Decommissioning spotlight

Richard Vann, RVA Group, UK, explores the process and benefits of asset retirement planning, and why operators should start thinking about the end of a tank’s life earlier than expected.

Being prepared for the retirement of an asset is a fundamentally crucial and strategic way to approach the operational lifecycle of a tank farm, or even an entire terminal. In many parts of the world, it is also a legal requirement – to comply with international fi nancial provisioning standards such as

FAS143 in the US, and IAS 37 in Europe. The roots of such standards date back to the days of events such as the ‘Enron scandal’, when the American energy giant was declared bankrupt. The company was building and running power facilities throughout the US and overseas – seemingly successfully. However, despite sizable annual revenues, no fi nancial provisions were being made to fund the eventual decommissioning of Enron assets when the time came to take them offl ine. The liquidation of this company – and the fact that the government had to pay for the retirement of their plants – certainly acted as a lesson learnt, and accounting rules were changed as a result.

Now, a proportionate amount of money must be set aside every year for the decommissioning of high value capital assets with an expected life in excess of 15 years. If nothing else, this acts as a safety net in the event of abandonment.

Comprehensive financial provisioning

While the numbers associated with asset retirement were once estimated, they must now be evidenced and substantiated.

In other words, accounting law now states that asset retirement provisioning should be carried out in a proven manner, which naturally requires someone with decommissioning-specifi c expertise to be involved in the exercise.

Nobody knows an asset better than the operator who runs it, but that does not mean that the operator knows exactly how to retire the asset with maximum respect for safety, the environment and their bottom line. The many

components of a decommissioning project – including decontamination, dismantling and demolition – require a defi ned engineering skill-set, if the assignment is to be managed and executed successfully.

The ‘numbers’ must therefore include estimates of the resources that will be required – in terms of people and technology – over a given period of time, as well as considered third party cost estimates relating to everything from the surrender of licences and permits, through to community engagement, wider stakeholder liaison and the disposal of hazardous materials, to name just a few.

The data is then typically compiled in a transparent report with annotations to explain any assumptions and exclusions. Once audited, the fi gures are declared in operators’ annual results.

More than financial data

Of course, such accounting requirements do not exist in all parts of the world, but parentage of an asset naturally dictates the standards adopted, irrespective of where the asset actually resides. Consequently, this process forms part of common practice for a signifi cant proportion of the industry and the data is produced without question, much like a tax return. In larger fi rms, the numbers also tend to aid compliance with organisations’ own fi nancial regimes.

But delve deeper, beyond the headline summaries, and what do the fi gures actually say? This asset retirement exercise is one of many strategic studies that an operator can undertake to highlight, understand and better manage a site’s long-term liability. In fact, if used properly alongside a redundant asset management plan (RAMP), the operator has an extremely powerful resource at their fi ngertips.

For example, RVA began working with one European fi rm back in 2011 because, with >€100 million of redundant assets, it had reached the point where it was almost unaware of what it had got. Therefore, the fi rm sought a true and complete picture of its decommissioning responsibilities – a value-adding business instrument – not just an indicative cost.

It is also important to note that the aforementioned accounting standards require operators to evaluate all of their assets. However, in truth, fuel storage/distribution facilities and terminals may sometimes be considered with less rigour on certain sites, in favour of concentrating on elements of a plant that are considered more complex or hazardous in nature. This should not be the case.

Thorough analysis of all the client’s assets means that a decommissioning ‘hierarchy’ can be drawn up according to the level of safety risk associated with each. The deterioration of insulation or the general corrosion of a tank heightens the likelihood of a containment loss, for instance. Structural collapse is also a signifi cant risk, as well as leakage, which may consequently affect the need to accelerate the retirement of the asset concerned.

Figure 1. Tank farm and terminal decommissioning requires a defined engineering skill-set.

Figure 2. The decommissioning of tanks, terminals and other buildings and structures is increasingly being considered before they have even been built.

Monitor, measure and adapt

Once complete, the frequency with which an asset retirement study should be reviewed must be judged on a case-by-case basis. It is recommended that the information is rigorously re-assessed at least every fi ve years. This allows any changes to the assets or tightening of regulations to be accommodated, and the true liability of a site to be fully understood at a given point in time.

A solid baseline of data will ensure this ongoing review process can be carried out in both an effi cient and effective manner. At the heart of the costings exercise should therefore be a fl uid and reconfi gurable database which allows for the adjustment of resource costs, waste and scrap rates, as well as annual infl ation fi gures. This adaptability is essential if the study is to maintain relevance over a possibly extended period.

In truth, the frequency with which an operator chooses to update their asset retirement data often depends on their individual approach to good governance. For example, a tank explosion in Western Asia in 2016 had devastating consequences that a different care and maintenance regime could perhaps have helped to prevent.

Figure 3. Analysis of site assets means a decommissioning hierarchy can be drawn up according to risk levels.

The wider value of asset retirement data

As has been evidenced, this accounting practice can add value far beyond that of a compliance box-ticking exercise. As the age-old saying goes, knowledge is power, so hopefully it is viewed as much more than merely a ‘necessary evil’.

Therefore, if an operator is devising a business case for the installation of a new plant, considering a site exit, or evaluating the affordability of a decommissioning project over a defi ned period of time for cash-fl ow purposes, strong intelligence already exists.

With the current tendency for assets to change ownership perhaps more often than in the past, variations of this asset retirement study can also be used by prospective purchasers and vendors as a due diligence tool. For example, the information gathered gives clarity on the legacies that will remain with the site and costs that are likely to crystallise in the future.

Thinking about decommissioning before day one

The role of asset retirement provisioning is only going to grow – as is the importance of decommissioning in the oil and gas value chain. This is because the circular economy has gone from being a term usually referenced only by those in the environmental sector, to a philosophy now infl uencing many supply chains in various industrial settings.

When it comes to the futureproofi ng of assets in this sector and in many areas of construction, the decommissioning of tanks, terminals and other buildings and structures is therefore increasingly being considered before they have been built – even while they are still being designed.

Reuse and recycling matters more than ever, so if the fi nancially and environmentally savvy retirement of an asset can be ensured before it even exists, this takes an operator’s corporate social responsibility (CSR) status to a whole different level – and rightly so. Conversation surrounding this topic is only likely to grow.

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