The oil industry is set to spend over US$ 60 billion on decommissioning North Sea fields over the next 25 years. Greg Coleman, who managed financial aspects of decommissioning for BP Europe in the 1990s, discusses some of the issues involved.
What are the aims of decommissioning?
All companies and authorities want to achieve the maximum economic recovery of hydrocarbons from an oil or gas field, but there comes a time when this is no longer possible. We can stop pumping, but we cannot leave the infrastructure in place, so in the ideal world decommissioning involves the safe removal and disposal, preferably with reuse and recycling, of the platform and all associated pipes, seabed structures, material and debris. From the point of view of the oil company, timing and cost are the two vital issues: preferably as late as possible and in the most cost-efficient manner.
What are the triggers?
The main trigger is simply the oil price and where you expect it to be in the future. Decommissioning is usually discussed in times of low prices, when fields become uneconomic, but it’s always a difficult decision. Your field might be losing $20 million a year, but if it is going to cost $100 million to decommission and you think prices will go up it may be best to wait, which was what happened in the ’90s. However, that doesn’t take into account the condition of wells and facilities. If they have not been maintained with a view to continuous long-term use, then as they get older things start to slide, and decommissioning may be forced on you.
One also has to consider the tax situation. In many countries a company can claim the cost of decommissioning a field against the taxes they have paid on production from that field. The government wants to ensure that decommissioning is done properly and with a well-planned, structured program in as efficient a manner as possible to minimize the tax rebate.
How long does it take?
For an offshore field in an environment like that of the North Sea, this is a long process, which usually doesn’t physically start until a number of years after the decision has been made. Take the Brent field: from making the decision to decommission back in 2006, it took 10 years of planning and preparation before shut-in started, and will take another 10–15 years to complete the program. That means that Brent, which produced for 40 years, will take a further 25 to decommission.
What are the main challenges?
The biggest challenge is financial – only big companies have the financial capacity to take on these projects; the smaller ones now operating many of the more marginal North Sea fields cannot afford it. This has been taken into account in some of the change of ownership deals in recent years; the Magnus field, for example, is soon to be operated by Enquest, but the decommissioning liabilities remain with BP, who discovered the field in 1974. When the original deals were made the assumption was that the majors would be around throughout the life of the field.
Before physically dismantling the structures, all other options must be reviewed, such as using the redundant infrastructure for newly discovered resources nearby. Even when the decision has been made, the methods of breaking up the topsides and subsea structures, how and where they are transported to and the reuse and recycling of the material involve extensive discussions with a wide range of stakeholders.
Decommissioning is a new industry, and to date we have little experience of it. Only a few North Sea fields have actually completed the task, and the supply and service companies are still gearing up to the opportunity. Decommissioning is not really what people active in the industry want to do, so maybe a new generation of businesses and workers needs to develop?
Are there particular challenges in the mature North Sea?
Tax. There are very complex rules about tax payment and reimbursement and they can cause a lot of problems if not fully understood. Many companies have acquired assets without appreciating the decommissioning costs which they need to deal with – and $50 oil prices have brought a new perspective to acquisitions done when oil price expectations were nearer $100. When platforms were built in the North Sea in the 1970s and ’80s, very little thought was put into what was going to happen to them when the oil ran out. Since then society’s expectations, legislation and technology have all moved on and every offshore installation in the North Sea built after 1999 has been designed to be completely removed, but the oldest fields will be harder to decommission. The same applies to terminals, which will also have to be closed down. For example, the gas processing plant near Great Yarmouth on the east coast of England, which opened in 1968, is shutting down in the near future, as it is too expensive to repair.
There are many challenges in the environmental sphere and concerned NGOs are monitoring decommissioning developments. The primary aim is always to decommission in the most environmentally friendly way possible, but occasionally it is necessary to seek exemptions to ‘clean seas’ regulations because it is too expensive and potentially environmentally damaging to remove everything.
What business opportunities are there for service companies?
Contractors should do very well out of this if they plan properly and understand the scope of what has to be done. The total cost of decommissioning UK oil and gas infrastructure is estimated to be US$ 60 - US$ 120 bn and most of the work will go to contractors. In the subsurface area in particular, technology is going to be important and there will be plenty of opportunities. Maybe the winners will be new companies, with a different mindset. Decommissioning the North Sea will go on for 30 years or longer: a big investment which will be good for the UK and which will create an important exportable knowledge base. People now in E&P and wondering where their existing North Sea business is going should take advantage of this.
The infrastructure to bring all this steel, copper and sometimes radioactive material back to shore for reuse, recycling and disposal is not ready, so there should be plenty of opportunities in this area. At the moment the cheapest option is sometimes to take it abroad, but we need these facilities and the jobs and money they bring in the UK. Shell is modifying a port near Great Yarmouth specifically for recycling the Brent topsides, and more places like this will be needed, including ones with heavy lifting equipment and deep water capacity.
Has enough money been set aside by the industry?
This is a major issue. BP have provided US$ 18 bn for this on their balance sheet and Shell have a nearly US$ 30 bn decommissioning liability. Having a pool of money ready to tackle decommissioning is important. For fields owned by smaller companies perhaps a financial arrangement could be put together whereby a deep pocketed organization, such as a sovereign wealth fund, would agree to underwrite the risk of a decommissioning project, in return for a fee.
How much should governments and other authorities be involved?
As tax payers it is important to all of us that decommissioning is undertaken in the most cost-effective way possible, so government has many roles in this, simultaneously maximizing resource recovery and tax contributions while minimizing the amount of tax refund for decommissioning. 2015 was the first year the UK government gave out more than they took in and that bill will continue to grow as decommissioning ramps up.