Decommissioning … Deposit, Bond or Insurance? BWEA Offshore Wind 2003 27 March 2003 Ian Culley

1. Decommissioning … Deposit, Bond or Insurance? BWEA Offshore Wind 2003 27 March 2003 Ian Culley Aon Risk Consulting

2. Perspective • There are in excess of 6,500 offshore installations worldwide • predominantly oil & gas related • Estimated cost of removal in excess of US$20 billion • North Sea • 5% of installations • 60% of total cost • Offshore Wind • UK 1,350MW installed by 2006 • UK 2,500MW installed by 2010

3. International Regulatory Requirements • Decommissioning is not a recent issue • Covered by a framework of: • Global conventions and guidelines, • Regional conventions and • National legislation • The London Convention • Signed by 50 countries governs the disposal of waste and material at sea • “Installations with substructures weighing less than 4,000 tonnes situated in less than 75 metres of water be completely removed from the site at time of disposal”

4. International Regulatory Requirements • Geneva Convention on the Continental Shelf 1958, Article 5(5) • UNCLOS 1982 • IMO Guidelines and standards for the removal of offshore installations and structures on the continental shelf 1989 • Oslo Paris Convention – OSPAR (93/3)

5. Local Regulatory Requirements • UK • Petroleum Act 1987 • Requires government approval of abandonment plans • DTI • Responsible for all licensing • Crown Estates • Responsible for offshore installations up to 12 miles • Germany • Federal Mining Law • Requires complete removal of installation and submission of an abandonment plan

6. Regulatory Requirements • Underlying premise: • The taxpayer should never be required to bear the cost of decommissioning offshore installations • The Government ordinarily requires companies to guarantee liability by way of: • Letter of Credit • Cash deposit • Where there is more than one party involved then Government also seeks joint and several liability

7. Regulatory Requirements • Issues: • Government requirements are expensive and financially inefficient for large companies • Crippling when small companies are involved • Become even more inconvenient if original investors are seeking to refinance and are seeking full transfer of all liabilities • Joint Ventures • Government insists that Joint venture investors have joint and several liability with regard to decommissioning costs • Greatly increased credit risk exposure especially for small companies

8. Oil Industry Experience • Insurance Structures • Do not work – contested by the Inland Revenue • UK provides capital allowances to enable developers to offset decommissioning provisions against profit • Therefore no tax deductibility for premiums • Numerous attempts, no known successes • Tax deductibility always an issue

9. Insurance Structures • Duration is a major problem, 20 - 25 years • Insurers have difficulties with policies lasting 10 years • Continued solvency of operator • Ability to pay premiums • Security of insurer • Ability to pay claim • Government perspective • No tax deductibility of premiums

10. Insurance Concept • “Endowment” • Regular payments made during the life of the project, building up a fund equal to anticipated decommissioning cost • Not accepted as an insurance product by Inland Revenue • Ultimately proved unsuccessful

11. Financial Structures • Bonds / Guarantees • Specialised markets • Duration a major issue • Difficult to achieve durations in excess of 10 years • Would not provide any form of protection other than guaranteeing payment of decommissioning liability exposure • In the case of bonds, there is an automatic right to recourse • Requires supporting traditional insurance • Any guarantee would not preclude the Government from recourse to the original licensees in the event of shortfall

12. Offshore Wind • UK - Crown Estate: • Requires the most thorough and acceptable removal of foundations possible • Seeking to require that all wind farm developers must show a net asst value of £50 million to provide for decommissioning liability • Greatly impacts dynamics of wind farm finance models and potential entrants • Oslo Paris Convention – OSPAR (93/3) • Requires that oil and gas structures above the seabed are wholly removed to land for disposal • There is no equivalent requirement for wind energy infrastructures, but UK government departments have indicated that they will follow the spirit of this agreement

13. Offshore Wind • Current estimates by developers that approx £150,000 per MW installed is required to cover decommissioning costs • Based on current projections of wind farm capacity this means current decommissioning costs for UK offshore capacity of around £375 million

14. Offshore Wind - Issues • Provisions for decommissioning are affected by: • Increased costs due to unforeseen technical or engineering problems • Fortuitous events leading to premature abandonment • Changes in governmental regulation • Changes in the prevailing tax regime • Continued solvency of joint venture partners

15. Offshore Wind - Issues • Large developers tend to be vertically integrated • Design, Build, Finance and Operate • Able to capture full value of ROC values • Developers reliant on project finance must secure borrowing via long term Power Purchase Agreements • Environmental revenues are discounted to reflect perceived risks • Regulatory / Legislation

16. Options • Pure insurance is unlikely to offer solution on a stand alone basis • Lateral approaches required • Maximising short term revenues through enhanced recognition of full value of ROCs etc • Revenues from environmental values can secure financing for decommissioning

17. Lateral Approaches • Insurance / finance hybrids that improve or enhance revenue streams enabling greater cover for decommissioning costs through: • removal of risk such as weather related • Wind is free, but it does not always blow according to expectations • provide security of future revenue streams • enhance credit status of long term offtake agreements • guaranteeing value of “green credits” and other incentives received to build wind • Volatility and probability of non-energy revenues amount to 60% of total revenue

18. Lateral Approaches • Where a Joint Venture exists: • Decommissioning exposure is currently joint and several • Possible approach may be to seek a a single bond, whose costs and recourse are shared equally amongst the JV partners • Does not remove the issue of individual JV solvency

19. Lateral Approach Examples • Structured Finance • Contingent Capital • Insurance/finance hybrids • Factoring / Securitisation of receivables • Hedging • Weather • electricity prices • Credit Related • Credit enhancement • Guarantee of debt service • Revenue stream protection

20. Lateral Approach Realities • Realities • Insurers are as complex to deal with as banks • They also need to go through a due diligence and approval process that is as involved as any lenders • Under certain structures they are lenders • We obtained quotes for contingent capital for one organisation developing wind farms where the fee structure was: • Working Fee - US$100,000 • Structuring Fee - US$300,000 • Break-up Fee - US$300,000