Publication - Independent report

Ultra-deep water port: feasibility study

Published: 27 Nov 2018

Report compiled by Ernst & Young following their feasibility study looking at the most cost effective locations for an ultra-deep water port in the UK.

122 page PDF

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122 page PDF

2.0 MB

Contents
Ultra-deep water port: feasibility study
9. Cost Benefit Analysis

122 page PDF

2.0 MB

9. Cost Benefit Analysis

9.1 Introduction

This section assesses the potential costs and benefits of developing an UDW port at the two locations brought forward from the location assessment. It outlines the relevant costs and benefits to the UK economy while highlighting the key risks and sensitivities to the project.

9.2 Methodology

The methodology adopted is consistent with HM Treasury Green Book and SG Guidance and covers a 20 year operational period. Our methodology is outlined below:

1. Identify Costs and Benefits: in conjunction with SG and its key stakeholders, a range of costs and benefits of an UDW port were identified. This includes an assessment on whether the particular costs or benefits can be quantified or not, and their treatment in the CBA. Costs and benefits which cannot be quantified are included as supplementary commentary to the CBA.

2. Forecast timeline of projects: the decommissioning timeline outlined in the Market Demand Section (figure 3) is used as the underlying database which estimates when projects will come to market[16]. We use three scenarios which vary the success of the UDW port being able to attract decommissioning projects.

3. Estimate direct quantifiable benefits: following discussion with SG and its key stakeholders, we identified the following quantifiable direct benefits:

a. Onshore decommissioning activity: output value of decommissioning projects for an onshore contractor. This is determined by valuing each project in the forecast timeline of projects at the estimated price per tonne for the onshore contractor and the value of recycling material brought onshore.

b. Transit time savings: vessel day rate savings should a UK UDW port offer reduced transit times. This is calculated based on estimates of vessel day rates, the number of transits to a UK UDW port compared to benchmark ports.

4. Estimate indirect and induced impacts from onshore activity: The economic value of benefits deriving from the onshore decommissioning activity is calculated by using the direct benefit output impacts then:

a. Estimating the indirect and induced output impacts from the onshore decommissioning activity by using the economic output multiplier from the SG economic input-output tables.

b. Estimating the Gross Value Added (GVA) and employment impacts using employment and GVA effects from the SG economic input-output tables. This provides an estimate of the gross economic benefit from onshore decommissioning activity as a result of developing an UDW port.

c. Estimating the net economic benefit by considering a displacement factor for work in this industry which may be won by UK yards without the need for developing an UDW port.

d. Calculating the net economic benefits as net GVA impact in present values.

5. Estimate Costs: Costs are estimated based on available information and discussions with market participants, including consideration for optimism bias. Future costs are discounted to present values.

6. Calculate Cost Benefit Ratio (CBR): The CBR is calculated as the present value of total quantifiable costs compared to the present value of total quantifiable benefits over the 20 year assessed period. This also provides commentary on the qualitative benefits and costs of developing an UDW port.

7. Sensitivity Analysis and Risks Assessment: The CBR is subject to a number of key assumptions and therefore it is supplemented by sensitivity analysis which assesses and flexes the key inputs. Finally, we highlight key risks impacting the project, together with potential mitigating actions.

9.3 Identify Costs and Benefits

The list of costs and benefits of a UK UDW port were identified through discussions with SG and its key stakeholders, as well as feedback from the market consultation.

9.3.1 Benefits

The benefits of developing an UDW port are outlined in the table over page. This also highlights whether the benefits can be quantified as part of this feasibility study.

Table 14: Identified Benefits

Benefits

Detail

To be quantified

Onshore decommissioning activity

Onshore recycling and disposal work which could be performed in the UK, including the value of recyclable materials to the onshore contractor.

Yes

Transit time savings

Reduced transit time between the platform and port, which reduces the number of days an UHLV is required to be hired for.

Yes - but not included in CBR because savings are deemed too uncertain

Cheaper onshore disposal costs

Lower onshore disposal costs in the UK compared to competitors' locations.

Yes - but not included in CBR because savings are deemed too uncertain

Construction work

Economic activity generated from the construction work to develop the UDW port.

Yes - but not included in CBR in line with HMT guidance

Increased market competition

An additional UDW port in the market may increase the market competitiveness and drive lower decommissioning costs.

No

Simplified waste treatment

Simplified process for operators in managing hazardous waste from platforms.

No

HLV Activity

Vessels require bunkering, provisions, crew changes, berthing etc. which have benefits for the supply chain and port.

No

Multi-use opportunities

Ability to use the UDW port for other economic activity going forward.

No

Source: EY Analysis

9.3.2 Costs

The costs of developing an UDW port are outlined in the table below. This also highlights whether the costs could be quantified as part of this feasibility study.

Table 15: Identified costs

Costs

Detail

To be quantified

Construction

Costs for developing the UDW port e.g. dredging, quay construction costs.

Yes

Financing

Financing costs to deliver the UDW port.

Yes - but not included in the CBR

Maintenance

Costs to maintain the up-keep of the UDW port.

Yes

Environmental factors

Negative impact of decommissioning activity on the UK environment.

No

Disruption to ongoing operations

Negative impact on current operations at the site.

No

Source: EY Analysis

Construction and maintenance costs are reviewed and quantified for the purposes of estimating the CBR. Financing costs are considered as part of the CBR sensitivity analysis. Environmental factors and disruption to on-going operations are qualitatively discussed.

