Decommissioning costs for the UK North Sea have continued to fall. It's welcome news, but not without concern. According to the Oil and Gas Authority's (OGA) UKCS Decommissioning Cost Estimate 2020 report, the cost of decommissioning oil and gas infrastructure on the UK Continental Shelf fell 19% between 2017 - 2019, from £59.7 billion to £48 billion*. That's great progress. But we're not out of the woods. The cost estimate only fell by 2% in 2019.
The latest estimate report didn't take into account the impact of the Coronavirus epidemic, which may be a double-edged sword; we know that some activity has been deferred, yet costs have also fallen, due to depressed rates.
Oil & Gas UK expects a 27% fall in decommissioning spending this year, based on a survey of its operator members, with a further fall of 8% in 2021, then a 12% increase in 2022 by 12%. That's on top of an 11% (£170 million) drop in spending in 2019, which the OGA says was only partly due to project deferral, with 70% of the reduction due to actual cost reduction on live projects.
All these estimates point to a very complex landscape for those considering and planning for decommissioning. There's progress, but there's also inconsistency. The cost reduction in 2019, albeit small, was driven by improvements in planning and execution practices. But while some operators have made great strides in reducing plugging and abandonment costs, others have seen costs increase. The same goes for post-cessation of production operating costs. There's no room for complacency if the industry is going to get anywhere near the OGA's 35% cost reduction target (from £59.7 billion to £39 billion) by 2022.
Reducing cost uncertainty and getting a grip on the Asset Retirement Obligations (AROs) that weigh heavily on balance sheets is paramount. We've found for many of our clients - asset owners and investors - that the original estimates can vary considerably with current day valuations. The key here is managing the unknown long-term liabilities and setting aside sufficient capital for decommissioning, while not unnecessarily setting aside too much.
From campaign to consortium
Few, if any, large-scale consolidated decommissioning programmes are currently being discussed. The economies of scale accessed by large multi-operator campaigns could be significant, yet as both the OGUK 2019 and 2020 UKCS Decommissioning Cost Estimate reports point out, these are still limited to individual operators.
In tandem with the decommissioning sector maturing, leading to increased task familiarity and lessons learnt, capitalising on multi-operator campaigns will result in cost reduction born through efficiencies. Reluctance to execute projects in such a way will hinder achieving cost reduction goals.
Given the current depressed situation the industry finds itself in, it is unlikely there will be opportunities for costs to fall further as a result of continued pressure on the supply chain. Resources are also getting scarcer, as people retire or leave the sector, exposing gaps that need to be filled.
Prior to COVID-19, and even more so recently, our clients have welcomed an integrated approach to their decommissioning projects. The combined expertise across the full decommissioning lifecycle from consortium partners LR, Worley and O.O.S. has not only reduced the overall cost, time and liability burden, but has allowed them to focus resources on more fruitful activity, knowing that their decommissioning project is in safe hands.
Innovation from adversity
The continually shifting landscape, influenced by factors such as project deferrals and low rates are accompanied by colossal project scopes and unknown long-term liabilities, which impact decommissioning costs. Whilst traditional areas for cost reduction are unit costs, economies of scale and operating efficiency, there is also the prospect of new technology and techniques that may ultimately reduce time and therefore costs. Similarly repurposing and leveraging offshore infrastructure for CCS, and to support renewable energy production and hydrogen generation, transportation and storage could play a key role in significantly reducing decommissioning costs.
Innovation often comes from adversity and there's no doubt the recent crisis will spur a shift in mindset and ways of working, that may even accelerate the downward trajectory of decommissioning costs.
*based on like-for-like costs