WoodMac: UKCS decommissioning to ramp up over next 5 years

Research and consultancy firm Wood Mackenzie Ltd. estimates based on current crude oil prices that 142 fields will cease production and £55 billion will be spent on decommissioning on the UK Continental Shelf over the next 5 years.

The tally includes the removal of 340 platforms with a combined weight of 5.6 million tonnes, and more than 3,000 development wells. Operators of five fields thus far in 2016 have reported their intention to cease production, and WoodMac believes the figure could rise to 50 fields, with many expected to enter “lighthouse mode” to save the imminent decommissioning costs.

The firm notes that 126 UK fields have already ceased but only 27% of those fields have been fully abandoned. Based on the 34 fields classed as abandoned, the average time between cessation of production (COP) and abandonment completion is about 3 years, but this is expected to lengthen as larger developments such as Brent are decommissioned.

“Although decommissioning in the North Sea has been an impending reality for some time, the high oil price between 2011-14 allowed some mature, high-cost fields to keep producing economically,” explained Ian Thom, WoodMac senior research manager, UK upstream research.

“The lower-for-longer oil price environment compounded by the maturity of the basin means that continuing production of certain fields in the North Sea region is no longer viable,” Thom said. “We expect companies will not be able to keep producing UK fields at a loss, and decommissioning activity will ramp up as a result.”

Thom said there are a number of uncertainties in the UKCS decommissioning activity, including the timing of COP and abandonment spending, and the decision to operate at a loss vs. deferring abandonment expenditure in the current environment. Furthermore, a change in mindset will be required to facilitate cooperation among the UKCS companies—something he said will be essential if the decommissioning task ahead is to be done efficiently.

WoodMac explains that recent tax changes introduced in UK Budget 2016 did little to improve company cash flows with so few currently in a tax paying position, but it does improve valuations. This may encourage new investment, or, at the very least, the continuation of loss-making operations over the short term rather than early cessation of fields.

Investment in ageing infrastructure will prevent a domino effect of fields ceasing in this mature sector. If no further investment materializes, the firm warns, the future of the North Sea could hang in the balance and many other countries will be watching how the UK oil and gas industry leads the great global decommissioning challenge.

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