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Decom cost estimate has fallen 23% to £46bn

Decom cost estimate has fallen 23% to £46bn

 

The Oil and Gas Authority’s (OGA) 2021 Decom Costs report reveals that the estimate has fallen from the original £59.7 billion to £46bn and is on track to hit the target of £39bn by 2023 called for in the 2017 report.

This year’s 4% reduction contributes to a total cut of 23% thus far, an average of almost 6% a year, and in line with what is needed to cut the total cost by 35%.

Importantly, the paper reduction has been matched by a 20% cut in the costs of completed decommissioning projects. Actual decommissioning expenditure in 2020 was £409million lower than estimated the previous year, in comparison to a £170m reduction in 2019 and £432m in 2018. The 2020 reductions were largely due to deferral of activity as a result of Covid-19 and the low commodity price.  

The industry is demonstrating a growing culture of continuous improvement, allied to knowledge-sharing and learning from experience which is helping it to reduce costs despite the fragmented nature of the market which historically made collaboration difficult.

The report makes it clear that industry must maintain the pace of cost-cutting because the opportunity is immediate; the next 20 years is when most decommissioning will take place and when the reductions must be made.

The OGA’s recently-published Decommissioning Strategy warns that the industry must change its commercial practices to prevent higher costs and focuses on four main strands to achieve savings - planning for decommissioning, commercial transformation – encouraging the supply chain to be more proactive in soliciting work, supporting energy transition from late life into decommissioning, and technology, processes and guidance.

Since 2017 reductions of 25-35% have been achieved across three of the largest cost categories – well decommissioning, removals and subsea infrastructure. Well decommissioning alone represents 45% of the total cost estimate and removals for a further 25%; and these two categories account for more than £10bn of the overall savings to date.

However, despite the overall positive performance, reductions have begun to slow, and if it continues at the same pace as the past two years, the target will be missed. Therefore, there is a clear need to build on what has already been achieved by capturing remaining opportunities from collaboration and aligned, incentivised contracting.

The OGA has recently relaunched the Pathfinder website which flags up a large and growing number of opportunities for contracts and which encourages collaboration in all projects, including decommissioning work.

The Estimate notes that there are a number of opportunities to bring about further cost reductions, including:

  • Industry mainstream adopting campaign and proven collaborative models
  • Creation of an environment and culture of stability and certainty
  • Increased sharing of lessons-learned and good practices through improved communication, engagement and stewardship
  • Updated late-life operating models

But it also notes the primary risks to continuing to bring down costs, which include:

  • Operator commercial misalignment or lack of collaboration
  • Poor performance
  • Delayed activity planning
  • Lack of real-time visibility of decommissioning during execution
  • Oil sector cost inflation

Stuart Payne, OGA Director of Supply Chain, Decommissioning and HR, said:

“The industry is responding to the challenge to cut costs well, but it must maintain focus and increase the pace to hit the 35% target.

“The prize is tempting. So far around £13bn has been cut and there’s another £10bn up for grabs. We will continue to help; the improved Pathfinder site is flagging up opportunities already and we will work to bring companies together – because collaboration and knowledge-sharing is key, companies must forget rivalries and work together in this area.”

Read the latest issue of the OGV Energy magazine HERE.

Published: 07-07-2021

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