DW says that, for much of the period since the year 2000 – characterized by high and rising oil prices, along with long-term concerns over global oil supply – decommissioning took a backseat. Asset lives were extended through improved recovery, enhanced maintenance, and, critically, divestments. Smaller, more agile operators found success extracting from fields that had ceased to be profitable under original ownership, and, with market fundamentals pointing toward continued high prices, many agreed to the transfer of decommissioning liabilities.
But with oil at $45/bbl, this model no longer works. Buyers cannot absorb the liabilities associated with big oil fields while returning value for shareholders. For sellers, other options do exist: bundling of legacy assets alongside new, promising acreage has worked in the past, while the model of selling assets without the transfer of decommissioning liabilities has precedents and real scope to reduce the gap between buyer and seller.
DW believes, however, that the current fundamentals will lead to “significant” growth in decommissioning activity on the UKCS. Operators are under increasing pressure to reduce exposure to high-cost regions, and remove decommissioning liabilities from balance sheets. Without traditional sale routes, operators will increasingly make strategic decisions to push forward with asset decommissioning. Advantages for first movers are evident, with the opportunity to avoid constraints in the supply chain, and to take advantage of suppressed rig rates for plug and abandonment (P&A) operatons.
Opportunities for related investment exist. Decommissioning is a nascent part of the industry, and it represents a huge technical and operational challenge. The Wood Report estimates costs of up to $50 billion for UKCS decommissioning. The final figure may be far higher. Companies offering solutions – products, services, or assets – that improve safety and efficiency will thrive. Companies involved in P&A will benefit, while maintaining an underlying level of demand associated with normal field operations.
For the North Sea, it’s not all doom and gloom: the region has extensive infrastructure in place, investment continues for the most promising fields, and the best existing assets remain profitable. But the region is mature. And producing in the North Sea remains expensive in a world awash with oil. For North Sea decommissioning, it appears that, this time, it’s different.