Wood Mac: Decommissioning to Ramp Up on Oil Price Slump

A high oil price has enabled operators to extend field life and delay decommissioning time and time again on the UK continental shelf (UKCS), however the current low oil price has brought into stark relief that this cannot continue indefinitely concludes a new analysis by Wood Mackenzie.

The report, prepared for Offshore Europe 2015, forecasts that while a small number of decommissioning projects have been completed to date, decommissioning activity and spend are forecast to ramp up over the next five years as mature fields are no longer economically viable in a low oil price environment. 140 fields could cease over the next five years.

Fiona Legate, UK upstream research analyst for Wood Mackenzie elaborates: “In 2015 operators have reacted to the low oil price environment by deferring spend and delaying sanction of new developments. We have analysed the impact of the low oil price on decommissioning activity looking at the timing of cessation, retained decommissioning liabilities from previous deals and batch decommissioning.”

Wood Mackenzie forecasts that around 140 UKCS fields will cease over the next five years even if oil prices return to US$85 a barrel ($/bbl). However we may see around 50 fields ceasing even earlier than expected if the oil price returns to a level around US$70/bbl, Wood Mackenzie wrote. This is compared with 38 new fields that are expected to be brought onstream in the same time. “17 fields are expected to be sanctioned over the next 5 years. In the current price environment there is a risk projects may be cancelled or delayed. We could start to see a shift away from work in new developments to decommissioning projects,” Legate explains.

And with a shift in activity, so too would be a corresponding shift in spend: “We expect around £54 billion (in nominal terms) will be spent on decommissioning on the UKCS and anticipate it to be completed in the early 2060’s. Decommissioning spend is expected to increase by over 50% by 2019 and will overtake development spend in the same year.

“There have been announcements of five fields to be retired early this year, none of which have come as a surprise. The fields most likely to be decommissioned are uneconomic without high oil prices to justify escalating maintenance costs and declining production which are unable to support the high operating costs. 30 fields have been abandoned in the UKCS to date and companies have gone through a steep learning curve. The costs assumptions for decommissioning projects are higher than estimates from ten years ago as there is more knowledge of what is involved, through regular decommissioning reviews; benchmarking against previous projects and more accurate estimates as the industry seeks costs savings across the board. Stricter plugging and abandonment rules have also driven up well abandonment costs,” Legate says.

In fact, with decommissioning costs top of mind for mature assets, it’s become more common for sellers to retain decommissioning liabilities as is the case with fields such as Beatrice, Heather and Kittiwake. “Buyers want to protect themselves from the burden of decommissioning liabilities, especially on mature assets,“Legate qualifies.

Wood Mackenzie concludes its analysis by offering one possible solution to managing costs: “Batch decommissioning involves a group of fields being abandoned together. These are selected by geographical proximity, operator or play. Our analysis takes a group of geographically close fields in three sectors (the central north sea, northern north sea and southern gas basin) and applies reductions to get an indicative view of the benefits of batch decommissioning. By our estimations this could yield an average cost reduction of around 20% for small batches in the three sectors,”  Legate added closing.

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