9.4 Forecast timeline of potential projects

9.4.1 Additional Drivers

There are a number of factors in addition to having UDW which operators consider when deciding on an onshore disposal location. The following considerations were raised during our market consultation:

  • Capability of the onshore contractor to perform all required onshore disposal and recycling activities. In particular the handling of hazardous waste streams.
  • Experience of the onshore contractor and confidence in the onshore contractor to perform the required work in a safe manner.
  • The port location having all the required waste management licences.

After all these factors have been considered and evidenced, the selection of an onshore disposal location is driven by price offered by the onshore contractor. This message was consistently reiterated during the market consultation exercise.

Given the additional factors, it is not possible to accurately estimate what projects a UK UDW port could attract. However, through consultation and discussion with SG and its key stakeholders, we have sought to provide a reasonable estimate for the purposes of quantifying the benefit. This section assesses a range of success scenarios where an UDW port is able to attract decommissioning work.

9.4.2 Scenarios considered

The scenarios considered in this section derive from the forecast of decommissioning projects outlined in the Market Demand section (figure 3). This is replicated below.

Figure 5: Estimated topside and substructure decommissioning tonnage per year

Figure 5: Estimated topside and substructure decommissioning tonnage per year

Source: EY Analysis

This forecast outlines expected topside and substructure removal timings based on currently forecasted CoP dates. CoP dates can vary due to a number of factors, including changes in oil prices. In addition, the timing of platform removal following CoP will vary from platform to platform. Therefore, this forecast outlines a current best estimate and does not represent a definitive timing of decommissioning projects.

We estimate a three year development period which includes one year to secure the relevant consents followed by two years of construction. We assume the consents process can commence in 2019, meaning a UK UDW port will be completed and able to attract decommissioning projects from 2022 onwards.

As the CBA is assessed over a 20 year period, only projects which are forecasted to come to market between 2022 and 2041, inclusive, are considered as potential projects to be included in the analysis. A 20 year period has been selected as this is a standard length of time over which project appraisals are performed and it covers the period over which the majority of decommissioning activity expected to come to market. This reduces the 64 platforms included in the candidate platform list (per Market Demand section) to 52 as 8 projects are forecast to come to market before 2022 and a further 4 projects are forecast to come to market after 2041.

The scenarios considered for the CBR are outlined in the table below.

Table 16: Cost benefit scenarios

Scenario Name Description Number of projects Average Platform* Weight
(Tonnes)
Percentage of market share^
Low The UK UDW port wins a project on average every three years 7 38,179 13%
Mid The UK UDW port wins a project on average every two years 10 37,978 19%
High The UK UDW port wins a project on average every year 20 37,870 37%

Source: EY Analysis, *includes topside and substructure, ^proportion of the 52 projects expected to come to market over the 20 year operational period

The differentiating factor between the scenarios is the number of projects which are won over the course of the 20 year operational period. In determining the projects to include within each scenario, consideration is given to the size of projects which are expected to come to market in each year. Medium sized projects (i.e. excluding the largest and smallest projects each year where applicable) were used. The projects included in each scenario have approximately the same average tonnage so fair comparisons can be made.

A range of factors are considered when deciding an appropriate onshore location for the platform decommissioning. As there is no single factor which would support this decision, no differentiation is made between the potential projects which would be taken to either Dales Voe or Nigg for the purposes of this analysis.

9.5 Direct Quantifiable Benefits

This section reviews the benefits deriving from the UDW port through each of the assessed scenarios. Where applicable, the benefits are quantified. Benefits which are not quantified are discussed at the end of the section.

9.5.1 Onshore Decommissioning Activity

The value for onshore decommissioning activity includes value derived from the onshore contractor costs and value recoverable from recycling materials.

Onshore Contractor Costs

Based on a review of current decommissioning forecasts and market feedback, £300 per tonne is used as our estimate of the decommissioning work. This estimate is net of value derived from the onward sale of material from decommissioning projects.

The table below outlines total tonnages and onshore contractor costs under each scenario.

Table 17: Direct value of onshore decommissioning work

Scenario Name Tonnes Value
(£'000)
Low 267,253 80,176
Mid 379,778 113,933
High 757,406 227,222

Source: EY Analysis

As highlighted above, the direct value of work for an onshore contractor, net of the value recoverable from recyclable materials, is estimated between £80m and £227m depending on the scenarios considered.

Recycling value streams

To estimate the quantum of recyclable materials in future projects we reviewed the lists of platform inventory from five decommissioning programmes. Each programme outlined inventory at different levels of detail. As such, they have been allocated to broad categories to allow for a comparison of expected materials. The results are highlighted in the table below.

Table 18: Inventory Assumptions

Inv. Project 1
(tonnes)
Project 2
(tonnes)
Project 3
(tonnes)
Project 4
(tonnes)
Project 5
(tonnes)
Total
(tonnes)
%
Carbon Steel 41,017 21,686 92,619 23,417 36,792 215,531 77.0%
Non-ferrous metals 3,481 2,857 4,215 1,000 3,276 14,829 5.3%
Stainless Steel 1,236 579 8,429 1,700 1,899 13,843 4.9%
Marine Growth 2,394 2,117 6,100 997 1,657 13,265 4.7%
Other* 1,517 573 3,660 3,400 2,930 12,080 4.3%
Concrete 1,295 1,669 1,996 461 588 6,009 2.1%
Plastic 1,228 649 998 351 153 3,379 1.2%
NORM / Hazardous Waste 246 455 333 62 21 1,117 0.4%

Source: EY Analysis, *includes a range of inventory including, but not limited to rubber, wood, residual oils, paint, insulation.

