The UK Continental Shelf, now in its 50th year of production, is one of the world’s most mature offshore oil and gas basins. Much of its ‘easy oil’ has now dried up, increasing development costs per barrel fivefold over the past 10 years. However, with its remaining – albeit harder to retrieve – resources predicted to produce up to a further 24 billion barrels of oil equivalent, the offshore region is still a long way from retirement.
The same cannot be said for the shelf’s ageing infrastructure. There are around 600 oil and gas installations – 470 of them in UK waters – and more than 3,000 pipelines on the UK Continental Shelf (UKCS), many of which were not designed to last beyond 40 years, according to the Department of Energy and Climate Change.
While there is still big money to be made from exploiting the North Sea’s resources, the industry is also facing up to the costs and technical challenges that will come with decommissioning many of its oil and gas installations.
During the next decade, more than 2,300km of pipeline, infrastructure from 74 fields, over 70 subsea projects and more than 130 installations are scheduled for decommissioning, estimates the annual decommissioning report from industry body Oil & Gas UK, which draws on the plans of 27 operators on the UKCS.
This equipment includes floating production, storage and offloading vessels, small, normally unmanned, platforms in the southern North Sea, and large integrated facilities in the central and northern North Sea.
The removal of such installations throws up many technical challenges for the industry, particularly in “the availability of sufficient lift capacity, equipment, vessels and rigs to carry out the work,” says Mick Borwell, Oil & Gas UK’s environmental director.
While the task at hand may seem daunting, companies have already begun making headway, with some big decommissioning projects now completed. These include one of the largest projects to date, the removal of nine platforms from the Norwegian Ekofisk oilfield in the North Sea. Heerema Marine Contractors, employed by operator ConocoPhillips, removed a total of 113,500 tonnes of material over a period of six years – no mean feat of engineering.
In carrying out the project, Heerema removed the topsides and jacket installations in phases, using its offshore semi-submersible crane vessels Hermod and Thialf. “Working in rough seas and very deep waters makes huge and unusual demands on our equipment,” says Heerema. “However, our offshore crane vessels have been designed and built to cope with such challenges.” These vessels’ lifting capacity, stability, dynamic positioning capability and manoeuvrability, even in heavy seas, make them suitable for large-scale decommissioning projects, according to the company.
At the beginning of the Ekofisk project, more than a decade ago, costs were projected to run to £8.6 billion. However, the cost of the services is now considerably higher, says ConocoPhillips.
Finding ways to rein in the often spiralling costs of such projects is high on the industry’s agenda, particularly in the light of Oil & Gas UK projections that total spending on decommissioning over the next 30 years will exceed £31.5 billion.
Even these predictions may now be modest when taking into account the increasing well plugging and abandonment (P&A) activity. For example, Shell says that the average P&A costs on its Brent Delta field are £2.7 million per well. With Oil & Gas UK’s report finding that more than 800 wells are scheduled for decommissioning in the North Sea, the industry faces being hit with a hefty bill.
With recent well abandonment performance taken into account, costs could escalate significantly and easily exceed £50 billion, suggests Sir Ian Wood’s assessment of the oil and gas industry, the UKCS Maximising Recovery Review.
Wood’s review calls for radical change and reform on the part of government and industry alike to maximise the productive life of the UKCS, with recommendations for the formation of an arms-length independent regulator of operations in the North Sea.
While his eyes are focused on the prize of 24 billion barrels of oil equivalent, one of Wood’s strategies looks at how decommissioning can complement ongoing operations. He calls for wider collaboration on these projects, and stresses the need to ensure that decommissioning is executed in a safe, environmentally sound and cost-effective manner so that the UK gains a “competitive industrial capability”.
This closely aligns with the Government’s Industrial strategy for UK Oil and Gas for which the industry is developing technical, commercial and regulatory proposals to bring about cost efficiencies in decommissioning activities, says Borwell.
Nigel Jenkins, chief executive of industry body Decom North Sea (DNS), welcomes the review and sees it as an opportunity to push forward decommissioning activities. “The Wood review is looking for a ‘game changer’ that will drive down costs,” he says. “This will come out of DNS, because we are the only organisation focused on decommissioning that brings all the stakeholders together.”
Jenkins says that his organisation will form part of a significant collaborative network. He will be part of the new Oil & Gas UK Decommissioning Forum. He will join DNS board member Nigel Lees, who also sits on the Oil & Gas Industry Council and is co-champion for industrial strategy actions relating to decommissioning. Another DNS board member, Paul Charlton, is chairman of NOF Energy, while DNS chairman Callum Falconer sits on the decommissioning committees of the International Association of Oil and Gas Producers and the Society for Underwater Technology.
In addition, the network has links to the East of England Energy Group, Subsea UK, the Offshore Contractors’ Association, the Department of Energy and Climate Change, Scottish Enterprise, Highlands and Islands Enterprise, Energy North and the Nuclear Industry Association.
