Dismantling oil rigs in the North Sea is a waste of money and has no environmental benefits, writes Tom Baxter of the University of Aberdeen. According to Baxter, it makes more sense to leave the infrastructure in place and use the savings to fund green energy projects. Courtesy The Conversation.
Oil giant Royal Dutch Shell is under fire from environmental groups over its proposal to decommission the Brent oilfield in the North Sea. The plans submitted to the government relate to four concrete and steel platforms which have been in service for 40 years.
The environmental groups, which include WWF Scotland and Greenpeace UK, are refusing to back Shellâs plans. They claim the company has not made enough information public to properly cross-reference its proposals against the internationally agreed OSPAR rules that are supposed to govern decommissioning.
Shell is one of a number of oil producers looking at decommissioning now that many North Sea oil and gas fields are reaching the end of their productive lives. Decommissioning is a massive, expensive and technically challenging task; and Brent is seen as a test case for the rest of the UK industry.
While the UK government mulls Shellâs proposals, there are a number of myths surrounding the decommissioning process that people need to be aware of.
- The oil company pays
Shell said in its Brent proposal: âShell and Esso will be paying the decommissioning costs. The tax relief we will get back is not a subsidy or a new cost to the taxpayer â itâs a refund â i.e. the tax has already been paid by Shell and Esso in previous years.â
But by having tax rules that allow oil producers to reclaim taxes paid in previous years to cover the cost of decommissioning, the taxpayer does pay.
How can a decommissioning industry that produces nothing and uses billions of taxpayersâ money be good for the economy?
If decommissioning comes in at the approximate ÂŁ50 billion estimate, the treasury (the taxpayer) will be down by around ÂŁ25bn. If the costs are higher, the treasury will pay more â a huge risk to the taxpayer. As a result of this system, oil producers already reportedly became a net drain on the UKâs coffers for the first time in 2016, costing the taxpayer ÂŁ396m.
- There are environmental benefits
Many marine habitat experts are saying there is little environmental benefit from removal. Indeed some of the decommissioning activities are expected to do more environmental harm than good. This is due to seabed disruption, noise and the removal process itself, which is very energy intensive and will therefore be a major source of harmful emissions.
If the architecture is left in place, it will naturally reef and arguably create an environmental positive. The reefing concept has been used extensively in the Gulf of Mexico with the Rigs to Reefs programme.
In an area which lacks natural reefs, this has enhanced the marine habitat for many species of fish. Admittedly some people have raised concerns about environmental damage from deteriorating metal and reefing disrupting the natural ecology, but one can certainly argue the positives outweigh any negatives.
As I have argued before, leaving this offshore infrastructure in place and using the savings from taxpayersâ money to fund green energy projects would be much more sensible. Alternatively, you could invest the money in recovering the countryâs manufacturing base, NHS funding, education, marine conservation, improving flood defences or tackling poverty.
- Weâll see an onshore jobs bonanza
Numerous reports in the media have reflected claims like this. In reality, onshore activities are around 2%-3% of the overall decommissioning costs, and onshore jobs are only a fraction of that. The jobs are transient; once the task is complete, there is no follow-on activity.
If we chose the green energy option, it would provide many more sustainable jobs designing, fabricating and constructing the wind farms and other power sources; as well as continuous operations and maintenance jobs over their 30 to 40 year lifespans. The same could be said of many of my other suggested alternatives.
- Decommissioning is good for the economy
How can a decommissioning industry that produces nothing and uses billions of taxpayersâ money be good for the economy? It is about taking things to bits. While itâs true you create short-term employment and that the employees and service companies will pay taxes, you donât build any factories or provide new infrastructure to serve society and the economy. Also, much of the removal money will go to the heavy-lift companies â the UK has none.
The Oil and Gas Authority (OGA), an executive agency of the UK Department for Business, Energy and Industrial Strategy (BEIS) is also obliged to maximise the economic recovery of the countryâs petroleum resources. How can the current plans for decommissioning be maximising economic recovery?
Even OSPAR should be able to see green energy as having a much better outcome for the international community
Again, to compare with my preferred option of leaving platforms in place and putting the money into green energy, this would clearly achieve more economic recovery. It would provide society and the economy with an essential commodity â power for industry, electric transport and heat for homes. The OGA has an objective of reducing decommissioning costs by around 35%, but the country can do far better â the authority should be lobbying Westminster accordingly.
- UK must follow OSPAR
When I raised the question of maximising economic recovery with OGA and BEIS, I was told their role is to ensure OSPAR is followed and not to challenge it. OSPAR is the mechanism by which 15 governments of the western coasts and catchments of Europe, together with the EU, cooperate to protect the marine environment of the northeast Atlantic. It broadly requires full removal of oil platforms at the end of their economic lives.
As well intentioned as OSPAR is, the directives are taking the nation to a very poor outcome. We know so much more now than when the directives were agreed in 1998 â the consequences of global warming, for instance, hence the argument that green energy looks a better investment nowadays. Even OSPAR should be able to see green energy as having a much better outcome for the international community. Why is the UK not challenging the agreement?
