The UK oil and gas sector must be alive to the threat of rising costs in its quest to become the global expert in cost-effective decommissioning, industry experts have warned.
Mike Tholen, upstream policy director at Oil and Gas UK, and John Warrender, chief executive of Decom North Sea, said companies were making a good fist of taking the sting out of the basin’s hefty dismantling bill.
But as companies increasingly focus on projects aimed at sustaining or increasing production, decommissioning teams will have a tougher ride competing for a slice of their employers’ budgets.
Tholen and Warrender said the problem could be lessened by the emergence of a separate, self-contained decommissioning industry, cocooned away from the exploration and production side.
Speaking in the run-up to the annual Offshore Decommissioning Conference in St Andrews later this month, they also said a number of the traditional Tier 1 supply chain companies were undecided on the exact space they intend to occupy in the decommissioning cycle.
The pair also spoke about the industry’s commitment to the principles of Ospar and the “curveball” presented by carbon capture and storage (CCS).
Decommissioning has been taking place offshore UK for a long time, but there is disagreement about when the industry will properly “take off” and deliver its first tangible “peak” in activity.
To many, this tipping point is always just around the corner – never quite there.
For exploration and production companies, decommissioning is a cost to incur, not a revenue source, which makes deferral attractive.
For supply chain firms, there is money to be made, but a lack of “visibility” regarding the timing of decommissioning expenditure has stymied investment in capacity.
Warrender and Tholen feel predictability is becoming less of a dilemma, with firms becoming more confident of showing what they’ve got coming up, even if nothing is “cast in stone”.
Warrender said some people imagined a “bow wave” of decommissioning work appearing at some point, with expenditure skyrocketing from zero to
£10 billion per year at the flick of a switch, providing plenty of action for everyone.
He said those expectations were unrealistic because only so much work can take place in a
budget year.
Decommissioning should be thought of as a provider of steady, but significant levels of work that the market can handle, Warrender said.
A crucial goal for operators and the UK Government – which will have to cover about half of the overall decommissioning bill through tax reliefs – is to get costs as low as possible.
Forecasts from the Oil and Gas Authority indicate operators and suppliers are doing well.
The sector is already half way towards its target of shaving 35% off the estimated £60bn UK decommissioning cost bill after just two years of concerted effort.
Tholen said the UK oil and gas industry was doing well in the battle against costs, but warned against taking its eye off the ball.
He said decommissioning activity was picking up “a bit” at a time when the global oil and gas industry was generally getting “busier” with other types of work, which could spell danger.
“As we get busier, decommissioning will feel some pressure on costs,” he said. “It’s a major issue and industry would be foolish if it was not alert to that.”
For example, with drilling activity increasing, rig utilisation and day rates will go up, which “creates tension” between productive wells, which can add value, and the plugging and abandonment of wells, which don’t.
Warrender said: “This has been a historical issue for decommissioning, which has to compete with exploration and production in operators’ budgets.
“It tends to be ‘tail-end Charlie’, either getting deferred or delayed. It’s at the mercy of the market.
“If rig prices go up, you might still want to drill wells because they generate value if they’re productive, but you may not want to do decommissioning until prices go down again.
“We’re trying to decouple decommissioning so that it almost has its own supply chain which is not influenced by the ebbs and flows of the production and exploration side.
“If we can do that, the decommissioning industry can become self-contained and not as susceptible to peaks and troughs in demand – and then we will have a chance of delivering on substantial cost targets.”
The UK not only wants to get costs down, it wants to steal a march on other regions and capture as big a chunk of global decommissioning spend – estimated at £80bn over the next decade – as possible.
In March, Westminster launched a call for evidence seeking views on how to support the industry to grasp these opportunities. Tholen hopes the UK Government will have something to report by the time of the conference.
Tholen and Warrender are encouraged by the launch of specialist decommissioning firms with new commercial models including Fairfield Decom, Maersk Decom, Well-Safe Solutions and Petrodec, and consortia such as Dundeecom.
