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Oil and gas

Breaking down the decommissioning cost for risk free asset acquisition.

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Key facts

  • 01

    Client

    Confidential

  • 02

    Asset

    Offshore oil and gas assets, UKCS

  • 03

    Result

    Accurate technical and commercial advice for informed investment decision making.

Pull out stats

  • 10

    assets and asset groups within scope

Client Challenge

Our client, an international industrial commodities group, who has requested to remain anonymous for commercial reasons, was looking to acquire a number of producing oil and gas assets in the UKCS and needed to review decommissioning costs, risks and remaining reserves to ascertain if previous estimates were accurate and if the investment was worthy.

How we helped

At LR, we bridge the gap which frequently exists between the technical and the financial. It is often the case that estimates held by the selling entities are outdated or simply meet insurance purposes. We provided our client with accurate and trusted technical and commercial advice, performing due diligence in relation to decommissioning costs, well plug & abandonment (P&A) costs, production profiles, the integrity and reliability of facilities, OPEX and planned CAPEX and risk.

The review of decommissioning costs pulled on our technical and operational experience to make an informed assessment, with reference to the guidelines and norms provided in Oil & Gas UK Decommissioning Insight 2017 and offshore facilities structural weights provided by the selling entity. We estimated that facilities removal costs were likely to be £454.8 mm in excess of the estimate provided by the selling entity. The discrepancy is due to a higher revised estimate in tonnage and an under-estimated in removal costs by the selling operator of 70-100%.

Stats from the projectThe integrity of facilities, wells and pipelines is key to ensuring reliability and continuity in operations. As expected, key offshore hubs were identified as in need of repair and maintenance, with other facilities in the portfolio being in relatively good condition.

The well stock was described by the seller as complex and ageing with wells at various levels of risk. In order to establish the nature of this risk and its financial impact, we categorised the well stock and established a risk adjusted norm for each group of wells. From the well P&A cost estimating exercise, it is clear that the operator adopted a mid range “average” well P&A cost estimate, and didn’t take into account the considerable number of wells in their well stock which are both aged and have serious well integrity issues. We estimated that well P&A costs are likely to be £483 mm in excess of the estimate currently provided.

P&A cost estimate OGUK cost forecast range vs operator estimate

Powerful Results

We equipped our client with accurate technical and commercial advice in relation to decommissioning costs, production profiles, asset integrity issues, OPEX/CAPEX expectations and risks so they could make an informed investment decision.

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