% of North Sea platforms are beyond their original design life with many operators looking to get another 20-30 years out of ageing installations prior to decommissioning. That is perhaps unsurprising given the current state of the market, but does mean that a reappraisal of the North Sea risk profile may be appropriate.
Whilst operational policies generally do not cover the costs of 'ageing' (for example, by excluding wear and tear) there is a continuing trend to provide coverage on a 'new for old' basis notwithstanding the fact that the insured infrastructure is well past its original intended lifespan. Should an insured peril operate, the insured may benefit from the replacement of insured property with a very limited remaining lifespan with brand new property, a result which might be considered a windfall in the insured's hands.
Whilst operational standards in the North Sea are generally considered to be excellent, logically, ageing infrastructure must present an increased risk of the operation of an insured peril especially given the North Sea's hostile marine environment. In these circumstances, it might be argued that an adjustment would be necessary to adequately share the increased risk inherent in older infrastructure. That might not necessarily be a pricing adjustment and a reappraisal of the basis of recovery (for example, considering discounts for betterment) might achieve the same objective, as might a reappraisal of the scheduled limits for particular aspects of the insured property. Another alternative might be a more dedicated 'end of field life' policy to cover ageing installations through the decommissioning process.
Decommissioning in the North Sea
Decommissioning in the UK is regulated by both international and national legislation. The Department for Business, Energy and Industrial Strategy (BEIS) regulates the decommissioning of offshore oil and gas installations and pipelines and is responsible for ensuring decommissioning approaches comply with OSPAR Decision 98/3 which prohibits leaving any offshore installations in place unless specific derogations are granted.
The BEIS provides guidance notes for decommissioning but there is no standardised procedure. Instead, decommissioning is largely influenced by the original installation design and choice of dismantling strategy implemented by an operator. The method used is often subject to assessment whereby technical feasibility, environmental and social impacts, economic, and health & safety implications must be taken into consideration. Operators seeking to decommission must also seek BEIS approval prior to commencement of any dismantling works.
How might decommissioning risk be insured?
The problem is that the majority of the platforms in the North Sea are not designed for removal. As a multi-year, multi-phased, and extremely technical procedure there are various insurance risks to take into account, and these may be different to the types of risk encountered whilst the platform is operating. For example, the decommissioning process will be akin to the construction process as there will be many contractors involved all with different roles, and bound contractually to the project. In that sense, the decommissioning phase resembles 'construction' more than 'operation'. However, in a Construction All Risk (CAR) policy a key component is the insurance and replacement of the project works as the insured seeks to protect physical damage to an installation which is intended to be a profit making asset.
Decommissioning is different: leaving salvage values to one side, the result at the end of the project will be to leave the site in the condition it was in before construction started, and so there are no 'insured works' as such. Rather, the risks that will be of more importance to the operator will be damage to third party property (assuming for this purpose that the contractors involved in the project are third parties rather than additional insureds) and liability exposures.
It is perhaps the latter that have the most potential for significant claims. The operator will face an appreciable risk of exposure to residual liabilities (including abandonment and environmental pollution) stemming from seepage, pollution, and/or contamination as the platform is dismantled and removed. Additional risks that both an insurer and operator should consider in regards to decommissioning therefore might include:
- liabilities under English/Scottish law and international conventions;
- removal of wreck or debris;
- damage to lost property and/or damage to property being removed (in particular where that property might have a salvage value);
- damage to existing property not intended for decommissioning and/or third party property adjacent to the structures to be dismantled; and
- risks during heavy lifts.
There is currently no generally accepted standard insurance coverage for the removal and dismantling of ageing structures encompassing all of the above risks (in contrast, for example, to the WELCAR form for offshore construction). Instead, operators and contractors are often presented with modified versions of CAR cover (for physical damage, third party liabilities and consequential loss) and operators' extra expense (OEE) cover (for control of well, pollution, seepage and/or leaks).
The concept of decommissioning coverage for platforms remains relatively new and, as set out above, gives rise to an unusual combination of insurance risks which suggest that bespoke coverage might be appropriate. That said, the starting point would appear logically to be a CAR type policy rather than an operational policy given the nature of the works, amount of contracts involved and the exposure of liabilities. Such structure has the advantage of reflecting the nature of the decommissioning process and will be able to accommodate contractors and operators as co-insureds in support of the usual contractual terms that would be expected to be found in their contractual arrangements (for example 'knock for knock' agreements).
In summary, ageing structures and decommissioning represent a new 'mix' of property and liability risks, and a significant insurance opportunity. If that opportunity is to be realised, however, careful thought must be given to the structure of the coverage provided in order that effective and economically viable cover is provided to the offshore industry.