UK industry faces $40 billion-plus outlay for decommissioning

Cumulative UKCS decommissioning costs 2007-40

While investment may be deferring decommissioning in some fields, other projects are going ahead already, the most recent including North West Hutton, Frigg, and Indefatigable. Decommissioning begins several years after a field has ceased production due to the extensive consultation process, engineering, and planning required. Britain’s Department of Energy and Climate Change (DECC) reports the current cessation of production (COP) dates for existing fields as shown in the accompanying graph.:

The timing of decommissioning will be influenced by a range of factors including:

• Increased recovery from existing fields, new exploration, and tieback of new fields, which will extend the productive life of these assets and infrastructure
• Certainty/uncertainty about the future fiscal and regulatory regimes. This will influence the investment environment
• Long-term trends in oil and gas prices will determine whether it remains economic to keep a field in operation
• Reduction of decommissioning costs through experience, greater coordination with the supply chain, and a more systematic approach across the industry
• Technical innovations which further enhance oil and gas recovery, extend the life of many existing facilities, and ultimately reduce the costs of decommissioning
• Alternative use of the infrastructure, for example, gas or carbon dioxide storage, thereby extending its life further.

Addressing the challenges

Oil & Gas UK is taking the lead in helping to ensure the regulatory and fiscal regime for decommissioning does not hamper the maximum recovery of oil and gas. The association also is promoting collaboration across the industry where possible so that when decommissioning does occur, it is carried out in the safest, most efficient, and cost effective manner possible.

Challenge 1: Ensuring the tax regime does not restrict commercial activity

Most companies active on the UKCS have to provide a surety to cover future costs of decommissioning, usually at 150% of the estimated gross decommissioning costs because of uncertainties around the cost estimates and the tax relief that ultimately will be secured.

This leads companies to over-provide substantially for decommissioning security, at up to three or even six times the ultimate net of tax cost, because of the high tax rates and contingency costs. The obligation to provide security in this way is detrimental to commercial activity, accentuated in the current business environment by high costs of credit and limited access to primary sources of finance.

If DECC/HM Treasury could provide assurances concerning future tax relief, decommissioning security could be provided on a net-of-tax basis, allowing billions of pounds (dollars) more capital to be available for productive re-investment in the UKCS. This is because companies’ debt capacity would be applied towards this, rather than locked in decommissioning security letters of credit.

Oil & Gas UK, therefore, is considering a range of potential solutions and discussing them with the relevant government departments.

Creating more certainty around future tax relief also could open opportunities for a wider range of securities than just banks letters of credit. Increasing the means of securitization available to investors also would better protect the government’s position in the longer term. This measure would be of particular value to smaller investors who have to cash collateralize any bank letter-of-credit, which severely constrains operations and their ability to invest in further assets.

Current cessation of production dates for existing UKCS fields

Challenge 2: Ensuring regulatory regime does not hamper recovery

Decommissioning of offshore oil and gas installations and pipelines on the UKCS is regulated by the Petroleum Act 1998. The current owners of the assets are jointly and severally liable for decommissioning and its costs; liability is not restricted to the current owners. Through Section 29 of the Act, previous owners may be held liable in the event that the current owners are unable to meet their obligations.

Thus, when a company sells its interest in a field, it may retain a liability for decommissioning, even when the purchaser has accepted the responsibility.

These provisions may be considered by DECC to be the most expedient route to shield the government from any commercial exposure to decommissioning. However, many consider it to be a rigid regulatory framework which is more costly than required and which frustrates the sale and transfer of assets to new investors unnecessarily, thereby reducing commercial activity, restricting the number of new entrants, and, ultimately, reducing the recovery of the UK’s oil and gas reserves.

In order to help ensure that joint venture partners provide security that each will take responsibility for covering its share of future decommissioning costs, Oil & Gas UK, working closely with DECC, has developed a standard commercial agreement known as the Decommissioning Security Agreement (DSA).

