Over the next decade, the forecasted decommissioning expenditure for the United Kingdom Continental Shelf (UKCS) is £15.2 billion. With the aging infrastructure and introduction of new operators, more E&P companies are having to post financial assurance for future decommissioning. This financial assurance can be in the form of a Financial Guarantee, a Letter of Credit, or Surety Bond. Often times, a North Sea lessee will have few options domestically with unfavorable terms. One solution to this growing problem is to have these obligations underwritten by experienced U.S. surety companies with reciprocal UK or European paper. Similar to a Gulf of Mexico operator obtaining windstorm coverage from Lloyd’s, the U.S. insurance market aims to be the leading provider of surety and financial assurance for North Sea Decommissioning.
Specifically for the United Kingdom, the Government’s Department of Energy and Climate Change (DECC) regulates decommissioning of offshore oil and gas installations and pipelines. Operators under any field’s JOA are required to institute a Decommissioning Security Agreement (DSA) toward the end of a field’s life. A key objective of a DSA is to ensure that each lessee provides adequate security in proportion to their decommissioning liability so that other co-lessees and the DECC are protected from possible credit risks.
Under a DSA where a field owner has secured status as a Qualifying Surety (BBB or greater with S&P, Baa2 or greater with Moody’s) it may provide a parent company guarantee as security for its share of a decommissioning liability. A field owner that is not a Qualifying Surety will be required to provide a letter of credit or a performance bond from a Qualified Insurance Company (A- or greater S&P, A3 or greater Moody’). This financial assurance, provided by the lessees, will remain in place until the end of the field’s decommissioning.
Candidates
In a broad sense, anyone currently providing financial assurance on a DSA or other decommissioning agreement, is a candidate for this market. Obtaining a quote is free and would only require the disclosure of certain financial statements and reserve information to the surety markets.
All markets are fully aware of the proprietary nature of this material and will readily execute non-disclosure agreements. Most assets remaining in the North Sea have a decommissioning schedule or one on the horizon. Whether a company has just one of these assets or a portfolio of them, their risk profile can be analyzed and a surety bond may be the best solution for one’s financial assurance requirements.
We have also seen instances where a new entity, typically with private equity backing, is required to post financial assurance for future decommissioning of a well prior to, or just after, initial production.
U.S. Underwriters
While decommissioning financial assurance in the North Sea is a relatively new concept, underwriters in the U.S. have been managing surety portfolios for onshore and offshore operators for 40+ years within their commercial surety departments.
Because of this, most major carriers and many niche carriers have offices in Houston or Dallas to specifically field these decommissioning requests and meet with these operators frequently. As the need for surety in the North Sea has increased, many of these U.S. carriers have entertained and underwritten opportunities through their UK or European offices, or through fronting partners.
Financial Underwriting
Similar to any bank, sureties will take a deep dive into a lessee’s financial statements to see if they qualify for the necessary bonding exposure. Analyzing projected and actual cash flows to see if the operator is capable of sustaining the necessary funds for annual decommissioning is a vital part of this process. Often times the underwriter will require the forecasted model to be stress tested at varying commodity prices.
Asset Underwriting
While most North Sea assets are near the end of their useful life, some cash flow valuation credit can be given as certain wells continue to add value even in their final stages of operation. The surety will also model risk based on production to decommissioning expenditure. Several U.S. Sureties now employ reservoir engineers to help them better evaluate these models and their risk profile. These surety engineers are unique to the U.S. Market.
EPIC Approach
In the past 4 years, we have seen several North Sea lessees obtain the coverage they need by approaching our U.S. underwriters. Our team has obtained North Sea coverage for companies domiciled within the UK and abroad. With a surety headquarters in Houston, we invite any qualifying candidate to visit these underwriters in Houston and present their case to our markets.
EPIC can partner with your current insurance broker to provide this coverage or place these surety bonds directly. Either way, we look to guide any North Sea operator toward a more robust and risk tolerant U.S. Surety Market.
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