No single company can provide a full package of decommissioning services, Tholen said, adding that a lot of big players in the supply chain were watching to see how the emergence of this new breed of specialists “pans out”.
He added it was “not yet clear” whether decommissioning represented “a main job, a job, or a sideline” for some of the Tier 1s.
Warrender added: “Some Tier 1s are on the edge of this. We don’t quite know whether they’re going to try to become these single-source organisations that will provide the whole package or whether they may even step out and leave that to consortia.”
The pair also said newer operators would have a “different view” of how to approach decommissioning compared to traditional oilfield owners.
Majors – with their greater financial clout – are better positioned to dictate how and when decommissioning is undertaken.
Furthermore, companies such as BP and Shell have enough assets around the world to know that competency gained in the UK will come in handy elsewhere.
For newer UK operators, decommissioning is very much an obligation they will deliver on, but not a “way of life” or something they will aim to become an expert in, Tholen said.
They will have to be “creative” and “savvy” in their handling of mature assets – and pass some of the governance of their decommissioning programmes on to the supply chain.
Something UK oil and gas companies won’t be passing on is their financial and environmental responsibility for decommissioning, Warrender and Tholen insisted.
Under the Ospar convention for protecting Europe’s marine environment, of which the UK is one of 15 signatories, companies must leave behind a clean seabed once they have decided to cease production from an oilfield.
In certain circumstances, infrastructure can be left behind if owners can prove the removal process would do the environment more harm than good.
Shell believes the huge, concrete platform support legs in the Brent field are a prime candidate for “derogation”, given that they were never designed with removal in mind.
The firm has been condemned by environmental groups, who accused Shell of using the North Sea as a dump.
At an Ospar meeting last month, Germany said a “compromise” on Shell’s plans to leave the structures in place may be possible, but that leaving oil behind in storage cells was “not acceptable”.
Tholen said no one was “demurring from Ospar” and that industry was “doing as much as it can”, and was making “rapid” strides on technology and knowledge relating to decommissioning.
“Decommissioning is a living process,” Tholen said. “There’s a lot of information still coming in from the academic world on the science of what we’re doing in the North Sea.
“Taking equipment out has a consequence as well. It’s a learning exercise.
“There’s a lot of pressure on the industry to deliver all it can. Industry is rising to the challenge and being alert to doing things better.”
Warrender said: “The UK understands Ospar and regulators do a rigorous job.
“On one side, there’s pressure from Ospar and the EU to stress the way operators interpret the regulations, and from the other side, there’s pressure to make
sure the regulations are fit for purpose.”
They also said the UK had one of the most mature and respected systems for ensuring the oil industry is held accountable.
The UK uses “residual liability in perpetuity” – which places responsibility for structures left at sea in the hands of the oil companies.
It means oil firms would have to deal with any problems which occur after decommissioning.
There are concerns that the buck will stop with the state if the companies in question no longer exist in the event of an incident occurring offshore.
The prospect of businesses running out of cash before decommissioning even takes place isn’t very appealing either.
However, the UK Government has been using decommissioning security agreements to require operators to stump up funds in advance to cover the post-tax cost of decommissioning.
At the time of last year’s decommissioning conference, almost £1bn had been squirrelled away to protect UK taxpayers from being slapped with excessive decommissioning bills.
The figure was expected to keep rising.
Warrender and Tholen believe that there are enough mechanisms in place to protect the state financially.
“It’s maybe not belt and braces, but it’s pretty close in terms of protection,” Tholen said.
CCS – a key plank in achieving international climate goals – is viewed by many oil and gas companies as an opportunity to show they can play a part in the energy transition.
To make CCS work, pipelines and other structures will need to be preserved to channel emissions into depleted reservoirs.
The UK Government is thinking about how decommissioning will relate to CCS, Tholen said, adding that in two years, the decommissioning conference could be “as much a CCS talk as a decom talk”.
Warrender added: “Our industry is very mindful of CCS. We get flak for many things, but we’re thinking ahead and have made huge strides already on the reuse of offshore facilities.”
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