The DSA provides an agreed template, with options for negotiation, which while only completed in 2007, now is regarded as the standard protocol to be used across the UKCS. It provides a systematic means of securing decommissioning liabilities to the benefit of all involved, and Oil & Gas UK actively supports its use throughout the industry. Oil & Gas UK has created a standard cost estimating guideline to provide some consistency in the decommissioning estimates concerned with individual assets.

The DSA includes the use of a trust fund to provide a secure place for any liquidated guarantees due to default, until such time as they can be applied to the decommissioning purpose for which they were intended.

Challenge 3: Enabling efficient and sound well abandonment

For the sizeable task of well abandonment to be executed in an efficient and standardized way across the industry, there was a need for guidance in this area.

Earlier this year, an Oil & Gas UK workgroup comprising representatives from operators, contractors and Britain’s Health & Safety Executive (HSE) reviewed and re-wrote the guidelines on the considerations that need to be taken when suspending operations for a limited period of time and when finally abandoning a well.

The latest insights enabling efficient and sound well abandonments were incorporated and the guidance now clarifies the requirement to squeeze perforations and advise on well construction in facilitating well abandonment. It also reflects the key changes of single plug risk assessment and, with additional diagrams, is now easier to use.

Challenge 4: Ensuring the supply chain is ready to grasp the opportunities presented by decommissioning

While deferral of decommissioning expenditure and continued production is to be welcomed in terms of maximizing oil and gas recovery from the UKCS, the changes in predicted timings of decommissioning create difficulties in establishing an effective market place for the services required. Contractors are restrained in preparing the necessary technical support and workforce for ever-changing plans.

One way forward is to understand the size and approximate timing of the opportunities on offer, and Oil & Gas UK has begun to address this knowledge gap at the industry-wide level. For example, the annual activity survey of its members provides an estimate of the size of the whole decommissioning market. In addition, with Acteon earlier this year, the association published a report which shed light on the well abandonment market.

The report estimated that 3,725 platform wells and 910 subsea wells on the UKCS would need to be abandoned, the majority in the next 15 years. The report also showed that the size of the market appears large enough to support many businesses and teams of specialized well abandonment professionals for several decades.

Secondly, contractors need to develop a greater understanding of how technologies will have to advance to ensure efficient and safe decommissioning. In response, Oil & Gas UK teamed with the Industry Technology Facilitator (ITF) in 2008 to organize sessions at which the required decommissioning technologies were identified.

Earlier this year, Oil & Gas UK’s well abandonment report highlighted that existing technology will permit the rigless abandonment of two thirds of those wells, a method which typically is more cost effective than using a rig. However, the abandonment of the remaining one third of wells will require the advancement of techniques such as well control and string tubular recovery.

ITF is looking for funding support from industry to develop innovative techniques in areas such as salvaging, rigless abandonment of wells, new designs for facilities removal and ideas for re-use, more efficient cleaning of facilities and pipelines, and mapping of hazardous materials.

A third way in which the association helps industry prepare is to ensure lessons are learnt from decommissioning in other countries. The Southern North Sea for example, exhibits different characteristics from the Central and Northern North Sea; the platforms are smaller, more numerous, and in more benign conditions. They share more in common with facilities in the Netherlands, Denmark, and the shallow water of the Gulf of Mexico.

Oil & Gas UK held a conference in May to assemble the experiences gained in these areas and to discuss their application to decommissioning in the Southern North Sea. In the Gulf of Mexico, a steady stream of projects over the last two decades, and many more recently following Hurricane Katrina, have resulted in a well-developed decommissioning market. Specialist companies providing niche expertise or offering a complete one-stop-shop approach have emerged. Careful project management to meet customer needs and tailored contracts which provide integrated services have delivered success. Importantly, there is now more certainty around cost, enabling asset owners to contract with confidence. •

For more information, go towww.oilandgasuk.co.uk.