This introduction sets the scene for a series of articles which will explore the challenges faced in handling claims arising from both the established and developing energy industries in the North Sea and beyond.
In recent years there has been much talk about the Energy Transition and Oil and Gas companies working towards net zero; the burgeoning renewable energy market, carbon capture, utilising power from shore facilities and hydrogen production, and these industries are now generating regular work for our Natural Resources adjusters.
Ongoing challenges
At the same time, the Oil and Gas industry in the North Sea, and in particular in the Norwegian sector, is still going strong ranging from multiple mega-developments to more modest tie-backs and field life extension projects. These projects continue to generate claims too; with new technology, contracting arrangements and improved industry experience of Policy response, all providing challenges to claims handling. Consequently, the offshore adjuster‘s skills and expertise have developed to become broader, more diverse and more adaptable to accommodate these changes in the offshore energy sector.
- The future of Oil and Gas Development in the North Sea is still an uncertain one. A 2020 report from the Institute for Public Policy Research thinktank found that a new net zero deal aimed at keeping oil and gas in the ground, while channelling investment to low-carbon industries, could secure jobs in the UK. But this plan would require the UK government to scrap existing Policy which calls for Oil and Gas Companies to derive Maximum Economic Recovery from existing assets. -
Cost of decommissioning
As the industry continues to mature, those oil and gas assets installed in the 70’s, 80’s and 90’s are coming to the end of their life-cycle and need to be removed. Indeed, many platforms and associated assets have already been removed such as BP’s Hutton platform and Shell’s Brent Alpha and Delta platforms. In August 2020, the Oil and Gas Authority (which regulates the UK oil and gas industry) published a report estimating the cost of decommissioning existing infrastructure on the UK continental shelf to be £48bn.
Of that cost, 45% is for well abandonment, 25% for platform removal, 10% for subsea removal with the remainder being owners’ costs and recycling. It is clear from these figures that decommissioning the North Sea is a major industrial challenge and opportunity for the contractors and service providers involved. But does it present a major opportunity for the Insurance industry?
- According to a report issued by the UK Oil and Gas Authority in 2019, Large Cap and Supermajors accounted for over 75% of North Sea production in 2014, whereas that number was 25% in 2018. -
There are inherent risks in removing and dismantling large and aged structures in the hostile offshore environment, but these assets are often of little intrinsic or operational value. Some brokers and insurers have developed decommissioning-specific products which provide cover for third party, legal and contractual liability, property damage, and removal of debris. This is in addition to cover such as that for offshore cancellation, increased cost of project completion and stand-by charges. Time will tell whether significant volumes of claims arise and how these policies will respond.
End of life claims
What is perhaps a more immediate challenge is how claims are dealt with on assets which are reaching the end of their useful lives. Repairing on a like-for-like basis may not be the right solution for an asset with a very short operational future. Indeed, any significant damage may just accelerate the Cessation of Production and ultimately decommissioning of the field, without undertaking a repair at all. If we couple this with the fact that many oil majors have divested these aged assets to Private Equity-backed independent producers and overseas state-owned oil companies, then the way that claims are approached and settled will almost certainly be very different to those dealt with 35 years ago when CTA first started handling claims in the North Sea.
In this series of newsletters, we will focus on some of the issues raised here in more detail and provide our thoughts, and those of the industry more generally, about the challenges facing settlement of claims in the North Sea and beyond.
Mike McMahon
Managing Director – Natural Resources, UK, Europe and Singapore
mike.mcmahon@charlestaylor.com
Expertise:
Loss Adjuster, Mechanical Engineer, Marine Engineer,
Offshore Construction, Mechanical & Electrical Rotating Machinery,
Natural Resources, Drilling & Production
Location:
London
