North Sea exposed to domino effect in near term

The North Sea will remain exposed to the threat of a domino effect of early decommissioning unless operators and regulators band together to find solutions, experts have warned.

Experts still warn of a domino effect in North Sea decommissioning (Image credit: iStock / alxpin)

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Decommissioning expenditure is expected to match capital expenditure by the end of this decade as around 80 fields cease production, Oil & Gas UK said in its 2016 Activity Survey. Twenty-one fields ceased production last year, which the trade association put down in part to a worsening market outlook. Wood Mackenzie believes 140 fields could be closed over the next five years, assuming the oil price increases to $85 per barrel. 

Because many companies rely on shared infrastructure to transport oil from field to terminal, owners of fields left behind will face difficult choices, Craig Stevens, Senior Manager, Oil and Gas at PwC, told DecomWorld. “They either find another export route, which is expensive, or use tankers, which could also be expensive and has other risks. They might decide they are better off decommissioning as well.”

Three-quarters of North Sea fields produced less than one million barrels-of-oil equivalent in 2015, but a number are considered to be infrastructure “hubs” for their area, the Oil & Gas UK report said.

The government’s Oil and Gas Authority has warned that a domino effect would have a negative impact on all areas of the industry, from employment to supply chains to technology innovation. Stevens said the dominos were still standing, but a “prolonged period” of depressed oil prices “certainly won’t help” and companies need strategies in place.

Fairfield Energy’s decision to decommission all operations in the Dunlin area five years earlier than expected provides a litmus test. Fairfield has an existing contractual obligation to provide an export route via the Dunlin Alpha until September 2017. Thereafter the Dunlin Alpha and all other Dunlin-area infrastructure will be decommissioned, and neighbors – such as Enquest with its Thistle field – will need to find new transport routes.

Co-operation the way

The best way to protect the industry is to enact the measures outlined in the Wood Review to improve economic efficiency, Stevens said. Offshore companies and service companies need to work together and share their innovative solutions, he said, adding that other stakeholders – including the Treasury and the Department of Energy and Climate Change – need to be involved in discussions.

Cooperation on decommissioning projects can play a significant role in mitigating risks. Brian Campbell, Director at PwC, wrote in a recent blog post that developing a coordinated strategy would limit the risk of a domino effect. “If the costs of decommissioning are shared with the field next door, it becomes economic to keep it producing for longer. And coordinating the timing of projects will reduce the risk of some fields getting stranded and squeezed as adjacent ones are decommissioned before them.”

Annual decommissioning expenditure is expected to exceed £2 billion ($2.85 billion) in 2017, putting pressure on those fields that remain behind (Source: Oil & Gas UK)

Companies have so far shown little willingness to collaborate, in Campbell’s opinion. Gareth Davies, Founder of the Bestem network of operators, financiers and consultants to the oil and gas industry, believes the convoluted relationships in the North Sea make the task of collaborating a little more complex than it seems.

“Some things get in the way, such as the cross-ownership of assets,” he told DecomWorld. “For example, the Talisman platform is owned by several companies holding different percentages. Conflicts of interest result in stand-offs and stasis, both in working together to explore new fields or collaborating over decommissioning. Most operating committees have a unanimous voting system and lots of oil companies have no cash. If one person says ‘no’, it won’t go ahead.”

Further complications

The situation is further complicated, Davies said, because new field developments will turn to relying on floating production and storage vessels (FPSOs) to transport oil.

“Operators will think they won’t be able to rely on hooking up a new field to someone else’s platform so they will use more FPSOs to transport oil,” he said. “But for FPSOs to work you need a certain flow rate. Therefore, smaller and older wells are less likely to be developed and fields are likely to be shut earlier, which could increase the speed of decommissioning assets.”

There is a government regulation designed to prevent the domino effect, Davies pointed out. Companies wanting to decommission assets have to apply for a COP (Cessation of Production) certificate. To be approved, they are obliged to take into account the knock-on effects of closure. To date, the government has not denied anyone a certificate, but in theory it could.

Although the threat from a domino effect is not yet imminent, that is not to say it could not happen, Stevens said. “A lot depends on commodity prices and costs. When oil prices are US$40 a barrel and a lot of companies are financially sound at US$60, we might get an acceleration of decommissioning. That’s when we might get a more severe domino effect. The best means of avoiding it are to reduce costs per barrel and cooperate for the greater good.”

By David W. Smith