Choice between decom now or decom later requires looking beyond just costs vs. savings
To decommission now or decommission later? To answer this, one must begin by comparing the expenditure they expect to incur from maintaining an asset with the savings they expect to make for every year in which decommissioning is delayed.
That is the basic way of looking at it, according to Sripad Gopala, an economist who has worked for several North Sea operators, including Taqa and Dana Petroleum. Gopala and Innes Auchterlonie, who has held senior engineering roles with Hess and other North Sea players, have developed a model that takes into account this and many other complexities around this question.
At the heart of this decision is a simple trade off, Gopala told DecomWorld. “It pays us to defer decommissioning by every year that we can – because money not spent today will earn us something,” he said. “Typically, in the oil industry an appropriate discount rate may be 8-12% and it’s worth deferring that spend by a year. However, it costs us something to run that facility for every year, and if that cost is less than the value that we get by deferring it, then quite simply we can defer it.”
But one must also assess the potential for future cost cuts or blowouts, according to Gopala. On the upside, it may be worth waiting a few years for new technologies to reduce decommissioning costs or for potential synergies with neighboring assets that are nearing cessation of production (CoP). On the downside, any increase in the price of oil will likely lead to an increase in the cost of hiring vessels and drilling rigs, and there are engineering risks associated with keeping a facility running.
“We know that we can decommissioning for a given cost today,” Gopala said, “but in deferring it, we can only make an estimate as to what the future cost of decommissioning might be – and that could be lower, it could be higher.”
Three strategic choices
Gopala and Auchterlonie’s model has three elements, of which expenditure versus savings is the first. The second element is to compare the impact of conducting some decommissioning work prior to CoP, namely through temporary well abandonment, versus tailoring integrity-management expenditure to buy a few more years of asset life. It takes into account the possibility that a facility may be past its economic limit but the licensee may not have set aside the capital required to decommission it.
This second element assesses not only the value gained by deferring abandonment, but also: how integrity-management expenditure will materialize into life extension; how many years replacing a piece of equipment will buy; whether it is necessary to extend equipment life by that many years; and it considers alternative solutions.
Thirdly, the model can compare expenditure from decommissioning with revenues from producing assets across a company’s portfolio, with the aim of achieving a manageable level of outward cash flow as a proportion of inward cash flow at any given time.
“It may be that there’s sufficient cash flow to fund decom. It may be that we need to raise some debt in order to fulfil this decommissioning exercise. It may be that we want to bring forward or defer spending to accommodate capex [capital expenditure] exposure to a new development. Every portfolio’s going to be different,” Gopala said.
Operator input is essential
According to Gopala, a simpler version of this model was first used in planning the CoP timeline for the Anglia gas field in the southern North Sea. He said a number of North Sea operators have shown interest in using the updated model.
Many operators are waiting for the oil price to stabilize before deciding on CoP, meaning he and other consultants will need to wait for a few months before securing contracts, Gopala observed. But he is confident of securing business in the coming months.
Finally, Gopala stressed that operators will need to give consultants access to financial and operational data in order for such modelling to work. He said: “In the current- late-life paradigm in the UKCS [UK Continental Shelf], it is necessary to examine the technical solutions in the Extend vs. End debate in conjunction with their economic impact, so we obtain a range of ideal outcomes before we begin to superimpose constraints such as capital availability, time, etc.”