The top three categories are for metals which will be sold by the onshore contractor. To estimate a value of these metals we reviewed quotes[17] over the previous three years. The prices for metals are dependent on a number of global demand and macroeconomic factors. As such there is no set price which can be applied to the analysis. To provide a conservative estimate, we used prices at the lower end of price ranges[18]. The prices used for the purposes of our study are:

  • Carbon Steel - £100 per tonne. We noted prices varying between £50 and £200 per tonne over the last three years.
  • Non-ferrous metals - £500 per tonne. This refers to a basket of different metals including aluminium, copper and zinc. These metals are more valuable than steel. Prices for metals contained within this basket have varied between £250 and £4000 per tonne over the last three years. In general, copper was often the most significant metal in this group. It has traded towards the upper end of our non-ferrous price range over the last three years. As such, the use of £500 per tonne may be considered a conservative estimate for non-ferrous metals from platforms.
  • Stainless steel - £500 per tonne. We have noted prices between £450 and £940 per tonne over the last three years.

By applying the inventory assumptions and the assumed prices to the tonnages in each scenario we can estimate the direct value of the onshore recyclable material. This is outlined in the table below.

Table 19: Recycling value streams

Scenario Name Tonnes Value
(£'000)
Low 267,253 34,249
Mid 379,778 48,670
High 757,406 97,064

Source: EY Analysis

The combination of onshore contractor costs (outlined in Table 17) and recycling value revenues (outlined in Table 19) equates to the direct output impact of onshore decommissioning economic activity. This is used to determine the economic value of onshore decommissioning work in terms of indirect and induced economic impacts, GVA and jobs in Section 9.6.

9.5.2 Transit time savings

When removing platforms, UHLVs are often required to make several trips to and from the onshore location to transfer modules. As UHLVs charge per day for the use of their vessel, shorter distances to a UK UDW port could reduce the transit times between platform and port, resulting in lower overall decommissioning costs.

We have reviewed the distances between the 52 candidate platforms expected to come to market between 2022 and 2041 and Nigg, Dales Voe, Stord and Vats[19]. All platforms with the exception of three are closer to UK ports than Norwegian alternatives. More than half are closest to Dales Voe.

Table 20: Closest Port to Platform

Table 20: Closest Port to Platform

Source: EY Analysis

In deciding the appropriate alternative ports to include we considered the capabilities of key Norwegian ports. Stord and Vats both have experience in performing reverse engineer decommissioning projects using UHLVs. Consideration was given to a Lutelandet port which is currently targeting decommissioning projects. Ultimately, this was not included in the analysis as we understand this site is not able to accommodate reverse engineer projects due to not having the required water depths or load bearing capacities at its quays.

In order to estimate the value of achieved journey time savings, we have been required to make a number of assumptions on vessel day rates and the number of trips made between platform and port during the decommissioning process. These are:

  • The number of trips between platform and port is generally dictated by the size of modules the UHLV can place on its deck. As we do not have the detailed information on the dimensions of platforms and their modules we use weight as a proxy. Our working assumption is that 8,000 tonnes will be transported each time from platform to port[20].
  • The day rates for UHLVs can significantly fluctuate depending on the demand for their services. Understandably, no operator is willing to provide commercial detail on what they charge or what they have been charged. Therefore, our working assumption from speaking with industry stakeholders is that a rate of £500k per day is not unreasonable.
  • How transit times are modelled into decommissioning costs by UHLV operators is commercially sensitive. We do not have sight of this, as such, we have considered there to be a transit time saving under two scenarios:
    • Daily basis: transit time savings are achieved when it would take less than one day to reach either Dales Voe or Nigg, compared to taking more than one day to reach the closest Norwegian alternative. The saving per trip equates to the full vessel day rate.
    • Hourly basis: transit time savings are achieved when its takes at least one hour less to reach either Dales Voe or Nigg, than it would to the closest Norwegian alternative. The saving per trip equates to the number of hours saved and the estimated vessel hourly rate (i.e. vessel day rate divided by 24 hours).

Factoring these assumptions into the analysis, the number of trips equates to the platform weight (topside and substructure) divided by 8,000 tonnes. This is multiplied by two to estimate the number of trips to and from the platform.

Whether there is true transit time savings available for UK ports compared to alternative locations depends on the particular vessel used and its transit speed. The Thialf vessel has a transit speed of 6 knots whereas the Sleipner vessel (expected in the market in 2019) has an expected transit speed of 10 knots[21].

6 Knots Transit Speed

At 6 knots, when transit time savings are calculated on a daily basis:

  • 20 platforms are within a one day transit to Dales Voe, whereas it would take more than one day to reach the closest alternative Norwegian Port. For these 20 platforms, we estimate that 206 transit days could be saved which equates to an expected £103m of transit time savings.
  • 4 platforms are within one day transit time to Nigg, whereas it would take more than one day to reach the closest alternative Nowegian Port. For these 4 platforms, we estimate that 32 transit days could be saved which equates to £16m of transit time savings.

