Three-quarters of oil firms see $40 as North Sea tipping point

Almost three-quarters of industry participants believe sub-$40-per-barrel oil prices will accelerate decommissioning in UK waters, DecomWorld’s North Sea Late Life Strategy Survey has found.

The tipping point for North Sea decom is $50/bbl in the long term, according to one expert (Image: DecomWorld)

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But two experts who spoke to DecomWorld on the back of the survey said decommissioning could not take off immediately because companies lack the cash to fund such activities.

Tom Leeson, Principal Consultant in Well Abandonment at Reverse Engineering Services, said there will be less decommissioning for at least the next 18 months because of cash shortages, but that “a lot of fields” cannot be sustained long term at prices of less than $50/bbl.

“A lot of the production that’s coming out of the wells right now was sold 18 months ago or more,” Leeson said. It was hedged at perhaps $70, $80, $90 a barrel. So operators are still getting $70, $80, $90 a barrel for their production right now. This year those hedging agreements will likely come to an end – and then we will really see things bite.”

Jan Groot, Director of PB Consultants, said UK North Sea operators might begin to plan for decommissioning planning, but he doubted there would be an acceleration in contracts awarded because those same oil companies lack the funds to commit to anything.

The major risk – both from a cost and time perspective – is in well plugging and abandonment (P&A), Groot said. He pointed out that companies such as Shell and Hess have completed well P&A at an average duration of 30 days, and said this is the duration other companies should use in their planning.

“As soon as the well has been plugged then it’s relatively straightforward to remove the platform or the subsea infrastructure,” he said.

Biggest concern a lack of E&P investment

Survey respondents admitted to being more concerned about securing investment for operations than about decommissioning. When asked to rate four concerns on a scale of one for little concern to five for high concern, 56% gave a five to investment in new exploration and production projects, while 37% gave the maximum score to integrity failure and 20% and 13% gave five to premature decommissioning and the prospect of a decommissioning domino effect respectively.

When asked to rate their organization’s likelihood of accepting any of six late-life outcomes, the most popular response was “continue production by lowering unit production costs”, with 33% rating this as highly likely and 28% as somewhat likely. Next in line was “sell assets” with 21% rating this as highly likely and 31% somewhat likely. Less than 10% of respondents considered it highly likely that their own firm would accelerate decommissioning, accelerate partial decommissioning through activities such as plugging and abandonment, lease assets to another operator, or initiate “lighthouse mode” in the form of ongoing care and maintenance.

There is more concern about lack of investment in E&P than in early decommissioning (Source: DecomWorld)

Groot agreed that structural integrity failure could cause serious problems if oil prices remain at around $40/bbl, because oil companies are not prepared for decommissioning. Although integrity failures may push them into opting for decommissioning, it will take them at least two to three years to prepare a decommissioning plan in conjunction with the Oil and Gas Authority (OGA), he noted.

Leeson said it was natural that companies would do everything they can to continue production on late-life fields because they have to maintain a revenue stream for as long as they can. Asked about recent UK government promises to provide tax relief for decommissioning, Leeson called it “welcome” but said there were bigger strategic issues that few people were willing to embrace.

“We are hugely inefficient. And the [future] costs that we’re incurring for decommissioning I don’t think are sustainable for the oil companies nor the taxpayer. Based on historic performance to date, the projected costs are probably… an underestimate,” he said.

“We have to change it [the future of decommissioning], and we’re only going to do that if we think strategically about how we’re going to manage all the changes as a whole.”

Companies want help from government

The DecomWorld survey questioned a broad range of respondents, with 56% representing E&P companies, 17% coming from production-focused or services-focused oilfield firms, 14% from consultancies, and the remainder from firms with other interests in North Sea oil.

When asked to rate which factor had the most ability to help maximize North Sea recovery, the respondents overwhelmingly voted in favor of fiscal regime adjustment to encourage investment and asset transfers. The second-most popular option was “innovative approaches to decommissioning liability”, followed by “clarity and delivery of the Oil and Gas Authority’s maximizing economic recovery strategy”, and “development of small pools”.

The Treasury was ranked the body with the most influence in the North Sea’s battle to survive low prices, followed by the OGA, Department of Energy and Climate Change, and Oil & Gas UK.

By Nadav Shemer