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    Financial challenges in decommissioning

    Financial challenges in decommissioning

    Decom North Sea, with 230 member companies, was established in 2009 to ensure decommissioning is undertaken in the most efficient and cost-effective way.

    Decom North Sea, with 230 member companies, was established in 2009 to ensure decommissioning is undertaken in the most efficient and cost-effective way.

    Brian Nixon, Decom North Sea, Aberdeen

    Since the 1970s, the North Sea oil and gas industry has steadily developed into one of the strongest and most highly regarded clusters anywhere in the world. Part of this success has been due to the industry's ability to extend the economic and productive lives of mature offshore platforms through the introduction of new technologies, expertise with asset integrity, and production optimization.

    Despite this success, it is now recognized that a growing number of oil and gas assets have either reached, or are approaching, the end of their economic life. In accordance with current regulations, assets will have to be decommissioned and removed. This presents financial challenges for the owners and operators, while offering major business opportunities for engineering consultants, contractors, and service specialists.

    However, as with other oil and gas sectors, smaller decommissioning companies are facing difficulty in attracting funding. This, combined with uncertainty over timescales for decommissioning projects, presents challenges to the industry.

    The cost to the industry

    With many UK Continental Shelf (UKCS) assets reaching end of life and the latest estimates putting a forecast spend on decommissioning of £35 billion by 2040, it is an increasingly important sector for the supply chain. Approximately £31.5 billion of this will be to decommission existing installations and £3.5 billion to decommission new developments.

    With production in the UKCS falling for 11 straight years, there will be an increasing number of assets nearing their decommissioning stages. Given concerns over reliability of equipment and falling production efficiency, decommissioning will continue to rise in prominence in the coming years.

    It is estimated that the total cost of UKCS decommissioning in the next five years alone will be around £4.5 billion, focusing on 40 platforms and their associated wells, pipelines, and subsea structures, across 80 fields. To put this figure into context, latest estimates for the same period show that total decommissioning costs in arguably the world's most mature petroleum province, the Gulf of Mexico, will amount to around £3 billion – considerably smaller than the UKCS figure.

    Though UKCS decommissioning spend is expected to face a steady rise in coming years, there exists uncertainty over the timing of the market and, with many levels of companies involved in decommissioning, this can cause further ambiguity into funding.

    This was addressed at a recent industry round table event hosted by law firm Maclay Murray & Spens LLP (MMS) on February 25 in Aberdeen. Entitled Decommissioning – Financing Solutions for the Supply Chain, the day featured speakers from across the decommissioning sector to discuss the challenges facing the industry as well as possible solutions for financial access for those involved in decommissioning.

    One of the biggest challenges today is the issue of timing. As decommissioning continues to be deferred on large projects, there is no clear timeline as to when operations will reach the end of their natural and prolonged lives.

    As a result of the continuing lack of market information and project timescales, decommissioning companies are deferring investment in new decommissioning equipment and technologies, favoring to do so in other better-understood opportunities such as overseas and new capital developments.

    "With many UK Continental Shelf assets reaching end of life and the latest estimates putting a forecast spend on decommissioning of £35 billion by 2040, it is an increasingly important sector for the supply chain… It is estimated that the total cost of UKCS decommissioning in the next five years alone will be around £4.5 billion." – Brian Nixon, Decom North Sea – Brian Nixon, Decom North Sea

    Geographic spend

    Decommissioning spend across the UKCS will vary by region, with the northern North Sea and central North Sea having considerably higher costs per asset than the southern North Sea. There are a variety of different sizes and types of asset found in the North Sea, each of which has its engineering challenges and opportunities. The southern North Sea is a region with relatively shallow water and modest sea states, accommodating almost 400 platforms producing (mostly) natural gas.

    The owners and operators of oil and gas infrastructure in the UKCS are liable for the cost of each decommissioning program. However, following recent confirmation from the UK government, tax relief will be made available once decommissioning expenditure is incurred, effectively resulting in the public sector contributing between 50% to 75% of the costs of each decommissioning program.

    Although some 7% to 8% of North Sea infrastructure has already been decommissioned and removed, this has taken place sporadically. As a result, the approaches and models needed to optimize the performance of decommissioning projects have yet to evolve. The majority of operators gearing up to undertake their first decommissioning program are taking time to develop their own approach and strategy.

    There is currently no time constraint for offshore decommissioning to be undertaken, which gives project teams time to commission various forms of engineering studies, surveys, inspections, and analyses from the very beginning of the process.

    As the industry begins to speak more about decommissioning, stakeholders can begin to understand the issues surrounding the sector as well as how they can best support the industry financially.

    Decom North Sea was established in 2009 to ensure decommissioning is undertaken in the most efficient and cost-effective way, as well as see that its supply chain members benefit from the huge business opportunities available in the sector. It goes about this by developing models, guidelines and facilitated joint industry projects designed to increase efficiency, reduce or contain costs. It also stimulates collaboration and cooperation.

    With a focus on global reach, the group now has more than 230 member companies drawn from operators, contractors, consultants, service providers, technology developers, equipment providers, marine and heavy lift specialists, logistics, subsea engineering, wells, onshore disposal facilities, and professional services.

    DNS is witnessing encouraging signs of cooperation, sharing of ideas, joint industry projects, and open dialogue between operators, contractors and supply chain specialists. This is important because the cost of the decommissioning program will be shared between the private and public sectors.

    This and other collaborative efforts are discussed at DNS courses and events throughout the year, including Decom Offshore, a one-day conference being held May 27 in Aberdeen highlighting the many and varied technologies and techniques required within the sector and to showcase some of the latest industry developments and thinking. This year's program will also focus heavily on networking, providing opportunities for companies of all sizes within the industry to find their niche as they confront the financial challenges facing the sector, and advice on best practices moving forward.

    About the author

    Brian Nixon has been chief executive at Decom North Sea since its inception in January 2010. He has an engineering and business development background in the energy industry as well as experience in the public sector. He was director of energy at Scottish Enterprise from 2001-2009. He also worked with the British Embassy in Angola in 2000 to develop market strategies for UK companies and to promote British oil and gas expertise. He has also served in management positions at Wood Group Engineering and Motherwell Bridge Ltd. Nixon holds an engineering degree from Strathclyde University, is a Chartered Engineer, a Fellow of the Institution of Mechanical Engineers, and is a Fellow of the Energy Institute.

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