At 6 knots, when transit time savings are calculated on an hourly basis:

  • 42 platforms are closer to Dales Voe than the closest alternative Norwegian port. For these platforms, we estimate that 2,940 transit hours could be saved, equating to £61.25m of transit time savings.
  • 29 platforms are closer to Nigg than the closest alternative Norwegian port. For these platforms, we estimate that 984 transit hours could be saved, equating to £20.5m of transit time savings.

10 Knots Transit Speed

At 10 knots, when transit time savings are calculated on a daily basis:

  • All platforms included in our list of projects have the same number of day's transit between the UK ports and the closest Norwegian port. As such, there is no estimated transit time savings for vessels which travel at this speed.

At 10 knots, when transit time savings are calculated on an hourly basis:

  • 42 platforms are closer to Dales Voe than the closest alternative Norwegian port. For these platforms, we estimate 1,730 transit hours could be saved, equating to £36m of transit time savings.
  • 29 platforms are closer to Nigg than the closest alternative Norwegian port. For these platforms, we estimate 984 transit hours could be saved, equating to £11.5m of transit time savings.

Summary

Transit time savings may be achievable with a UK UDW port depending on the particular platform considered, vessel used and how the transit costs are modelled. Due to the lack of certainty over whether the transit speeds could lead to actual cost savings, this benefit is not quantified for the CBR, and is considered as a potential qualitative benefit at Section 9.6.2.

9.5.3 Summary of Direct Quantifiable Benefits

This section has reviewed the direct quantifiable benefits from having a UDW port in the UK which is able to attract greater levels of decommissioning activity. The table below summarises the value of the quantified direct output benefits applicable for both Dales Voe and Nigg.

Table 21: Summary of Direct Benefits

Scenario Name Onshore Contractor
(£'000)
Recycling Value
(£'000)
Onshore Contractor Decommissioning Activity
(Output) (£'000)
Low 80,176 34,249 114,425
Mid 113,933 48,670 162,603
High 227,222 97,064 324,286

Source: EY Analysis

These direct benefits are used in the next section to quantify the economic benefit from having this extra activity in the UK. Unquantified benefits are also discussed in the next section.

9.6 Economic Value of Benefits

In this section we estimate the economic value and supply chain effects of the direct benefits identified in the previous section. There are three main sources of economic benefit to the UK economy:

  • Economic Activity and Location Impacts (EALIs): The impacts of the proposed intervention expressed in terms of their net effects on the local and national economy. Specifically, these are associated with the onshore decommissioning activity; through onshore decommissioning work and recycling value streams.
  • Decommissioning Economic Efficiencies (DEEs): The potential decommissioning cost reduction impacts of the proposed intervention; i.e. transit time savings, lower onshore contractor costs.
  • Wider Economic Benefits (WEBs): This relates to the notion that a potential UK UDW port facility can deliver transport impacts or agglomeration effects (a concentration of activity) and other impacts. We do not assess these benefits quantitatively, but rather identify some of the additional benefits which have been highlighted in consultations.

EALIs are associated with onshore decommissioning economic activity. The economic value of benefits from the onshore decommissioning activity at an UDW port are calculated using the methodology outlined in Section 9.2. The working assumption is that these impacts are additional relative to a counterfactual where there is no UK UDW port facility. This reflects recent evidence that all reverse engineer decommissioning projects using UHLVs have been taken to Norway. It does not necessarily mean that no future large decommissioning projects will be won in the UK. Per table 16, the high scenario assumes the UK UDW port is able to capture 37% of projects over the 20 year operational period. Thus, a substantial number of UKCS projects are still available for other UK operators to target, specifically those capable of accommodating single-lift. Consideration has been given to the potential for a UK UDW port to displace future activity which could be generated through barge transfer of modules. However, while we note a number of operators are investing to improve the efficiency of barge transfers, we have not been made aware of a commercially competitive alternative to direct to quay module transfer. As such, for the purposes of performing the CBR, no displacement is assumed. However, a displacement assumption is included in the sensitivity analysis to illustrate the impact this would have on the results.

DEEs drive cost reductions arising through a number of areas of potential saving and efficiency. These costs savings would be expected to benefit platform operators through reduced overall decommissioning costs and therefore do not have a direct impact on the UK economy in terms of activity. It depends on how any savings are deployed by operators. For example, savings could be allocated to further investment in the offshore sector, and given the nature of the global industry may be deployed elsewhere. It is also feasible that savings would be redeployed as profit or dividends to shareholders, with a number of operators not being UK headquartered and shareholders being global in nature. As such, we do not assume that decommissioning efficiencies will feed directly to increased onshore economic activity.

However, there may be expected direct benefits to the wider UK public sector from reduced overall decommissioning costs through reduced allowances provided by the UK tax system for assets being decommissioned in UK basins. This could be a direct benefit to the UK Exchequer, but at this feasibility stage we do not have sufficient sight of expected operator costs at present. Given a lack of detail on current operator cost estimates and whether these savings will materialise we do not consider these estimates sufficiently robust to include in the CBR. Instead we do discuss these benefits in the DEEs subsection below.

Finally, we qualitatively discuss the WEBs.

9.6.1 Economic Activity and Location impacts (EALIs)

In estimating the economic activity and location impacts we assume the direct output impact of the onshore decommission activity is sufficiently captured by the sum of the onshore decommissioning work and recycling value stream, which have already been estimated in 2018 current prices. Furthermore, we assume that the final demand is to the waste, remediation & management Industrial organisation category (IOC) in the SG Input-Output (IO) Framework.

