Experts join forces to address UKCS decommissioning conundrum

By 2040, total costs involved in decommissioning the UK Continental Shelf (UKCS) oil and gas infrastructure are estimated to reach US $40.6 billion (£26 billion), of which the subsea sector is expected to account for around 30%. It is vital that the industry has a thorough understanding of the issues to meet the challenge.

Grappling with cost
According to Alistair Birnie, chief executive of Subsea UK, it is crucial that the industry first harnesses the potential costs involved: “Only a few years ago, the costs were estimated to be around $31.2 billion (£15 billion),” he said, “but this figure continues to escalate dramatically, and unnecessarily so. The industry urgently needs to curb the costs for decommissioning, which will be a relatively short-lived sector, and aim to reduce them by one-third through addressing the key issues.”

Those issues are:
• Deciding whether to leave equipment in the seabed, bury it, or recycle where viable;
• Investing in technology to relieve the largely manual decommissioning process, which is highly time-consuming and, therefore, not cost-effective;
• Investing in skill sets and marine assets; and
• Focusing on the decommissioning market and opportunities on a global scale, including collaboration, to ensure both a uniform approach and best practice.

By 2040, total costs involved in decommissioning the UKCS oil and gas infrastructure are estimated to reach $40.6 billion (£26 billion). (Image courtesy of Shell)

In the next two decades, decommissioning will begin on many of the installations that have been producing oil and gas for the past 30 to 40 years. With 6,214 miles (10,000 km) of pipelines, 15 onshore terminals, and around 5,000 wells involved, this is a complex process during which a number of economic, tax, legal, and environmental aspects must be addressed.

Expenditure involved in decommissioning varies considerably by region, driven by the complexity of each individual project. Large platforms with substantial substructures require more work to remove than subsea and floating equipment.

Environmental factors also play a key role. In the North Sea, for example, recent UK figures estimate the central and northern sectors have considerably higher costs per installation compared with the shallower water and milder conditions of the southern sector. These areas are reported to be worth $18.3 billion (£11.7 billion) and $13.7 (£8.8 billion), respectively, of the total projected UKCS cost for decommissioning.

“One of the ways to reduce costs is by investing in technology and innovative approaches that enable a more sophisticated decommissioning process,” Birnie said. “In addition, while current costings continue to rise, the value of an asset doesn’t, so the industry needs to decide what to do with its assets.

“Decommissioning is a big market, but it’s also going to be short-lived, and people want to invest in a market that has growth for the future. Some of the specialized companies will be the big players – only recently PSN was awarded the Shell contract for decommissioning its North Sea interests – but for a large number of the supply companies, particularly SMEs (small and medium enterprises), they will struggle to get into what is a limited market.”

This is why it is important that decommissioning is seen as an international market. “In effect,” Birnie said, “the UK is leading the way in the sector, but it’s important that this is developed internationally in that everyone who has a stake hold in decommissioning adopts a uniform approach.”

Financing decommissioning
As well as causing a headache for existing operators, decommissioning liability is a major issue for companies looking to buy into fields. While larger firms can rely on good credit ratings, smaller firms must guarantee decommissioning liability. This usually is achieved through acquiring a bond, which ties up the restricted cash resources of a smaller company while leaving the original owner or larger development partners at risk should the small company fail.

Locking money to secure guarantees often can eliminate any value achievable from an acquisition. While a handful of deals have been done where decommissioning liability has been retained by the selling company (for example, BP on Thistle and Talisman on Beatrice), the problem remains for most.

“The issues surrounding bonds can be a major obstacle for companies in terms of returns on their investment. And on top of this, there is the decision about what to do with the decommissioned asset,” Birnie said.

While there is a market for some of the decommissioned fields, the issue of integrity comes under scrutiny.

“There are industry taboos that need to be opened up, predominantly concerning potential environmental impact, and we need to address them once and for all. Whilst the industry certainly can’t overlook HSEQ (health, safety, environment, and quality) issues, it must also consider other viable solutions and learn from initiatives such as America’s Rigs to Reefs program, where obsolete, non-productive offshore structures are converted to designated artificial reefs. Ensuring integrity during well abandonment is also an area where technology can play a part and again create significant savings.”

In the next two decades, the oil and gas industry will begin to decommission many of the installations that have been producing oil and gas for the past 30 to 40 years. (Image courtesy of Aker Solutions)

There is no doubt that decommissioning will emerge as an important business opportunity in its own right. A diverse range of sectors and businesses are involved in a decommissioning program with the most significant spending in the UKCS, according to Oil and Gas UK, being on jacket and topsides removal (18% and 17%, respectively), plugging and abandonment (16%), and operations (14%). Total market for jackets and topsides removal is valued at $14 billion (£9 billion), with $1.1 billion (£730 million) going to onshore disposal.

OPITO weighs in
Offshore Petroleum Industry Training Organization (OPITO) - The Oil & Gas Academy is the body charged with ensuring the UK industry has the skills needed to secure its future.

Managing decommissioning remains a challenge. According to managing director David Binnie, “Decommissioning presents a major opportunity, but also a major challenge for the whole supply chain in terms of the skills and specialist knowledge needed to meet the anticipated demand. Companies have been preparing for some time in order to respond to these growth opportunities and skills capacity constraints. Major programs are ongoing to attract the cream of the world’s science, engineering, technology, and math students to the UK, both for current production and growth activities.

“However, there will be increased demand from other sectors such as conventional power and renewables to contend with.” OPITO anticipates constraints in the supply of skilled engineers, management staff, heavy marine equipment, and onshore facilities.
OPITO has been engaging with the industry to identify skills pinch points in the near future and as decommissioning ramps up.

“Well abandonment is ongoing while production is still in progress as this is more efficient with resources sourced from the existing work force and the skills sets already in place,” Binnie said. “Decommissioning will require a large number of operations and maintenance specialists as well as project management and dedicated sector-specific experts, many of which may cross over from other industries.”