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Has the North Sea decommissioning cost been seriously underestimated?

North Sea oil production is now in its final stages, and everyone’s thoughts are turning to what will be one of the largest decommissioning projects the UK has ever undertaken. The government is estimating that the cost is going to be around £39 billion.

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However, a recent report from a think tank called the Intergenerational Foundation has described this as a serious underestimate and forecast a likely bill of £80 billion. Work will involve plugging oil wells; decommissioning and dismantling drilling platforms, rigs and other infrastructure; and removing a massive network of pipelines.

Dispute over costs

The Oil and Gas Authority (OGA) has based its much lower numbers on a substantial contribution from the oil and gas industry. The report from the OGA includes a cost contribution of 35%. That’s brought the original £60 billion estimate down to £39 billion. The think tank based its figures on the fact that projects in the oil and gas sector often overrun. It’s true that even smaller projects such as tank decommissioning can hit unexpected problems, so one can imagine the kind of snags that might arise in a project of this size.

Both figures are somewhat speculative, although it has to be said that the OGA has published the template it used as the basis of its cost estimate. Right or wrong, it is a level of transparency that is to be welcomed.

The think tank’s main criticism is that whereas the Energy Act of 2004 said that operators should be responsible for bearing the costs of decommissioning, this is not being enforced in the government’s plans. It’s certainly true that smaller firms that have been operating a facility and need to pay for tank decommissioning Tank Decommissioning can’t defer the payment for a generation.

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No provision for decommissioning costs

The Department for Business, Energy and Industrial Strategy (BEIS) has mounted a pretty robust rebuttal. However, when revenues from the North Sea oil industry were strong, no money was put aside for decommissioning. This means that whether they are paid by companies or the taxpayer, the costs must be found from future income. This contrasts with a producer such as Norway, which has built up a big fund to pay for closing and decommissioning its oil and gas industry.

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