To calculate the direct impacts upon an industry we employ the following Scottish Government methodology and latest available SG IO multipliers for Standard Industrial Categorisation (SIC) 38, 39.

  • The total effect on output (using Output Multipliers): The indirect and induced effect on this industry's suppliers, we multiply the direct output impact by the Type II output multiplier for this industry (1.6) giving a total of direct plus indirect and induced impacts (direct, indirect and induced effects).
  • The total effect on employment/jobs (using Employment Effects): Multiplying the direct output change (in millions) by the Type II employment effect for the Waste, remediation & management industry (10.2) to give an estimate of the direct plus indirect and induced employment changes resulting from this additional output.
  • The total GVA impact (using GVA Effects): The GVA effects estimate the effect of the direct change in output upon GVA in Scotland. Multiplying the direct output change by the Type II GVA effect for Waste, remediation & management (0.7) gives an estimate of the direct plus indirect and induced GVA impact resulting from this additional output.

Details of the economic impacts are provided in the table below. This captures the forecasted economic activity over the 20 year operational period in each scenario considered.

Table 22: Decommissioning activity - Economic Impacts

Scenario Name Direct Output Impact
(£'000)
Total Output Impact
(£'000)
Total Job Impact
(Average FTE per year)
Total GVA Impact
(£'000)
Total Discounted GVA Impact
(£'000)
Low 114,425 184,208 58 80,734 51,315
Mid 162,603 261,768 83 114,726 74,147
High 324,286 522,053 165 228,803 150,908

Source: EY Analysis, Scottish Government Input-Output Type II Multipliers

In summary:

  • In the mid scenario, it is estimated that a UK UDW port facility could contribute £115m net to Scotland's economy and support on average approximately 80 net jobs per year.
  • In the low scenario this falls to just over £80m in net contributions to the economy and 58 net jobs per year.
  • For the high scenario, this increased to a £229m economic contribution and over 160 net jobs per year.

The net GVA impact is discounted using the Social Time Preference Rate of 3.5%, as per HMT Green Book guidance. This accounts for the notion that people tend to prefer goods and services now, rather than in the future. The GVA impact across the 20 year period, discounted at the Social Time Preference Rate, is the quantified benefit which is included in the CBR.

9.6.2 Decommission Economic Efficiencies (DEEs)

This section considers each of the identified DEEs in turn. Where estimates of DEEs are made, the benefit to the UK is considered as the reduced tax liability for the UK Exchequer. Platform operators are able to offset decommissioning costs against taxable revenues. The relevant tax rate is different per operator with a range of 40% to 75% being generally applicable. For the purposes of outlining potential tax savings, we use 40%, as the lower end of this range to outline a more conservative estimate. This is used as a broad range for all operators in the market. Due to the complexity of the fiscal regime and Decommissioning Relief Deeds a more detailed estimate is not possible for the purpose of this study.

Transit time savings

When removing platforms, UHLVs are often required to make several trips to and from the onshore location to transfer modules. As UHLVs charge a day rate for the use of their vessel it is possible that shorter distances to a UK UDW port could reduce the transit times between platform and port, resulting in lower overall decommissioning costs.

Lower onshore decommissioning costs

Through our market consultation, it was highlighted by interviewees that in their experience UK port disposal costs were lower than the Norwegian options. This is primarily due to the lower costs of labour in the UK. It was however noted that Norwegian ports are actively investing in mechanical solutions to reduce their reliance on labour to offer more competitive prices.

To provide an illustration of the potential quantum of these savings we have considered a number of situations where UK decommissioning costs are 10%, 20% and 30% lower than Norwegian options. This is based on feedback from market consultations with one interviewee suggesting Norwegian Ports were up to 40% more expensive than UK options. The table below outlines the value of these cost savings and the potential tax savings for the UK Exchequer.

Table 23: Lower onshore decommissioning cost savings

Potential Operator Cost Savings
(£m)
Potential Tax Savings
(£m)
Level of Saving 10% 20% 30% 10% 20% 30%
Low 8,018 16,035 24,053 3,207 6,414 9,621
Mid 11,393 22,787 34,180 4,557 9,115 13,672
High 22,722 45,444 68,167 9,089 18,178 27,267

Source: EY Analysis

Depending on the scenario considered and the level of saving assumed, operators could benefit from a saving of between £8m and £68m from bringing the modelled projects back to the UK as opposed to alternative more expensive ports. This level of saving would result in a benefit to the UK Exchequer of between £3m and £27m, assuming an applicable tax rate of 40%. Assuming an applicable tax rate of 75%, this would result in a benefit to the UK exchequer of between £6m and £51m.This analysis considers that Norwegian yards are more expensive than the UK's £300 per tonne estimate. If the UK is able to offer decommissioning projects below £300 per tonne and Norwegian port costs remain the same, this would increase the overall level of savings, but reduce the level of direct benefit from onshore activity.

Increased competition in the market

The addition of a new UDW port into the decommissioning market will provide added competition which can drive efficiencies leading to lower prices charged for decommissioning. There is a circularity to this point whereby lower costs would lead to a lower level of benefit per our calculations for the onshore decommissioning activity.