Editor’s Note
Tom Baxter is Senior Lecturer Chemical Engineering at the University of Aberdeen. This article was first published on The Conversation and is republished here with permission from the author and publisher.Â
See also his earlier articles on The Conversation on this topic:
How to burn more oil and gas but slash emissions? Offshore power stations
North Sea decommissioning will cost taxpayers billions â hereâs a better idea
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Bob Wallace says
“The tax relief we will get back is not a subsidy or a new cost to the taxpayer â itâs a refund â i.e. the tax has already been paid by Shell and Esso in previous years.â
What kind of tax were they talking about? Was it a tax specifically aimed at capturing decommissioning costs? If so, a refund would seem to be in order.
Or are they saying that they are going to be spending money on decommissioning which is a legitimate business expense and should result in some sort of tax savings.
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Leave it in place and you create an unmarked navigational danger. Drop some stuff on the bottom to serve as artificial reefs works for me. But don’t leave large unlit piles of steel for ships to crash into.
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Create jobs removing stuff above the bottom. And create more jobs installing wind and solar. Old oil rigs don’t make good wind towers.
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Most importantly – Plug the Wells. And do it the right way. Fill the pipe all the way down.
Are Hansen says
Also we must make sure that all toxic chemicals onboard are removed before sinking them
owinglyndwr says
‘What kind of tax were they talking about? Was it a tax specifically aimed at capturing decommissioning costs? ‘
Two parts,the second the being most important. Opportunity cost of lost revenue to HMRC first. The tax paid or reclaimed by an explorer is based on total activity, decommisioning, pumping and tax costs are all set against revenue to give profit or loss in that year. So if a oil explorer is de-commissioning older rigs whilst the company continues pumping existing fields or decides to sink new wells, any future revenue is subject to tax, less total expenses. In any tax year if total costs exceed revenue, losses to carry forward and / or backwards are generate for tax purposes. No tax will be paid and the explorer then has a choice.
Either reclaim tax already paid in previous years as a refund from the UK Exchequer or carry forward that year’s losses to future years. Tax paid on profits in future years is significantly less. Future marginal profits made on existing and new rig operations will not be paid to the exchequer. No tax paid due to decommisioning is going to go down like a lead ballon with the general public. The oil explorers will claim they are being responsible cleaning up the environment according to plans set out which as the article points out has questionable enviromental merit anyway.
Or th UK Government could either disallow or preferrably limit decommissioning costs by allowing a rigs to reef programme. Then explorers would likely pay some tax on existing / future exploration in future years. In explorers financial models for the future , marginal costs would increase so future exploration would likely be curtailed in UK waters as a result of the margin between Sales and Costs (including tax) narrowing.
This is a case of trying to fight every battle but losing the war if you support the environmental lobby in strictly business terms which is how oil explorers will see it.
When Energy returned (Sales money) > Costs of new / existing rigs a well will continue to be pumped or developed, the assets will be sweated. Lower the expected costs of existing / new wells for explorer financial models by allowing decommissioning costs to be offset will lengthen the life of existing fields. Oil will not be left in the ground even if the price of oil hovers around $45 -$50 a barrel in the long term.
Second, the Oil and Gas industry will continue a little longer in the North Sea for the UK. Marginal costs appear lower to the oil explorers due to the fact they will not pay any future tax. Indeed some will be looking for UK Government refunds and continue to pump from old rigs. Maintenance might be an issue on older rigs, particularly for smaller less resourced companies as they try to cut costs to the bone in an era of low oil price revenue. These explorers will have to sweat the assets. The world oversupply of oil is clearly set to continue in the absence of a major conflict, so the days of $100 oil appear long gone.
Catch 22 if you are an environmentalist and the UK Government.
Bob Wallace says
Could I have an easy to understand answer to my question?
âWhat kind of tax were they talking about? Was it a tax specifically aimed at capturing decommissioning costs? â
put another way –
Were the oil companies paying money into a government controlled fund which was specifically for rig decommissioning?
owainglyndwr says
Nope. All Tax goes to the exchequer which is used at the government’s discretion in that year. For example to pay for the public service. I bet you are under the impression National Insurance Contributions go into some ‘special fund’. If they did the National Debt would soar.
NI is simply another tax. The benefit to those who pay is the IOU promise by future Government to pay a larger state pension.
Bob Wallace says
No, I asked a very specific question in order to determine if there might be some very understandable reason that Shell and Esso should expect a tax refund.
S. Herb says
There must be similar arguments regarding the decommissioning of nuclear generation plants, albeit more complicated and with greater safety issues. Worth a broader discussion in both cases.
Mike Parr says
“The plans submitted to the government relate to four concrete and steel platforms which have been in service for 40 years” – so these platforms have sat out in the north sea for 40 odd years supporting x thousand tonnes of platform. This raises an interesting question on the length of time off-shore wind farms could expect – i.e. the expensive bits sitting just above and below the surface of the sea. Sounds like with a bit of re-turbining at the circa 20 year point, the off-shore wind farms now being built could still be around in 50 odd years.