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April 29, 2019updated 12 Apr 2019 3:06pm

Highs & lows: the falling costs of offshore decommissioning

Oil and Gas UK predicts that offshore decommissioning costs will run at around £1.5bn a year over the next decade – 20% lower than forecast in 2017 – good news for an industry that is reported to require more than £24bn in UK taxes for end of life costs in the coming years. Julian Turner reports.

By Julian Turner

Media reports on the UK offshore industry appear to be roughly equally divided between optimism and pessimism. Upbeat stories on disruptive digital technologies used to exploit untapped reserves, upticks in M&A activity and the benefits being accrued from forensic cost-cutting share column space with record low levels of E&P activity, sporadic investment and an industry in terminal decline.

Decommissioning may be a reminder that the North Sea is in its twilight years but, as a recent report by Oil & Gas UK asserts, the UK’s reputation for operating excellence is matched by its expertise in managing end-of-life projects. The 2018 Decommissioning Insight Report predicts that costs will run at around £1.5bn a year over the next decade, 20% lower than forecast in 2017, saving almost £4bn.

In the report foreword, Oil & Gas UK upstream policy director Michael Tholen claims a steady flow of decommissioning may have helped some companies negotiate the industry downturn over the past four years and the UK Continental Shelf (UKCS) is beginning to see a steady increase in investment.

“Cost leadership in decommissioning is essential to extending the productive life of the UKCS and encourage reinvestment in new opportunities,” Tholen writes. “Rapid improvements in productivity and efficiency are already being achieved with good effect. Forecast decommissioning costs per well have fallen by an average of 26% over the last year. Decommissioning spend in 2017 came in almost 30% lower than anticipated at £1.15bn.

“Such achievements demonstrate that the decommissioning market is maturing, and industry has the capacity and commitment to safely deliver the 35% cost reduction target through a combination of performance improvement, cost control, technological innovation and an openness to adopting new business models.”

Vital statistics: key takeaways from Oil & Gas UK report

Put very simply, decommissioning involves the safe plugging of the oil well and the disposal of the equipment – everything for topsides and jackets to subsea pipelines – used in offshore production.

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For example, more than 950,000t of topsides are slated for removal across the North Sea, of which more than 605,000t will be from the UKCS, where subsea infrastructure removal will cost £1.7bn.

According to the Oil & Gas UK report, an estimated 1,465 wells, a fifth of the UKCS stock, will be retired over the next decade, with almost half of the UK expenditure in the central North Sea.

That expenditure is stabilising and is projected to be around 8–10% of total spending going forward, competing for funding alongside E&P activities – and constituting a major opportunity for the UK.

“The prize is enormous,” confirms Tholen. “The industry will spend around £15bn over the next decade on decommissioning on the UKCS and is committed to delivering a safe, environmentally sound and cost-effective outcome.

“Globally, the decommissioning market is estimated to be worth over $80bn of over the next ten years and companies that show mastery of decommissioning in the UK will be well-positioned to secure a share of the rapidly growing international market.”

The UK Government responded in its 2018 Budget with a ‘call to evidence’ to form a global decommissioning hub, and the Oil & Gas Technology Centre and the University of Aberdeen are developing a new National Decommissioning Centre. Localised hubs are also springing up along the oil & gas supply chain in Scotland, in the North East of England, and in East Anglia.

Taxing times: public purse to fund decommissioning to tune of £24bn

Some more salient figures from the Oil & Gas UK report: unit well decommissioning costs have fallen by an average of 26%; the average amount of days spent on well decommissioning has halved during the lifecycle of some end-of-life projects; and forecast costs per tonne for the removal of topsides and a substructure in the central and northern North Sea have fallen by 13% and 16%, respectively.

So far, so positive, but the decommissioning process remains notoriously expensive, even taking into consideration the reductions mentioned in the report, which have resulted from improved productivity – including cost reduction, efficiency improvement and deflation – coupled, it should be noted, with the movement of end-of-life operations beyond 2027.

UK companies have been spending in excess of £1bn on the work each year since 2014 and are permitted to recover some of the expenditure through tax relief. The UK National Audit Office recently revealed that taxpayers will be on the hook for £24bn for offshore decommissioning costs over the next 45 years.

But, as The Scotsman reports, that figure could be higher still, since the government is ultimately liable for decommissioning if operators lack the financial resources to complete the work.

The Department for Business, Energy and Industrial Strategy has sought to reduce this risk by requiring nine operators to set aside a total of £844m to pay for future end-of-life projects.

Global reach: exporting UK decom expertise worldwide

Wood MacKenzie reports that UK is the largest market for decommissioning spend over the next decade, representing one-third of expenditure across the top dozen oil and gas markets.

However, of the 2,379 wells that are expected to be decommissioned in the whole North Sea and West of Shetland region during that time period, more than 900 are located in the Norwegian, Danish and Dutch sectors. The three countries are also forecast to remove more than 347,000 of topsides and decommission more than 195,000 tonnes of substructure.

Ironically, then, decommissioning – the safe and cost-efficient dismantling of offshore infrastructure at the end of its operational lifecycle – may yet provide an invaluable opportunity for the UK’s oil and gas sector to once again compete from a position of strength on the European and global stage.

For example, the Decommissioning Work Breakdown Structure (WBS) outlined by Oil & Gas UK is already setting a framework for global performance. The WBS acts as a guide to all elements of a typical decommissioning project, from operator project management through Post CoP-OPEX – the term given to operational expenditure (OPEX) after cessation of production (CoP) on a project – right through to site remediation and post-decommissioning monitoring.

“The UKCS is far from its end game,” writes Tholen in his foreword to the Oil & Gas UK report. “To date, 12 new projects have been approved in 2018, which will attract £3.3bn of capital investment and produce 400 million barrels of oil equivalent over time.

“In last year’s report we highlighted the opportunity for the UK’s decommissioning sector to become a champion of decommissioning excellence within the global arena,” he concludes. “As costs fall and expertise grows, we are already seeing encouraging progress towards this goal. Together, we can ensure this is achievable.”

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