Simplifying waste treatment

Market consultations highlighted that a UK UDW port may have benefits from a waste handling perspective. These are:

  • Operators need to apply to SEPA for permission for naturally occurring radioactive material (NORM) waste of NORM contaminated items to leave the UK. If the platform was brought to the UK, then operators would not be required to undergo this process.
  • Any radioactive wastes removed from platforms abroad needs to be returned to the UK. This requires an extra transfer of waste from the country of platform destination to the UK. If the platform was decommissioned in the UK, then there is no need for this, saving costs.
  • A potential requirement to remove mercury before any platform leaves the UK or repatriate it if it does leave the UK would add costs to the decommissioning project. If the platform was decommissioned in the UK, it would avoid these additional costs.
  • One market participant highlighted that Norwegian regulators have a policy of requiring the treatment of refractory ceramic fibres the same as asbestos. As a result of this treatment, costs for the onshore disposal element increase. This is not the requirement in the UK suggesting that this element of the cost could be lower if performed in the UK.

9.6.3 Wider Economic Benefits (WEBs)

The WEBs from a UK UDW port are highlighted below:

Multi-use opportunities

Our market consultation highlighted that an UDW port could also support 6th and 7th generation drilling rigs coming direct to shore for maintenance and capex. No other specific activities from the oil and gas sector were identified which require UDW.

There were no specific need from the offshore renewable energy sector for an UDW port. However, as this industry develops and structures become bigger, there may be a need for an UDW port at some point in the future.

Given the proximity of a UK UDW port to the North Sea, the location may be able to support existing capital expenditure programmes.

UHLV Activity

An increased level of UHLV activity at a specific port location can provide additional benefits to the wider supply chain such as bunkering, provisions, crew changes, berthing, etc.

9.7 Costs

This section reviews the costs deriving from the UDW port through each of the assessed scenarios. Where applicable, the costs are quantified. Costs which are not quantified are discussed at the end of the section.

9.7.1 Construction Costs

This section gives consideration to the estimated construction costs of an UDW port and any residual value which may derive from it from the end of the operational period.

Development costs

Dales Voe has performed an assessment which outlines the cost to develop an UDW port at that site is c£40m.

To our knowledge, Nigg has not performed a detailed cost assessment for developing their quay into an UDW port. Arch Henderson have performed a high level assessment on the expected costs for developing NIGG into an UDW port. It is estimated to cost £48m which is 20% greater than the costs at Dales Voe. In reaching this conclusions Arch Henderson considered:

  • Both quays would require significant dredging, with Dales Voe requiring more than Nigg due to there being a greater distance to an existing channel depth of -24m CD. This is because a proposed UDW quay at Nigg could be built at the end of the existing finger jetty which reduces the distance of the proposed quay to natural deep water in the channel. At Dales Voe the quay would be built out from the existing shoreline.
  • Both quays would also require extremely high modulus quay walls which would be tied back to anchor walls via a tie system. Due to the fact that the extension at Nigg would extend from the end of the existing finger jetty, rather than the shoreline, a greater length of quay wall would be required here than at Dales Voe, due to the requirement of the berthing face return walls. Dales Voe could utilise rock armour faced revetments extending out from the shoreline.
  • Broadly speaking, the cumulative cost of new quay construction and dredging could be considered to be similar between Dales Voe and Nigg.
  • However, the existing finger jetty at Nigg is not considered to be wide enough to support transportation of components from a newly developed UDW quay, nor does it have the required load capacity. It would therefore be necessary to widen the existing finger jetty and strengthen the existing section of finger jetty by installing a pile supported slab. The cost associated with widening and strengthening the finger jerry at Nigg can approximately be considered the difference in cost between developing an UDW quay at the two facilities, estimated at around 20%.

Residual value

As quays tend to have a useful life which is significantly greater than the 20 year operational period assumed as part of this analysis, consideration has been given to the residual value of an UDW port. In order to provide an estimate of this, we would need to have a reasonable understanding of the expected activities which would be performed at the quay beyond the operational period and the value derived from it. As we do not have sight of this, we have included a residual value of £1 in our model.

Total construction costs

The total construction costs are highlighted in the table below. As the construction is expected to commence in 2020 and be spread evenly over two years, the present value of these costs are also outlined.

Table 24: Construction Costs

Total Construction Costs
(£'000)
Discounted Total Construction Costs
(£'000)
Dales Voe 40,000 36,709
NIGG 48,000 44,051

Source: EY Analysis

In accordance with HMT Green Book guidance we do not consider the construction impacts as benefits. Although it is not uncommon in local economic impact assessments to consider the construction benefits.

For illustrative purposes, our analysis of this shows that the £40 million (for Dales Voe) or £48 million (for Nigg) spending on construction for the development of a UK UDW port facility over the two years 2020-2021 is estimated to support, in gross terms, on average 300 jobs (for Dales Voe) or and over 350 jobs (for Nigg) and contribute approximately £33 million (Dales Voe) or £40 million (Nigg) to Scotland's GVA in each year.

9.7.2 Maintenance Costs

Over time, it is assumed that regular maintenance work will be required for up-keep of the UDW port. The working assumption used for this equates to 0.5% of construction costs per annum[22] , for example, Dales Voe at an estimated cost of £40m, would equate to £200k per annum in maintenance costs. This is incurred each year over the 20 year operational period.

The total maintenance costs for each of the locations are outlined in the table below.

Table 25: Maintenance Costs

Total Maintenance Cost
(£'000)
Discounted Total Maintenance Cost
(£'000)
Dales Voe 4,000 2,563
NIGG 4,800 3,077

Source: EY Analysis

9.7.3 Financing Costs

HM Treasury Green Book guidance outlines that financing costs either through borrowing or raising taxes should not be considered when performing an economic appraisal on a proposed development. Instead, financing costs should be considered as part of the financial appraisal. This guidance is generally focused on public sector developments (e.g. schools, hospitals). Based on our understanding of the project, it will likely need to be financed by a mixture of public and private finance, the details of which would need to be developed at the business planning phase.

