UK Prepares for Decommissioning Upstream

The UK appears to be taking a more industry-focused approach to the decommissioning process than before, while still being bound by international obligations such as the 1992 Ospar Convention governing the protection of the marine environment of the northeast Atlantic.

In late June, the UK upstream regulator Oil & Gas Authority published a strategy for decommissioning. Deliberately vague in its wording, it does not set out prescriptions on how this massively costly operation must be carried out – it puts a mid-range cost estimate of £47bn on the process – but states its expectations of how the process will be managed.

In its aim to maximise the economic recovery of the UK oil and gas reserves, many of which find their way to the beach terminal through common infrastructure, it wants the last one to finish production to set the pace for decommissioning, taking the "cluster" approach.

It also wants to encourage smaller operators into the North Sea who might otherwise be put off buying assets by the large liabilities for decommissioning, leading to premature cessation of production (CoP).

It says decommissioning will be expensive and span several decades but it presents significant opportunities for innovation, cost reduction and development of UK skills and capability. Estimates of scope, complexity and cost vary but there are over 250 fixed installations, over 250 subsea production systems, over 3,000 pipelines and about 5,000 wells.

The current mid-point cost estimate for UKCS decommissioning to 2050, prepared by an independent industry expert for the OGA and the Department of Energy & Climate Change, is about £47bn (in today’s money), with a stated uncertainty range of +/-40%, it says.

Marc Hammerson, a partner at the London office of international law firm Akin Gump, told NGE in an interview July 11 that “to the extent that it is done in clusters, it will be a lot less expensive as there are economies of scale; but the costs will need monitoring as they will fluctuate from year to year." He said: "Abandonment used to be talked of as something that needed to be done swiftly after CoP but in practical terms it may be possible for a platform to be decommissioned after a couple of years of non-use (rather than immediately) providing that the operator maintains all the certificates relating to environmental and health and safety and otherwise maintains the integrity of the infrastructure so that workers can re-enter the platform for the purposes of decommissioning.”

He praised the strategy as a declaration of intention. “The UK wants a good, functioning decommissioning industry in line with our international obligations,” he said.

When the price of oil was comfortably above $100/barrel – that is, until the summer of 2014 – the decommissioning process was further in the future than now, even though falling costs help with the economics of production. Now the process is expected to spike in the early 2020s. “The current oil price is leading to an accelerated push for decommissioning,” he said, and the government and industry needs to be ready for that.

“The UK is relatively well prepared, legislatively speaking. The 1988 Petroleum Act consolidated earlier laws regarding decommissioning. The UK could be the first really big example of a basin to see it on this scale, a test case, and the expertise could turn into an exportable business,” Hammerson said. “The government wants to facilitate a new industry. Like anything else to with oil and gas, it is an international industry that will look for opportunities around the world.”

Under its international legal obligations, the government is the ultimate guarantor of the costs of decommissioning in the event that companies are unable to pay, which could be a huge burden for the taxpayer. So the government has always provided tax benefits, allowing the zero-revenue, high-cost final years of a field’s life to be offset against the taxes paid in earlier years. This means tax repayments for example for Shell, as it decommissions Brent field. “As a rule of thumb, the taxpayer will foot a third of the cost and the oil company the rest,” he said.

Marc Hammerson (image credit: akingump.com)

Another aspect of decommissioning is the need to manage social objections. Ospar derogations make it possible to dump the redundant infrastructure at sea; but this can raise the temperature of the emotional argument and pose a commercial risk to the operator, he says, especially if it has a big downstream presence that could become a target. This is not the case for newer entrants into the North Sea, however.

The most famous example of decommissioning going wrong was the Brent Spar episode of the mid-1990s. It was the first time that a major oil company had caved in to consumer pressure brought to bear by an environmental group, Greenpeace. Customers boycotted petrol stations and some also took more aggressive action. The result was that the platform was brought ashore, which was later admitted by both sides to have been a worse outcome environmentally as well as being riskier in terms of life and limb than sinking it deep offshore.

Brexit and UK energy

Hammerson does not see Brexit having much direct impact on the upstream where decisions are affected by the oil price, reserves and tax. The possibility of a second Scottish referendum on independence from Westminster is something that Brexit has revived. And it has weakened the currency, increasing the cost of imports.

Brexit could also weaken the market for mergers and acquisitions, although that market has been weak for some time. And it could impact the midstream and downstream sectors, depending on whether the UK went for what he called a ‘soft Brexit’ where the UK was so similar to Norway in terms of movement of labour and so on that the Leave camp might feel the referendum was pointless; or ‘hard Brexit.’

Anything that jeopardised the movement of energy across Europe, such as higher trading or network access or other costs would be bad for the government of the day, he said. “If we go for ‘hard Brexit’ then there will be a medium and long-term effect on UK midstream and downstream space,” he said.

William Powell