Low oil prices to accelerate UKCS decommissioning

Plummeting oil prices are forecast to ramp up decommissioning activity in the UKCS over the next five years as mature fields are no longer considered economically viable, reports Brian Davis. According to new analysis by Wood Mackenzie, 140 fields could cease operations over the next five years. Fiona Legate, UK Upstream Research Analyst for Wood Mackenzie, anticipates that around 50 fields could cease earlier than expected (even if the oil price rises to $70/b) compared with 38 new fields that are expected to be brought onstream in the same period. ‘About 17 fields are expected to be sanctioned over the next five years. But in the current price environment there is a risk projects may be cancelled or delayed, and we could see a shift away from work in new development to decommissioning projects,’ she says.

Wood Mackenzie expects around £54bn will be spent on decommissioning on the UKCS for completion in the early 2060s. Moreover, decommissioning spend is expected to increase by over 50% by 2019 and will overtake development spend in the same year.

There have been recent announcements to retire several fields early, including Fairfield Energy’s Dunlin Cluster (comprising Dunlin, Dunlin SW, Merlin and Osprey fields) and ConocoPhillips MacCulloch and Viking fields, as well as Shell’s Brent Delta, following decommissioning of Perenco’s Thames, Arthur and Gawain assets, Centrica’s Stamford subsea infrastructure, and Tullow’s Horne, Wren, Orwell and Wissey developments. Generally, hard pressed operators maintain that falling oil prices, escalating maintenance costs and declining production are unable to support high operating costs. Some 30 fields have been abandoned in the UKCS to date.

Bibby Offshore has recently delivered two major decommissioning contracts in 3Q2015 in the UKCS. Endeavour Energy appointed Bibby Offshore to perform operations in the Renee and Rubie fields located in blocks 15/27 and 15/28 of the central North Sea. The Bibby Sapphire dive support vessel (DSV) was used to recover subsea equipment including cross-over structures, umbilicals and protection mattresses (see picture). Bibby also completed work for Tullow Oil in April/May, using the DSV Bibby Topaz on decommissioning at the Orwell and Wissey installations, including tie-ins at the Thames, Horne and Wren platforms in block 49/28 of the southern North Sea.

Furthermore, the cost assumptions for decommissioning projects are climbing, ‘and are higher than estimates a decade ago … Stricter plugging and abandonment (P&A) rules have also driven up well abandonment costs,’ says Legate.

Faced with the burden of decommissioning costs for mature assets, it’s becoming increasingly common for sellers to retain decommissioning liabilities, as is the case with fields such as Beatrice, Heather and Kittiwake. Buyers understandably want to protect themselves from the burden of decommissioning liabilities, especially on mature assets.

Wood Mackenzie suggests one possible option is to manage rising costs by batch decommissioning, ie abandoning a group of fields for economies of scale. ‘These fields could be selected by geographical proximity, operator or play. Our analysis takes a group of geographically close fields in three sectors (the central North Sea, northern North Sea and southern gas basin). We estimate this could yield an average cost reduction of around 20% for small batches in the three sectors,’ says Legate.

Photo: Bibby Sapphire in port during mobilisation
SourceL Bibby Offshore

The issues surrounding decommissioning and maturing assets, including the key findings of a KPMG report entitled Decommissioning strategy: a new imperative for E&P firms, will be addressed in the October issue of Petroleum Review.