As there is no currently defined plan for funding the project, we have not considered the impacts of financing costs for the CBR. However, within the sensitivity analysis, we outline what the impacts may be on the CBR through different levels of private and public sector support.

9.7.4 Other costs

Other costs noted are:

  • Environmental costs: As noted in Table 18, marine growth accounts for c5% of the expected platform tonnage. When this is brought onshore it decomposes and creates a foul odour. During discussions with the market it was highlighted that residents in the local proximity to Norwegian UDW ports have recently complained about the negative impact this work is having on them.
  • Disruption of ongoing activities: It can be expected that the development of an UDW port at Dales Voe or Nigg may disrupt current activities. This is not quantified for the purposes of this study as EY does not have details on the future business plans, projects and expected work at each location.

9.8 Cost Benefit Ratio

This section compares the quantified costs and benefits to highlight a CBR for each location under each scenario. The table below summarises the analysis.

Table 26: Cost Benefit Ratio

Dales Voe Nigg
Low
(£'000)
Mid
(£'000)
High
(£'000)
Low
(£'000)
Mid
(£'000)
High
(£'000)
Construction 36,709 36,709 36,709 44,051 44,051 44,051
Maintenance 2,563 2,563 2,563 3,077 3,077 3,077
Total Cost 39,272 39,272 39,272 47,128 47,128 47,128
Onshore contractor & recycling 51,315 74,147 150,908 51,315 74,147 150,908
Total Benefits 51,315 74,147 150,908 51,315 74,147 150,908
Cost Benefit Ratio 1.31 1.89 3.84 1.09 1.57 3.20

Source: EY Analysis

As we assume each location could win the same projects, the quantified benefits are the same. Therefore, costs are the differentiating factor between the locations. As Nigg has a higher estimated construction cost, it also has assumed maintenance costs, making the CBR higher for Dales Voe across all scenarios.

All scenarios show a CBR of greater than 1. The key determinant on the ultimate success of a UK UDW port depends on its ability to attract a sufficient proportion of the market share. Beyond having UDW, the economic and commercial success of a new UDW port will also depend on the capabilities of onshore contractors who will use the port and the price they can offer the market.

It should be highlighted that the above analysis does not consider the impact of private financing costs. As it is likely that the development will require private finance, this is considered in the following section.

9.9 Sensitivity Analysis

9.9.1 General Sensitivities

A number of assumptions have been made to determine the CBR. These are sensitised to highlight the impacts on the CBR. Sensitivities considered are:

  • Construction Costs: Construction costs are increased and decreased by 20% to highlight the impact of potential efficiencies or overruns and more significant optimism bias assumption.
  • Onshore Contractor Value: The anticipated £300 per tonne estimate is increased and decreased by £100 to highlight the impact that increased demand or greater competition may have on the value of onshore work.
  • Steel Price: The onshore contractor is able to hold its stock of steel until a point when market prices are favourable for sale. In this case, £250 is received per tonne of steel.
  • Displacement: For illustrative purposes, 20% of the activity won by the UDW port is a displacement of activity which would have been won by other UK ports.

The results of this sensitivity analysis is highlighted in the table below.

Table 27: Cost Benefit Ratio Sensitivities

Dales Voe Nigg
Low (CBR) Mid (CBR) High (CBR) Low (CBR) Mid (CBR) High (CBR)
Base Case 1.31 1.89 3.84 1.09 1.57 3.20
Construction Costs +20% 1.09 1.57 3.20 0.91 1.31 2.67
Construction Costs -20% 1.63 2.36 4.80 1.36 1.97 4.00
Onshore Contractor Value £200 1.00 1.45 2.95 0.83 1.21 2.45
Onshore Contractor Value £400 1.61 2.33 4.74 1.34 1.94 3.95
Steel Price £250 1.66 2.40 4.88 1.38 2.00 4.07
20% Displacement 1.05 1.51 3.07 0.87 1.26 2.56

Source: EY Analysis

The analysis highlights:

  • How sensitive the CBR is to construction costs. As increased construction costs also impact on the maintenance costs, project overruns will materially impact the CBR.
  • The total benefit varies significantly with the value derived from the onshore decommissioning activity. The actual amount an onshore contractor will charge will vary from project to project. Therefore lower contract values have the potential to significantly reduce the benefits derived.
  • If an onshore contractor was able to store recovered materials until a point where the market prices are favourable it could substantially increase the benefits derived from this activity. A key assumption to this is that improved returns on the recovery of materials is re-invested into the UK economy.
  • Displacement of current activity will reduce the net benefits derived from an UDW port.

9.9.2 Financing Cost Sensitivities

Financing costs have not been considered within the CBR. However, as the UDW port development is expected to be funded by a mixture of private and public finance it is appropriate to perform sensitivity analysis which considers the impact of financing costs on the CBR, under different levels of public support.

The financing costs outlined in this section reflect a high level estimate and calculation of what financing profile and costs such a development may attract. The rates and types of funding have been outlined at high level and in generic terms. We have not performed a detailed review of the funding market.

The key financing cost assumptions are outlined in the table below.

