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 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 novel solution to decommissioning
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
Our decommissioning solutions draw on our global expertise and that of the wider BNP Paribas Group. Our Multi-Asset and Quantitative Solutions (MAQS) team are responsible for portfolio modelling and management. They leverage the best ideas from our public market investment teams, BNP Paribas Group’s origination channels to source compelling opportunities across private debt and real assets markets, and BNP Paribas Security Services’ custodial, loan administration and loan servicing capabilities.
1 BNPP AM UK Review of 4 power sectors, 2019
2 European Commission, 2019
Any views expressed here are those of the author as of the date of publication, based on available information, and subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This material does not constitute investment advice.
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