The scale of decommissioning required in the oil and gas industry is expected to soar as energy systems shift from fossil fuels and sustainable finance could help to fill a big funding shortfall, according to a report by Sustainable Fitch.
The cumulative cost of decommissioning ageing oil and gas assets may reach US$42bn by 2024, according to research company Rystad Energy, as wells are plugged and installations are dismantled and removed and the environment is restored.
"We're going to see an increase across the board in terms of decommissioning and we can expect it to accelerate much more over the longer term," said William Attwell, associate director of climate risk at Sustainable Fitch.
The cost of retiring the UK’s North Sea oil and gas installations is estimated at more than US$50bn alone, and the US has 2.6m documented onshore wells to plug, which could cost about US$288bn, Carbon Tracker estimates.
The cost of decommissioning is expected to dwarf the amounts pledged by companies and financial assistance programmes, which may leave governments picking up the bill, but signs are emerging that ESG-labelled debt instruments could be used.
"Sustainable financing could help to facilitate the funding and financing gap for decommissioning that we're seeing in many jurisdictions," Attwell said.
Use-of-proceeds bonds such as green, social or sustainable bonds with specific decommissioning or "retirement" use of proceeds are seen as unlikely to work for decommissioning projects as investors with strict ESG mandates already apply negative screening to fossil fuels.
"For companies, specific use-of-proceeds bonds for decommissioning could be tricky – we're not too confident about investor demand,” Attwell said.
Investors that do not screen are still likely to have reservations as they do not necessarily distinguish between a company and an instrument and will be concerned that any financing could be used to fund the continued expansion of fossil fuel assets.
“I would struggle to buy ESG-labelled bonds from an oil and gas company,” an ESG investor said. “It’s not because we have hard exclusions, it's because I haven’t seen any transition plans that are robust and credible enough.”
While corporate use-of-proceeds deals could be problematic, such bonds issued by sovereigns or public bodies for environmental clean-ups could be easier to attract support from investors.
"Environmental remediation by governments is different; we could see investors for green bonds issued by public sector bodies," Attwell said.
There are more indications that performance metrics tied to sustainability-linked bonds, and particularly loans, could be used for decommissioning projects, Sustainable Fitch said.
SLLs for oil and gas companies have been minimal to date. KPIs typically involve CO2 reduction or improving the carbon efficiency of operations and supply chains, but decommissioning could become a bigger theme for industry KPIs and SPT targets, along with preventing methane leaks.
US firm Diversified Energy announced an agreement with lenders led by KeyBank that will see the company’s US$300m revolving credit facility converted to an SLL and includes an explicit SPT to have "asset retirements above current levels" that could prove to be a blueprint for SLL retirement deals.
While the immediate focus is on the North Sea, decommissioning costs in the Gulf of Mexico are expected to be up to US$48bn in the next decade and new financing mechanisms will have to be developed to fund emerging market decommissioning.
Decommissioning offshore wells is difficult and expensive and while the cost of retiring onshore wells is lower, there are more of them, particularly in the US and Canada. Federal programmes are likely to cover only a fraction of the total estimated clean-up costs, which may see the task fall to municipalities and local governments.
The issuance of sub-national green, social or sustainable bonds, or green "muni" bonds, has increased in recent years and is seen as a viable potential source of capital for decommissioning.
"One potential area is raising green municipal debt to finance the repurposing of oil and gas assets, potentially for renewable energy," Attwell said.
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