Oil & Gas Decommissioning: Opportunities and Challenges

Spending on decommissioning is set to increase every year over the next two decades as offshore oil and gas fields reach their end of life, especially in mature basins such as the North Sea, while onshore wells at the end of their production life need to be safely plugged. Removing and repurposing the infrastructure from decommissioned offshore and onshore assets creates long-term opportunities for the supply chain of oilfield services.

Decommissioning costs have been steadily falling offshore the UK, but the industry faces a highly ambitious cost reduction target. 

Globally, the high oil and gas prices have not resulted yet in a renewed focus on decommissioning, which, analysts say, could threaten the targets for decommissioning backlog. Delays in decommissioning work could translate into more expensive decommissioning down the road, according to an analysis by Boston Consulting Group from June this year. 

Oil and gas companies are mobilizing to invest in extending the life of existing assets, growth across the oil and gas value chain, decarbonization, and low-carbon energy businesses. The largest international companies plan a combined $110 billion in capital expenditure in 2022, which would be around 25% higher than in 2021, Philip Whittaker, Partner & Director at Boston Consulting Group, said.

“As money flows into the sector, companies have the opportunity to invest in both sustainability and competitive positioning. Delivering on decommissioning commitments is core to this,” Whittaker wrote.

“But so far, this upcycle has not coincided with a renewed emphasis on decommissioning. We believe this poses a threat to targets for decommissioning backlog liquidation and performance, intensifying the risk of value erosion,” the BCG director noted.

Pushing back decommissioning could also threaten the emissions targets of oil and gas companies, according to the analysis.

“For operators with late life portfolios, decommissioning is often the primary driver of emissions reductions (though usually insufficient to fulfil both absolute and intensity emissions reduction targets). As such, pushing back the cessation of production dates of late life assets - which tend to be among the largest emissions and emissions intensity assets in a basin - could slow down decarbonisation,” BCG’s Whittaker says.

Moreover, delays are likely to result in more expensive decommissioning, considering the high inflation rates in the UK and the US.

Another challenge of delayed decommissioning activity could be that delays are likely to deter the oil and gas supply chain from building specialist capability.

“Further delays in decommissioning activity are likely to deter specialists, making it difficult for operators to access an essential ingredient to realize full potential from scale,” BCG said.

Opportunities and Collaboration in UK North Sea Decommissioning

The UK has some of the most advanced and experienced companies specialising in decommissioning because of the maturity of the UK North Sea basin compared to some other offshore locations around the world. Decom North Sea has connected capability with opportunity across the decommissioning sector for more than a decade. Decom North Sea has 220 members, including operators, major contractors, service specialists, and technology developers.

The UK is launching a Subsea

Decommissioning Collaboration in what it describes as a game-changing initiative to scale up decommissioning activity and boost industry partnership. The key goals of the initiative are to support radical technical and commercial efficiencies; provide opportunity to trial new technologies and solutions; and provide a clear hopper of work for the next 25 years. The initiative will have a “world first” ambition to cut costs by 50 percent, and it will look to enable industry-leading solutions that can be transferred worldwide.

The organisers of the initiative, backed by the North Sea Transition Authority (NSTA), are currently holding one-to-one meetings to discuss and refine goals and opportunities, with the purpose to start developing a roadmap to success from December 2022 onwards.

UKCS Decommissioning Cost Estimate Falls 25%

Since 2017, the decommissioning cost estimate in the UK Continental Shelf has dropped by 25 percent, the North Sea Transition Authority (NSTA) said in a report in August.   

The total estimated cost of decommissioning UKCS upstream oil and gas infrastructure fell by £1.5 billion, or by 2 percent, to £44.5 billion in 2021. The drop last year contributed to a total cut of £15 billion, or 25 percent, since 2017. Back then, the NSTA introduced a baseline estimate of £59.7 billion and set a target of reducing costs by 35% to £39 billion by the end of 2022.

The Decommissioning Cost Estimate Report 2022 highlighted the industry’s ability to generate huge savings for the Exchequer and carry out projects in a more cost-effective manner, the authority said.

“The highly ambitious 35% target was always intended to be challenging and the significant savings already delivered greatly benefit companies, which can invest more in production and emissions reduction projects, and taxpayers by reducing the cost of decommissioning tax reliefs to the Exchequer,” the NSTA noted.

During the first two years of the target, the oil and gas industry made swift progress and cut the decommissioning cost estimate by a massive 17%. The pace of cost cuts has slowed since then, partly due to the logistical and economic pressures of the Covid-19 pandemic, yet progress has continued, the authority said.

Importantly, the scale of reductions to the estimate is reflected in the final costs of completed projects, which are on average 20-25% lower than initially predicted, over the five years.

The report showed that in 2021, decommissioning expenditure totalled £1.2 billion, lower than the forecast £1.4 billion, thanks to improved project execution and Covid-related deferrals of activity.

“This was a sizeable investment in the face of unprecedented logistical and economic pressures, and points to industry’s determination to carry out planned work and meet its decommissioning obligations,” the NSTA said.

The authority will publish in the middle of 2023 a final report on progress against the 35% target, which expires at the end of 2022.

“Delivering potential savings of £15bn during a short period marked by extremely turbulent economic conditions should give the sector confidence as it looks to the future,” Pauline Innes, NSTA Head of Decommissioning, said in a statement.

“The decommissioning market is worth tens of billions of pounds in the UK alone. Our industry is demonstrating that it can complete projects safely, efficiently and economically in the North Sea, and that places it in a strong position to compete for what is a big international prize,” Innes added.

The NSTA vowed to continue helping the decommissioning sector pick up momentum, including through the introduction of new estimates and targets, the authority’s head of decommissioning noted. 

“Decommissioning offers a long-term, sustainable opportunity for the UK supply chain, with investment expected to ramp up to a peak of £2.5bn per year over the next two decades and will contribute 25-30% of sector spend over the next four decades,” the NSTA said in the report.

“Industry continues to work hard to deliver cost efficiencies by pulling the levers at its disposal, including effective planning, commercial transformation, infrastructure re-purposing plus testing and deploying new technology, all of which are key pillars of the NSTA’s Decommissioning Strategy,” the authority noted.

“By maintaining this positive approach, the sector can achieve further cost reductions, though it must do so against a challenging global economic outlook.”

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