Oil & Gas Decommissioning: Challenges & Opportunities

As oil and gas fields around the world mature, the industry faces increased work in decommissioning—the safe plugging and abandonment of wells and the removal of the platforms that have reached the end of their productive life.

In the North Sea, one of the world’s most mature offshore production basins, decommissioning will be a major industrial challenge, as well as opportunity for the UK industry, over the next decades. There are hundreds of platforms, millions of tonnes of infrastructure, and thousands of wells that will need plug & abandonment (P&A), removal, and recycling in the coming years.

Decommissioning is a costly business but costs have been declining in recent years. Moreover, this segment of the oil and gas value chain represents an opportunity of innovation, increased cooperation in the supply chain and operators, and development of first-class skills and capabilities within the oil and gas industry in the UK. Decommissioning could provide more opportunities for work to skilled offshore workers and the supply chain that have fallen on hard times since the latest oil price crash, which resulted in slashed capital expenditure (capex) plans of operators for drilling new wells.

The global pool of decommissioning projects could reach as much as US$42 billion through 2024, Rystad Energy has estimated.

The UK North Sea is set to dominate the global decommissioning work and spend over the next five years. So far, only about 15% of North Sea assets have been decommissioned. Rystad Energy expects an average of 23 assets to cease production every year in the coming five years.

The UK is set to lead the way with nearly 80% of total estimated expenditure on Northwest European decommissioning in the next five years, followed by Norway with 14% and Denmark with 4%. The pool of removal projects in the North Sea region for the period through 2024 is estimated at about US$17 billion, Rystad Energy says.

“A protracted low price environment can potentially motivate operators to leverage low contract prices and commit to their asset retirement obligations, thus spurring decommissioning activity in the Northwest Europe region. This will also provide welcome opportunities for contractors in an otherwise gloomy oilfield services market,” said Sumit Yadev, energy service analyst at Rystad Energy.

“While decommissioning is becoming a pressing concern for North Sea operators, the prevailing low-price environment presents an opportunity for driving down costs. For instance, after the oil price slump of 2014, rig and vessel rates declined by 30% to 40%. We expect rig and vessel rates to exhibit a downward trend this time as well, with declines likely lasting until 2022,” Yadev noted.

Decommissioning costs vary because of different climate, regulations, and locations. 

A recent study from Rystad Energy showed that the cost of removing a steel platform in the North Sea, excluding subsea infrastructure, is more than twice the cost of the same removal task in Southeast Asia.

The removal of a steel platform, located in 60 meters of water with four piles, a topside weight of 1,500 tonnes and a jacket weight of 800 tonnes would cost US$22.35 million in the North Sea, compared to US$9.08 million in Southeast Asia, mostly because of the higher spread rates and weather conditions which can represent a significant operational challenge.

“The removal cost per platform can also vary within the same region depending on the time and scale of the decommissioning campaign. Removing multiple facilities at the same time can help optimise costs by spreading the mobilisation and demobilisation costs across different assets,” said Sara Sottilotta, energy service analyst in Rystad Energy.

For the UK, the Oil and Gas Authority (OGA) has estimated that total UK offshore oil and gas decommissioning dropped by a further 2% on a like-for-like basis to £48 billion in 2019. The OGA’s latest annual report UKCS Decommissioning Cost Estimate 2020 showed that estimated decommissioning costs have been reduced by 19% since the OGA began benchmarking in 2017.

The OGA’s 2017 baseline estimate was £59.7 billion, while industry and government have a shared objective to reduce decommissioning costs by at least 35% compared to the 2017 baseline, or to levels below £39 billion.

The 2% cost reduction on a like-for-like basis in 2019, building on the 17% achieved in 2017/2018, was driven by minor improvement in planning and execution practices, which helped reduce the estimated cost of platform and subsea infrastructure removals in the northern North Sea (NNS) and central North Sea (CNS) and reduced cost risk associated with estimating uncertainties.

Estimated decommissioning costs remain at £51 billion in 2020, the OGA said.

“Looking ahead, there’s more to be done to drive costs down safely and sustainably. We’ve seen how performance can be improved when learning and good practice are shared,” said Pauline Innes, Head of Decommissioning at the OGA.

“Notwithstanding this success, the next 16% of cost reductions will need behaviours and approaches beyond those to-date, with aligned/incentivised commercial models routinely adopted, and cost-effective outcomes achieved regardless of which operator is contracting the work,” Innes noted.

The UK’s leading offshore industry body, OGUK, commented on the report, with Joe Leask, decommissioning manager at OGUK, saying: “While significant progress has been made over the years, new ways of working will be critical to ensure we stimulate activity in the supply chain, keep skills and infrastructure in the UK, and meet our savings target.”

There will be a lot of decommissioning work in the future, since as many as 470 installations will need to be decommissioned in the UK North Sea over the next 30 to 40 years, according to estimates from Wood Mackenzie.

By 2029, more than £17 billion will be spent on decommissioning in the UK– twice the decommissioning spend of any other country, Romana Adamcikova, Senior Research Analyst, North Sea Upstream at WoodMac, said in late February.

The decommissioning sector could be critical to maintaining activity in the UK North Sea and maintain essential skills after the pandemic-driven crisis, Scotland’s Just Transition Commission said in the recent report Advice for a Green Recovery.

“Focusing in particular on plugging and abandonment activity (where much of the value in decommissioning lies) would result in the creation of immediate jobs throughout the whole supply chain. Decommissioning has no impact on emissions but conserves capacity in the short-term and provides a skills bridge as we develop our capability and supply chain through the energy transition,” the JTC said.

“Decommissioning could act as a bridge for workers displaced in recent months who could play a key role in these emerging energy industries and new manufacturing opportunities. Decommissioning would be available to particularly hard hit groups such as offshore drillers,” according to the report.

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