Decommissioning in Oil & Gas

As a growing number of oil and gas fields worldwide near the end of their design and production life, the industry, lawmakers, and regulators are looking for the best ways to approach decommissioning of oil and gas assets.

Expenditure on decommissioning is expected to rise exponentially in the coming years and decades as more and more fields mature. Once considered an issue typical of the North Sea, decommissioning is now a topic for operators in mature areas in Asia Pacific and the US Gulf of Mexico.

Billions of pounds and U.S. dollars will be spent on decommissioning operations and activities in the world’s mature areas. Operators face growing bills with decommissioning assets, but those costs represent a huge business opportunity for the supply chain.

Over the past five years, as many as 400 oil and gas fields in the world have stopped producing. Over the next five years, the industry is set to spend a total of US$32 billion on decommissioning, according to estimates by consultancy Wood Mackenzie. More than 700 fields are expected to stop production through 2022, creating opportunities for the supply chain if it makes the investment in the right time, WoodMac says.

It’s not only the North Sea that faces decommissioning costs. Almost 2,600 platforms and 35,000 wells are set for decommissioning in Asia Pacific, and this mammoth task could cost more than US$100 billion, a Wood Mackenzie analysis from earlier this year showed.

“With over 380 fields expecting to cease production in the next decade, the magnitude and cost of work can no longer be ignored. Through learning from global decommissioning projects, the industry can adopt and adapt practices best suited for Asia Pacific’s own set of challenges,” Wood Mackenzie’s Asia upstream analyst Jean-Baptiste Berchoteau said.

Asia Pacific may use four key levers to reduce costs and bring decommissioning safely within budget, according to WoodMac. These are transfer of knowledge between regulators, operators, and service sector firms; choosing optimal commercial and contracting strategy; adopting innovative technologies for cost reduction; and achieving economies of scale.

North Sea Decommissioning

In the North Sea, one of the world’s most mature oil and gas areas, decommissioning of the many assets that have ceased or will cease production will continue for decades.

For the UKCS, the Oil & Gas Authority (OGA) sees decommissioning as offering significant opportunities for innovation, cost reduction, and development of UK skills and capability. There are over 250 fixed installations, more than 250 subsea production systems, over 3,000 pipelines and some 3,650 wells that must be decommissioned.

The OGA has had a decommissioning strategy in place since 2016, setting out three priorities: cost certainty and reduction; decommissioning delivery capability; and decommissioning scope, guidance, and stakeholder engagement. The strategy has set a target to reduce decommissioning costs by more than 35 percent. Costs are reducing, the OGA said in its ‘UKCS Decommissioning - 2018 Cost Estimate Report’ from June this year.

In 2017, total estimated costs were £59.7 billion in 2016 prices, while in 2018, despite including more assets and infrastructure than the previous year, estimated costs from 2018 onwards are lower, at £58 billion in 2017 prices.

“A key contributor to this reduction is companies’ gaining valuable real practical experience in what is still a relatively immature activity,” the OGA said.

“The tripartite relationship between government, the OGA and industry is working well together. It’s very pleasing to see industry make real progress towards the decommissioning cost reduction target set with them. However, costs still need to reduce further and industry must keep focused,” said Gunther Newcombe, Director of Operations at the OGA.

Oil & Gas UK’s 2017 Decommissioning Insight, the latest report by the trade association, found that decommissioning is a growing market across the North Sea, with activity on the UKCS expected to be significantly higher than on the Norwegian, Danish, and Dutch Continental Shelves to 2025.

A total of £17 billion is expected to be spent on decommissioning on the UKCS from 2017 to 2025, with 46 percent—or £7.9 billion of total spending--concentrated in the central North Sea, Oil & Gas UK has estimated. In terms of activity, well plugging and abandonment (P&A) will see the largest share of expenditure, 49 percent of all, or £8.3 billion.

In view of the big market for North Sea decommissioning and the supply chain and operator experience, the UK government plans to make Scotland a global hub for decommissioning.

“To continue to support Scotland’s oil and gas industry we will maintain headline tax rates at their current levels and launch a call for evidence on our plan to make Scotland a global hub for decommissioning,” the UK’s Chancellor of the Exchequer Philip Hammond said in his Autumn Budget 2018 speech.

“Establishing Scotland as a global hub for decommissioning is both aspirational and appropriate. The scale, scope and prize has been discussed for years. How to make a business case and execute this is the challenge. Let’s see what the ‘call for evidence’ brings to the table,” Wood Mackenzie said, commenting on the plan.

Decommissioning will take place in other mature areas around the world and billions of U.S. dollars will be spent on safely removing, dismantling, and plugging oil and gas assets. The UKCS and the UK supply chain are well positioned to be the leaders in the global decommissioning market.