A decommissioning revolution21 February 2018
William Roberts reflects on how attitudes towards decommissioning have evolved over the past 30 years.
Thirty years ago, the world of decommissioning simply did not exist. This new world brings new opportunities involving startling innovations, creative engineering and new horizons. In this short piece, I aim to highlight some of the factors, emerging both from bitter disputes and economic forces, that have brought the world of decommissioning into being.
Growing up in Manchester in the UK my childhood landscape was dominated by disused abandoned canals, the husks of cotton mills and former mine workings. We played in the ruins of an old mill in the Medlock Valley and took walks alongside the swampy unnavigable remains of the Rochdale Canal.
Decommissioning and environmental cleanup was a new and contentious idea, formulated with the realisation that global resources might not be infinite and that new chemicals might have dangerous consequences for health and the environment. Investors and governments saw no benefit from investing in expensive cleanup. Facilities were simply fenced off, warning signs erected and wastes routinely dumped at sea, in a landfill or to air.
Thirty years on, decommissioning is seen as a new and vigorous sector, one in which the UK excels, and where the idea that hazards should simply be ‘fenced off’ is condemned as unsustainable.
An accountant’s tale
In 1987, as an accountant with a mathematics degree, I was asked to work on determining nuclear liabilities for British Nuclear Fuels Limited (BNFL), as part of the push to privatise BNFL, Nuclear Electric, Scottish Nuclear, British Energy and Urenco. At that time decommissioning referred only to the cessation of operations, and did not usually include demolition or cleanup.
Liabilities did not refer to demolition, hazard reduction or environmental restoration, but rather to compensation funds, for example in the event of a fall in a disused mine shaft. This was a smaller figure, and as consequences were in the (potentially far) future, they were of little concern in annual cash flows or company results. The liability was associated not with the underlying hazard, but rather with the occurrence of resultant damage, so it was only reported as a ‘contingent liability’, and often had no impact at all on company profitability.
To assure potential investors, BNFL sought to understand its liabilities as a series of cash flows and report them as the present value of those future cash flows, using discounted cashflow techniques. Although discounted cash flows had been used since the Babylonians in 1600-1800 BC, they became popular in the USA following the Wall Street crash of 1929 and entered UK accounting standards in 1988. The method was to gather an engineering estimate of the decommissioning cost for each plant, create a cash flow with a high and low case scenario, and then add up the cash flows to arrive at the total cost.
The decommissioning and environmental cleanup costs represented uncertainties almost a century in the future: hard to grasp; and difficult to estimate and fit into the corporate finance techniques of investment bankers and policymakers, with their 20-year horizons. Being familiar with statistical methods, I created some Monte- Carlo simulations to give a probabilistic estimate for the uncertainties. It was a very substantial increase.
The figure set out in 1987 increased from £72 million, undiscounted, to £135 million discounted in 1988. The ‘raw’ figure was nearly £1bn, but that was an unacceptable lurch in the balance sheet, and given that there were probabilities and future uncertainties the Board decided to take a lower figure, in hopes of successful privatisation. In any event, it was considered that future generations would benefit from technological advances, which would significantly reduce the liability, and that therefore the lower figure was a true and fair view.
By July 2017, the true and fair view of the nuclear liabilities of the UK’s civil nuclear estate stood at £161 billion discounted cash flow. That is a more than a 1000- fold increase since the 1988 accounts. Luckily for investors the privatisation did not go ahead, although that may have reduced the economic drivers for innovation, productivity and efficiencies. Unsurprisingly, decommissioning liabilities are now a significant factor in both offshore and utility acquisitions.
This change in mindset – from the liability being an off-balance-sheet contingent liability in the 1980s, covering possible compensation for damage, to one where the liability is a major feature in the accounts and corporate transactions of energy companies – is an enormous change in approach. What drove this?
Historically, communities have always invested in large and complex structures: pyramids, henges and cathedrals were driven by belief; palaces and monuments celebrated the leaders’ successes; and fortifications were for security. Later, large structures such as transport systems, roads, ports, bridges, canals and railways were built for greater economic returns. In the modern era, oil fields, power stations, energy transmissions, petrochemical industries and factories expanded economic power.
Structures were not built with decommissioning in mind. The concept of waste routes just did not exist.
Closings coal mines changed that. In the UK, 500,000 miners, producing 177Mt of coal at 483 mines in the 1960s fell by 1999 to 13,000 miners at 16 mines producing 21Mt. By the end of 2015, there were no deep coal mines.
Coal mines were previously abandoned and fenced off. But there was a revolution in thinking in the 1980s, that a fresh start for communities was needed. That meant removing the vestiges of mining, converting the slag heaps into landscaped features, capping the shafts and removing the pitheads. The government and the National Coal Board decided to move quickly to remove the physical evidence of the coal industry, driven not only by the hazardous and usually unattractive buildings but also by the politics of moving on after the bitter industrial disputes associated with the closures.
In addition to the social drivers, a dispute in the UK’s oil and gas fields was also driving a new approach to decommissioning. In 1995, environmental activists reacted vehemently to Shell’s proposal for the disposal at sea
of Brent Spa. Greenpeace and others organised a global protest, dominating TV and media with overstated stories of plutonium wastes and successfully boycotting Shell, which had to back down, even while standing by its claim that this was the safest option, both from an environmental and industrial health and safety perspective.
Dumping of radioactive wastes at sea started in 1947. By 1958, the United Nations Conference on the Law of the Sea concluded that “every State shall take measures to prevent pollution of the sea from [the] dumping of radioactive wastes, taking into account any standards and regulations which may be formulated by competent international organisations”. In 1983, the UK stopped sea-dumping of radioactive wastes, and in 1993 there was a total worldwide prohibition (although the UN reports that some countries are sea-dumping off the waters of Somalia). The oceans have always been used as a universal repository for wastes, and the dumping of plastic at sea is a matter of debate now. For oil and gas, military and nuclear decommissioning, the loss of the sea as a universal repository, and the need to create acceptable alternative waste routes has created demand for characterisation, packaging, storage, retrievals and recycling/recovery of waste – a whole new industry.
The science still supports the abandonment of some structures at sea (such as ships and oil rigs) to create artificial reefs, and Engie has a new pilot site in the Netherlands to study the effects of a ‘leave in situ’ policy. In the USA, there is a well-established ‘rigs to reefs’ programme. If disposal at sea is to become again acceptable, it needs a good story to accompany the science, and win back policymakers and public opinion.
New economic drivers now join these social, environmental and political drivers. Share price and enterprise value are now associated with sustainable decisionmaking, and pollution is no longer an acceptable cost-saving because it carries existential penalties. The economic benefits of creating waste infrastructure, and the science of containment, are enormous. A decommissioning and cleanup industry adds value to its host economy, creating competitive advantages and benefit for adjacent sectors as well as for the environment and future generations. The sector looks set for decades of growth, and those early headaches in BNFL are being converted to global opportunities.
William Roberts is Director, Decommology.com