- While decommissioning is becoming a pressing concern for North Sea operators, the prevailing low-price environment presents an opportunity for driving down costs.
- For instance, after the oil price slump of 2014, rig and vessel rates declined by 30% to 40%.
- It is expected that rig and vessel rates exhibit a downward trend this time as well, with declines likely lasting until 2022.
- Overall, more than 2,500 oil and gas wells are expected to be decommissioned across the North Sea in the coming decade, of which 1,500 are in the UK.
- The low oil prices could play a pivotal role in boosting decommissioning spending in the UK if they persist beyond the end of this year.
- The increased spending on decommissioning may limit the room for operators to invest in other segments such as exploration, development and enhanced oil recovery projects.
A recently published article in Oil Price, reveals how decommissioning is inevitable. They also bringout the total amount the decommissioning would take place.
Slashing exploration and production budgets since the Covid-19 pandemic
Energy companies have been slashing exploration and production budgets since the Covid-19 pandemic took hold and sent oil prices tumbling, but, with few profitable investment alternatives, operators are now likely to increase spending in decommissioning work. Rystad Energy estimates the total value of the global pool of decommissioning projects that will accumulate through 2024 could reach $42 billion.
With an average asset age of 25 years, the Northwest European decommissioning market could grow 20% in annual commitments through 2022 if the current low oil prices don’t show signs of substantial recovery soon.
In addition to a rapidly maturing asset base and low oil prices that erode commercial viability and potential life extensions, the North Sea decommissioning market will also be helped by favorable service contract prices.
80% of decommissioning by UK in next five years
Only about 15% of North Sea assets have been decommissioned to date, but in the coming five years we expect an average of 23 assets to cease production annually. The UK is poised to lead the way with nearly 80% of total estimated expenditure on Northwest European decommissioning in the next five years, followed by Norway with 14% and Denmark with 4%.
The pool of removal projects in the region for that period is estimated at about $17 billion. By comparison, decommissioning costs in the US for the same period are estimated at $5.7 billion.
“A protracted low price environment can potentially motivate operators to leverage low contract prices and commit to their asset retirement obligations, thus spurring decommissioning activity in the Northwest Europe region. This will also provide welcome opportunities for contractors in an otherwise gloomy oilfield services market,” says Sumit Yadev, energy service analyst at Rystad Energy.”
Strigent Regulatory
The high market share of the UK can be largely attributed to its rapidly maturing production levels, as almost 80% of the country’s oil and gas assets have produced more than 75% of their available resources. Additionally, lackluster exploration results, growing regulatory stringency and a prolonged low oil price environment may lead operators to fulfill their asset retirement obligations in the absence of any lucrative competing investments.
Plugging and abandonment (P&A)
Plugging and abandonment (P&A) of wells is expected to make up about 45% of decommissioning costs for the period, followed by platform removals, which account for nearly 20% of the total costs. Platform wells are set to be the dominant segment for well P&A activity, making up about 65% of the total wells to be abandoned, while the rest are subsea wells. However, in terms of costs, subsea wells will take the lead as they cost on average $11 million each to abandon, compared with $5 million for an average platform well.
The low oil prices could play a pivotal role in boosting decommissioning spending in the UK if they persist beyond the end of this year. Nearly 10% of all UK offshore assets have lifting costs above $25 per barrel, which will hamper their life extension prospects and make decommissioning a better financial option if low prices persist.
Strong cost optimization measures
Operators implemented strong cost optimization measures after the oil price crash of 2014 and therefore have little room for further cost and efficiency gains now, which may also expedite decommissioning spending.
Overall, more than 2,500 oil and gas wells are expected to be decommissioned across the North Sea in the coming decade, of which 1,500 are in the UK. The UKCS will also witness the removal of nearly 300,000 tonnes of topsides in the next five years, with nearly 50 topsides set to be decommissioned, representing an average topside removal cost of $5,300 per tonne.
Additionally, almost 100,000 tonnes of substructures are expected to be removed in UK waters. In line with the broader North Sea trends, platform wells are expected to account for the bulk of the well P&A activity with nearly 70%.
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Source: Oil Price