“If there is a game changer out there, it will emerge from that network,” says Jenkins.
He adds that although it is important that UKCS operators prepare for the time when decommissioning is needed, in some cases partial decommissioning, and recycling as much of the structure as possible, may be a better option than full asset removal. “If you can remove an asset and use it somewhere else by refurbishing it, that would seem to be a great thing to do,” he says.
The technical and commercial challenges of carrying out any decommissioning project are significant, but there needs to be a shift in how the industry views what is a necessary process, he says.
“North Sea assets have not been, until recently, designed from the standpoint of how they were going to be decommissioned, but everything has a finite life. Decommissioning is an essential part of full lifecycle management.” It should not be seen in a negative way, he adds, because it will create opportunities.
Jenkins adds that, while operators knew they needed to act and are doing so, the Wood review has crystallised some key aspects, plans are being formulated and the market is becoming increasingly active. “The UK and wider European supply chain is becoming more aware of the market drivers and opportunities.”
To ensure that the UK gains a competitive industrial capability, Oil & Gas UK has said it is committed to ensuring that experience gained from decommissioning projects is shared across the industry. It works on several fronts in this area: supplying market intelligence, facilitating networking and knowledge exchange through forums, share fairs and conferences plus publishing guidelines on decommissioning operations.
Oil & Gas UK’s Borwell says the supply chain is considered to offer a great deal of decommissioning expertise. While this has not yet been fully tested, it is expected to adjust to the steadily growing levels of work and open up new opportunities. “Working within a mature province means that firms in the UK will build up expertise in decommissioning – which they may be able to export globally,” he says.
In fact, according to two Oil & Gas UK reports released last spring, the supply chain is a £35 billion industry, based on 2012 figures, with 42% of the turnover attributed to a rise in exports.
The Gulf of Mexico is one market to which UK supply-chain companies could export their decommissioning expertise, and Jenkins agrees that it offers great potential. “DNS is engaged with the Gulf of Mexico operators,” he says. “These organisations often have an international footprint with some shared challenges, and DNS can help with the cross-fertilisation of ideas.” The ‘idle iron’ regulations, whereby abandoned wells must be fully P&A after five years, is driving competence in the region. “So there is clear learning here, especially as it is estimated that 40% of decommissioning costs on the UKCS will be well P&A.”
However, the UK oil and gas industry still has a great deal of work to do and lessons to learn before it can be considered a global leader in decommissioning, particularly at a time when the sector is facing a shortage of skilled workers.
But the industry is making a concerted effort to close this skills gap, says Borwell, focusing on collaborating with other sectors to expand the pool of skilled recruits. It is addressing the problem through programmes such as transfer training and promotion of the industry to employees in other sectors, including working with the Ministry of Defence to deploy and retrain people leaving the services. “There are areas such as conversion training for engineers, craft workers and technicians where we can build on existing collaboration and put plans into action almost immediately,” he says.
The industry is also supporting apprenticeships, with a technician training scheme that recruits more than 100 apprentices per year in process, instrument, mechanical and electrical disciplines, Borwell adds.
Companies are working to ensure that schoolchildren and university students are aware of the interesting career opportunities available in the oil and gas sector. The industry sponsors schemes such as the Earth Science Education Unit to provide teachers with the tools and information required to teach earth sciences. It is also working with OPITO, the oil and gas industry skills body, and other key stakeholders to encourage the take up of Stem subjects and raise awareness of the sector.
The DNS is working with a range of industry bodies to ensure they are ready for the escalation in decommissioning work that the sector faces. In particular, Jenkins wants younger engineers to recognise the career potential that the industry holds.
“If you are an engineer or a project manager, this is a fascinating place to be, because every project is different and there is a huge drive to bring innovative solutions to decommissioning,” he says. “There is a 40-year horizon ahead of us with challenging, exciting and interesting things that must be done.”
Tax relief aids firms’ financial planning
Tax relief on the costs of decommissioning oil and gas infrastructure will continue to be available in the long term – a decision that has been welcomed by many operators.
In late 2012, the Treasury confirmed a contract between the government and oil and gas licensees, stating that tax relief on decommissioning costs would continue.
The ‘decommissioning relief deed’ enables companies to move their decommissioning liabilities to a post-tax basis and release additional funds for further investment in oil and gas production.
Mick Borwell, from Oil & Gas UK, says: “This has had a substantial impact on our sector. Long-term certainty on decommissioning relief will, at no cost to government, facilitate the sale of assets to companies most suited to invest in them, provide renewed confidence for late-life investment by current and new owners, and liberate new funds for use in extending the productive lives of many mature fields.”
Meanwhile, however, the industry will be closely monitoring the potential impact of Scottish independence, with the debate being far from resolved as to which government should bear the cost of decommissioning in the event of a ‘yes’ vote.