Table 28: Financing Cost Assumptions

Assumption

Justification

Gearing

60% Senior Debt, 40% Sub-debt/Equity

Due to nature of the transaction and uncertainty of future cash flows significant levels of sub-debt/equity required

Tenor

22 Years - 2 years development period plus 20 year repayment period.

Assumed loan tenor to match the operational period.

Repayment Profile

Interest capitalised during development period followed by 20 years of annuity repayments.

Typical development loan repayment profile.

Senior Debt Interest Rate

6%

General rate applied given type of funding.

Equity/Sub-debt Rate

15%

General rate applied given type of funding.

Source: EY Analysis

At these gearing levels, and assuming no public sector funding for the project Dales Voe is funded with £24m senior debt and £16m sub-debt/equity. Likewise, Nigg's construction costs would be financed by £28.8m senior debt and £19.2m sub-debt/equity.

However, in order to support the development, there is likely to be a need for public sector support. At present, it is not decided what level of public sector support would be available therefore we have assumed three different levels are offered: £5m, £10m and £20m. For the avoidance of doubt, these values do not represent any commitments from any government or public sector organisation.

The table below reviews the CBR with the inclusion of private financing costs. Private financing costs are included based on the proportion of project costs which are not met by public sector financing. For example, where Dales Voe development is £40m and £5m of public funding is available, £35m of private sector funding is required to be sourced. Any public sector funding is assumed to reduce the requirement for sub-debt/equity financing first, followed by reducing the level of senior debt where applicable[23] .

Table 29: Sensitivity Analysis - Financing Costs

Dales Voe Nigg
Low (CBR) Mid (CBR) High (CBR) Low (CBR) Mid (CBR) High (CBR)
Base Case 1.31 1.89 3.84 1.09 1.57 3.20
£5m public funding 0.66 0.96 1.95 0.54 0.78 1.59
£10m public funding 0.76 1.10 2.24 0.61 0.87 1.78
£20m public funding 0.98 1.42 2.89 0.79 1.14 2.31

Source: EY Analysis

The inclusion of private financing costs has a significant impact on the CBR. With £5m of public funding available, £35m for Dales Voe and £43m for Nigg, would need to be funded through private sources. Under this case, a significant element of the construction costs would need to be funded through relatively expensive sub-debt/equity. For both Dales Voe and Nigg, this reduces the CBR to below 1 under the mid scenarios.

As public sector support increases, the CBR's across each scenario increase. With £20m of public sector support, under the assumed gearing levels, neither facility would need sub-debt/equity. As such, with only senior loan financing costs, the CBR ratios significantly increase.

The CBR difference between Dales Voe and Nigg is accentuated by including financing costs. This is due to the higher construction cost of Nigg requiring greater levels of private sector funding when the same level of public sector support is available.

9.10 Risks

The key risks for the project, alongside potential mitigating actions, are outlined in the table below.

Table 30: Key Project Risks

Risk Type

Description

Mitigating Actions/Next Steps

Timeline Risk

A key assumption to the analysis is the timing of decommissioning programmes and platform removal dates. This depends on currently estimated CoP dates and timing from CoP to platform removal. Both of these aspects are unique for each platform and subject to changes for a range of factors including changing oil prices. As such, there is no certainty that the estimated decommissioning programme will transpire as outlined in this analysis.

It is important that operators of an UDW port are consistently up to date with new market developments and when certain platforms are expected to come to market. There should be a clear plan of targeted platforms which is regularly maintained and managed. Constant engagement with the market will be required to ensure the most up to date analysis is being used.

Demand Risk

After development, there is low demand for the UK UDW port for decommissioning activity.

Early engagement with the key market operators to ensure that the facility design is cognisant of their specific needs.

Value Risk

The economic value from working on decommissioning projects may be lower than the value outlined in CBA.

Detailed review of future projects coming to market and the likely value of work from them.

Price Risk

The price offered to market for use of an UDW port is too high to attract businesses. Potential for this where there are significant levels of borrowing required to deliver an UDW port.

Detailed commercial modelling of future projects to assess the impact of borrowing costs on the level of prices offered to the market.

Technology Risk

New solutions come to market which negate the need for an UDW port and are attractive for market operators.

Detailed technical assessment of emerging options and their ability to replace the need for an UDW port from an efficiency and commercial perspective.

Funding Risk

Funding not available for the project from commercial sources.

Early engagement with potential funders to gauge appetite to provide funding for the facility.

Scottish and UK Governments to set out a clear and robust strategic business plan for the project.

Source: EY Analysis

All risks need to be reviewed, assessed and addressed however, value risk and technology risk should be addressed as a priority as part of a more detailed study. The justification of public sector support relies on certainty around the quantum of benefits that may derive from an UDW port and that there is not a reasonable alternative that will attract decommissioning projects using UHLVs to the UK without one. A more detailed review of these factors will be able to provide more certainty on these points.

Funding risk and price risk aspects are inter-related and should be reviewed alongside one another. It is important that the level of public sector support for the project delivers value for money, but also allows the UDW port to offer competitive rates in the market to attract projects.

Timeline risk will always be prevalent given that the timing of decommissioning programmes is based on a number of factors which are not in the control of an onshore contractor. Demand risk can be addressed through a detailed technical assessment and engagement with the market.

In order to progress the project, the above risks should be taken into consideration along with any other key risks which have not been highlighted. These should be considered in the subsequent Business Planning phase.


Contact

Email: Claire Stanley