For much of the period since the year 2000 – characterised by high and rising oil prices, and long-term concerns over global oil supply – decommissioning took a backseat. Asset lives were extended through improved recovery, enhanced maintenance, and, critically, successful divestment. Smaller, more agile operators found success extracting from fields that had ceased to be profitable under original ownership, and with market fundamentals pointing towards continued high prices, many agreed to the transfer of decommissioning liabilities.
But with oil at $45/bbl, the model no longer works. Buyers cannot absorb the liabilities associated with big oil fields whilst returning value for shareholders. For sellers, other options do exist: bundling of legacy assets alongside new, promising acreage has worked in the past, whilst 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 take advantage of suppressed rig rates for P&A.
Opportunities for related investment exist. Decommissioning is a nascent part of the industry, and represents a huge technical and operational challenge. The Wood Report estimates costs of up to $50bn 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, whilst 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.
Alec Mitchell, Douglas-Westwood London
+44 (0) 20 8382 3919 or Alec.Mitchell@douglaswestwood.com