Asia-Pacific needs to address decommissioning costs, analyst warns

Wood Mackenzie estimates that partners in offshore fields in the Asia-Pacific region face a total decommissioning bill of over $100 billion.

Offshore staff

SINGAPORE –Wood Mackenzie estimates that partners in offshore fields in the Asia-Pacific region face a total decommissioning bill of over $100 billion.

The analyst claims nearly 2,600 platforms and 35,000 wells may need to be decommissioned in the years ahead, but warns that parties in the region appear to be largely unprepared for this task.

Typically, government regulations are unclear, and the general lack of experience in this sector could lead to high initial costs and the potential for mistakes.

Asia upstream analyst Jean-Baptiste Berchoteau said: "With over 380 fields expecting to cease production in the next decade, the magnitude and cost of work can no longer be ignored.”

However, through drawing on experience from decommissioning projects elsewhere, the industry could adopt or adapt practices best suited to Asia Pacific's challenges, he added.

Wood Mackenzie has identified the following priorities for the region:

Knowledge transfer

In order to establish a functional regulatory framework, it might be best to adopt guidelines and processes already in place elsewhere, such as in the UK North Sea or the Gulf of Mexico.

Operators with extensive experience in offshore asset retirement could also help draft regulations. Chevron and Shell are already collaborating with Thai and Bruneian regulators respectively through knowledge transfer and pilot projects.

“This is a great opportunity for countries in the region to develop service sector expertise through knowledge transfer," said Wood Mackenzie senior analyst, Prasanth Kakaraparthi.

Contracting strategy

Sound project management and pragmatic contracting strategies are critical to contain decommissioning costs.

Major oil companies have the necessary skills in-house; Wood Mackenzie expects other companies to employ project management specialists to help execute their project on time and within budget.

Lump sum, unit cost and day rate are the contracting strategies most typically adopted according to the level of risk.

The well plug and abandon (P&A) phase is usually the riskiest as live hydrocarbons are involved, and data may be lacking on well conditions. Unit cost contracts, under which the contractor undertakes well P&A or facility removal at a fixed cost per unit that includes a margin, appear better suited for projects in Asia Pacific, Wood Mackenzie suggests.

Innovative technologies

Some companies in the area have adopted innovative approaches to decommissioning that bring potential for significant cost savings.

Petronas implemented a rig-to-reef solution last year on two platforms on the Dana and D-30 fields in block SK-305 offshore Malaysia.

Rig-to-reef involves using the decontaminated platform structures to create an artificial reef at a designated location. The technique is best suited to facilities in water depths of 10-30 m (33-98 ft), where reef structures and associated marine life are the most prolific.

Economies of scale

Well P&A typically accounts for half a project’s decommissioning costs: various measures have led to 30-50% cost cuts in the Gulf of Mexico and the UK on rig dayrate or unit rate contracts.

For areas with a large number of ageing wells and platforms, batch decommissioning could offer major cost-saving opportunities, and this approach could be extended further across blocks with different operators, with participants jointly contracting for a larger piece of work, thus reducing per unit costs.

“While the decommissioning situation in Asia Pacific might look grim at the moment, we note that Chevron is taking a proactive approach in the Gulf of Thailand, and we expect the major to set a benchmark for large scale decommissioning costs in the region,” concluded Berchoteau.

02/1/2018

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