North Sea's new P&A pure-play must prove early abandonment cuts costs

The private-equity firm backing the North Sea’s newest oilfield-services company believes now is the “ideal time” to invest in plugging and abandonment. Industry consultants say that depends on whether operators can be persuaded that there are cost benefits to conducting P&A sooner rather than later.

Aberdeen has a new player in plugging and abandonment (Peter Ward / Wikimedia Commons)

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Lime Rock Partners invested £50 million ($72 million) in establishing Ardyne, a specialist in downhole products and services for P&A and for slot recovery - which involves reusing a plugged well slot to drill for additional resources from the same surface structure. Ardyne spent some of those funds on acquiring Wellbore AS, a Norwegian provider of downhole tools for casing cutting and pulling.

Support can be found in some quarters for Lime Rock’s assertion that commercial pressures are pushing field redevelopment and decommissioning higher up the agenda. Oil and Gas UK forecast in its November 2015 Decommissioning Insight that 950 wells will be plugged and abandoned in the UK North Sea between 2015 and 2024 at a total cost of £6.2 billion.

Davi Quintiere, a senior manager in Accenture’s energy business, told DecomWorld that when the oil price was $100-110 a barrel, assets were so profitable that decommissioning was delayed. Development of maintenance technologies also prolonged operations at the time. In 2014, the oil price plummeted and cash-strapped operators were left with limited funds for decommissioning.

“If the oil price had stopped at around $70-80 there would have been more decommissioning and P&A – which is about 40-45% of the process. But at current prices lack of cash flow means everyone postpones decommissioning. So, there’s no firm commitment there will be a lot of P&A in the short term,” he said.

Quintiere said similar economic arguments applied to slot recovery, which only makes sense when field operating costs are low enough to justify production in the current oil price. The North Sea has some of the world’s highest unit costs.

Roadblocks not entirely insurmountable

Paul Brindley, a management consultant to various operators and service providers with North Sea operations, agreed the market could prove challenging for Ardyne. He said most operators were currently being forced to direct funds toward operational expenditure and debt payments.

“Ardyne have specialist tools and can offer services, and anything that reduces P&A costs will be welcomed. Their best hope is to get operators to use their tools and develop the means to do P&A independently. But the key question is: who wants to spend on decommissioning when there isn’t much to spend and all eyes are on keeping companies afloat?” he told DecomWorld.

In the UK, the Energy Act 2008 empowers the Secretary of State for Energy and Climate Change to serve notice on an operator to submit a costed decommissioning program at any time. The government’s draft “Maximising Economic Recovery” policy, released this year, stipulates that operators must study all other viable options before planning for decommissioning.

Jim Rae, Managing Consultant at DCSL : D-Comms, a Scottish independent decommissioning consultancy, pointed out to DecomWorld that UK law does not set down a fixed timeline for decommissioning work.

“The regulator is pragmatic and recognizes operators need to be in a fiscally stable situation to be able to afford it,” he said.

Another factor for Ardyne to consider is the competitiveness of the P&A sector. Brindley said the lack of drilling means existing contractors will be keen to secure P&A work. Quintiere said competition could intensify once P&A picks up.

“Even if they don’t have specialist P&A skills, larger companies will quickly convert rigs to do well P&A if the demand is there,” Quintiere said.

Long-term prospects remain strong

Ardyne and Lime Rock declined to speak to DecomWorld for this report. But Ardyne chief executive Alan Fairweather expressed optimism in a press release announcing his company’s establishment, declaring that Ardyne’s technology and service-driven mentality will help customers “optimize operations, cut costs, reclaim rig time and unlock the long-term value of brownfield resources”.

If Oil & Gas UK’s forecasts turn out to be close to the mark, there should be plenty of work for Ardyne and its competitors. The industry roof body expects the number of wells being plugged and abandoned in the North Sea to rise from about 50 in 2015 to about 110 in 2016 and about 150 in 2017. P&A activity is expected to peak at about 170 wells in 2021 on the back of a spike in the central North Sea.

Energy consultancy Douglas-Westwood has also argued that the long-term nature of the price crash will force operators to consider decommissioning. In a recent article in the Society of Petroleum Engineers' Oil and Gas Facilities magazine, it forecast “a spate of abandonments” by the end of this decade.

Despite Quintiere’s caution about the immediate opportunities, he foresees growth in P&A activity following a lean period. Being the first mover could work in Ardyne’s favor, and having a financial backer in Lime Rock could provide the economic security to survive any quiet periods, he said. “It will pick up within the next decade, so companies need the ability to navigate through downturns until the opportunities arrive.”

Rae said it would be easier to make predictions about P&A when operators finalize their budgets around October. He said, “I temper my caution about Arydne’s prospects by saying there’s a chance they can persuade operators to bring forward P&A activities by offering them ways to do it more efficiently in terms of time and money. There will always be a market for that.”

By David W. Smith