The sustainable investor for a changing world

Decommissioning stranded energy assets through pre-funding

As the global economy moves to more sustainable sources of energy, companies must successfully decommission their obsolete operating assets such as:

  • Mining sites
  • Coal and nuclear power plants
  • Oil & gas facilities

The challenge

The decommissioning of these obsolete assets must be done in a way that addresses environmental considerations and adheres to ever-tightening regulation. It also comes at a significant cost to the energy company. The United Nations Industrial Development Organisation estimates that there are more than 29,000 power plants and 35,000 coal mines worldwide[1]. Decommissioning a single asset can cost more than $1 billion[2]. In the nuclear and mining sectors, needs such as continuing physical maintenance dramatically increase the final decommissioning cost, as well as the decommissioning period.

Pre-funding: a potential solution

At BNP Paribas Asset Management, we believe companies should seek to pre-fund the decommissioning of mining, coal, nuclear and oil & gas assets, known as decommissioning liabilities. By matching future decommissioning liabilities and avoiding potential cash-flow drawdowns, such a strategy can offer a number of advantages, including:

  • Decommissioning payments are no longer directly linked to volatile commodity or energy prices
  • Potential cost overruns can be mitigated by investment returns
  • Balance sheet, cost-of-capital and credit rating pressures caused by decommissioning liabilities are eased
  • Pre-funding provides more exit options when assets need to be sold, and can be crucial if assets face early decommissioning as a result of political decisions or accidents

In taking a more systematic and robust approach to decommissioning, energy companies can also realise sustainability-related benefits. For instance, they can allocate the funds for decommissioning to green investments or repurpose existing infrastructure into more environmentally friendly uses. The pre-funding of long-term liabilities for mining sites, coal and nuclear power plants and oil & gas facilities fits well within this theme and is something we, as the asset manager for a changing world, both support and encourage.   We discuss these benefits in more detail, as well as the policy outlook, in our paper Decommissioning: A $3.6 Trillion Challenge’.

We have developed an investment solution for corporates that have long-term, environmental remediation liabilities. One such sector is the UK oil and gas sector which has decommissioning liabilities in the UK Continental Shelf of c.£50bn. The COVID pandemic and resultant oil price volatility has further highlighted the inefficiency of matching these liabilities with annual cash-flows or, given the interest rate environment, through traditional treasury management instruments. With the UK Oil and Gas Authority itself keen to improve the certainty that these liabilities will be met and the growing pace of the energy transition read how our pre-funded decommissioning investment solution can help reduce the annual contributions required to meet them and enhance the ESG profile of the companies involved.

Despite often representing the single largest liability on nuclear, oil & gas, power, mining and other company balance sheets, decommissioning has long been overlooked. With the decline of traditional energy however, decommissioning is making its way to the forefront of many corporate agendas. We present a bottom up review of balance sheet data from over 150 nuclear, power, mining and oil & gas companies over the past 5 years in our new paper ‘Decommissioning: A look under the bonnet’.  It shows the impact decommissioning liabilities can have on the financial standing of a company and the resulting implications for long-term corporate strategy.

[1] BNPP AM UK Review of 4 power sectors, 2019

[2] European Commission, 2019

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