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

2. IAC March 2003 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. IAC March 2003 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. IAC March 2003 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. IAC March 2003 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. IAC March 2003 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. IAC March 2003 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. IAC March 2003 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. IAC March 2003 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. IAC March 2003 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. IAC March 2003 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. IAC March 2003 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. IAC March 2003 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. IAC March 2003 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. IAC March 2003 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. IAC March 2003 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. IAC March 2003 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. IAC March 2003 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. IAC March 2003 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. IAC March 2003 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

21. IAC March 2003 21