Oil price pressures UKCS firms to share resources to cut costs

UK North Sea oil operators will need to work in localized groups to optimise supply resources for as many as 140 decommissioning projects in the next five years, Fiona Legate, UK upstream research analyst for Wood Mackenzie, told DecomWorld.

With Brent crude prices currently lingering below $50/barrel, a new report by Wood Mackenzie (Wood Mac) forecasts up to 140 fields on the UK continental shelf (UKCS) will be decommissioned under the assumption that oil rises to $85/bl.

If oil prices settle at $70, a further 50 UKCS fields may be plugged and abandoned earlier than forecast, putting further pressure on decommissioning resources in the next five years.

This decommissioning outlook is substantially higher than the latest estimates from Oil & Gas UK, the industry association.

Oil & Gas UK has estimated that less than 80 fields will cease production between 2014 and 2019, which is 6% higher than its 2014 estimate. Some 23 decommissioning applications have been received so far this year.

Wood Mac’s report argues that the decommissioning market has been distorted by abnormally high oil prices over the past 10 years. Now that the cost of a barrel of Brent has returned to its historical trend line, the decommissioning market is responding.

“It’s hard to predict but we assume a long-term cost of $85. On that basis we have models from all the commercial fields on the UK continental shelf and we assume cessation when the cash flow is no longer positive, and that indicates that 140 fields will have a negative cash flow between 2016 and 2020,”  Legate, one of the report’s authors, told DecomWorld. 

There have been announcements of five fields to be retired early this year and none of these have come as a surprise, Legate said.

“The fields most likely to be decommissioned are uneconomic without high oil prices to justify escalating maintenance costs and declining production,” Legate said.

Capacity crunch

According to Wood Mac, £54 billion will be spent on UKCS decommissioning and activity should be completed in the early 2060s. Decommissioning is expected to increase by more than 50% by 2019 and will overtake development spending in the same year. 

Currently, 38 new fields are expected to be brought onstream in the next five years, Wood Mac said.

The expected glut of decommissioning projects has led to fears that the regional infrastructure will be overwhelmed by orders and this will be felt along the supply chain.

In its Decommissioning in the North Sea report last year, engineering firm Arup predicted that even without the surge in demand there would be a lack of rigs, heavy lifting vessels and onshore yards, and also a shortage of engineers with the skills required to handle the cutting and recycling work in those yards.

“There are plenty of issues around with capacity in the UK in terms of finding people who’ve got the experience of doing this work offshore, and then you do get into the issues of capacity of disposal onshore,” Dai Richards, Global Marketing Manager with ABB Consulting, told DecomWorld.
“It will definitely be a bottleneck when demand increases and big investment will be needed,” he said.

Wood Mac’s Legate noted that resources would be boosted by the fall in demand for upstream work, which will mean that contractors will be able to divert resources such as semi-submersible rigs to decommissioning activity.

Cost control

Operators will need to work together more, rather than compete for decommissioning resources, Legate warned.

“In the development phase companies pursued their own interest but because of the number of fields and installations we can't remove them the same way they were put in. We’re going to need companies working together a lot more,” Legate said.

The Oil and Gas Authority is urging firms to work together, “but it’s quite hard – it's not a quick process we’ll need to see a change in the way companies work together,” she said.

“Companies may decide to work together and do small batch decommissioning. If they take a group of fields that are close together and the companies work together, the rig doesn’t have so far to move so the mobilization and demobilization of rigs would be cheaper, and heavy lift vessel wouldn’t have as much downtime. In certain areas where there’s a host platform and a number of fields that tie back into it, it would make sense for them all to work together. That all helps to bring down costs, and we see a cost reductions of about 20%.”

Jim Christie, Global Decommissioning Manager at Marathon Oil, told DecomWorld in May that operators could slash Plugging and Abandonment costs by as much as 40% if they are willing to take a fully collaborative approach with rival producers.

“The day rate stays about the same, however you do save on mobilization and demobilization costs so you eliminate some days and also the increases in efficiency are quite significant over a number of wells. I would say the total cost savings might be between 30% and 40% from the start to the end of a campaign,” he said.