Middle East burying head in the sand on decommissioning
The Middle East is yet to fully plan for its decommissioning future
Decommissioning globally is set to expand rapidly as decades-old infrastructure comes to the end of its productive life. While the Middle East has largely escaped the wave of decommissioning that has hit the North Sea and Gulf of Mexico, this could soon be about to change.
The Gulf is now one of the most prominent future hot spots in the industry. By 2038, more than 1,000 structures and 3,000 wells will be more than 30 years old, a report on offshore decommissioning by the Boston Consulting Group identified.
The international push for countries to transition to a low-carbon economy may also hasten the need for decommissioning and the introduction of standards and legislation. The UAE, Saudi Arabia, Qatar, Kuwait and Jordan have all ratified the Paris Agreement, while Abu Dhabi's Adnoc has identified zero gas flaring as a key objective. If regional governments are indeed dedicated to this transition, and they certainly appear to be, the question of decommissioning is looming large. Conducting decommissioning activities in a responsible and sustainable manner will be critical in a region with such a large oil and gas industry presence.
Few decommissioning projects have been conducted in the Middle East and, therefore, there's a relatively small amount of experience and 'lessons learned'. Decommissioning projects expose companies to considerable risk of overspend, so creating a good plan is crucial to success. Unlike costs associated with traditional exploration and production activity, there's little chance for any of the decommissioning costs to be offset against future revenues—money spent unnecessarily can't be recovered.
Underestimates of cost will also, at least initially, artificially boost the balance sheet of companies and influence the scope of work selected for decommissioning. Excessive estimates will promote an inefficient use of capital. Inaccurate estimates may also lead to excessive demands on public funds. In each case, the lack of clarity around decommissioning costs will create difficulties for public finance planning.
Similarly, in the early stages of planning, poor data quality is a challenge that will significantly impact cost and risk. There are no ready solutions for this. But assessing the quality of data as soon as practicable will allow for further investigation, contingency planning and broader ranges of cost estimates. The quality of data also varies depending on the nature of the asset being decommissioned. It's generally more difficult to inspect the quality of a well than a surface facility.
Any accurate cost estimate is hugely dependent on the planned scope of work being undertaken. It's therefore essential to define what infrastructure requires decommissioning, what its current condition is and what the forward plan is for taking it out of service.
Cost certainty and subsequent cost control will require the combined skills of various technical and supply-chain disciplines from within a single company and in cooperation between companies. It's a regrettable reality that there will probably be some form of scope and cost creep pressure. The challenge for the industry is how to control it.
Another key feature in the region is a lack of regulation. The reasons for this vary but primarily there's a perception that decommissioning legislation isn't urgently needed-very few facilities have been decommissioned and there are no projections, at least not publicly. Secondly, the current approach of allocating liability on a case-by-case basis allows flexibility. This is important in a region that suffers political instability and security issues. Finally, forming specific legislation and guidelines will require extensive consultation and negotiation between governments and oil companies, a task needing significant commitment from all stakeholders.
The lack of certainty this generates is problematic. Without a clear understanding of a contractor's liabilities and other obligations under applicable legislation, it's difficult to make accurate budgetary projections. Oil companies operating in the region often work under host government granting instruments (HGGIs) with no decommissioning obligations or legislative framework in place. Without provisioning for decommissioning costs, companies may find themselves with liabilities that haven't been factored into investment decisions and which can't be recovered though petroleum production. Even where operations and decommissioning liabilities have been taken over by a new contractor, there's always a possibility that governments will try to claw back costs from previous contractors if the new one is unable to pay.
Few decommissioning projects have been conducted in the Middle East
Conversely, governments operating under such HGGIs may find themselves responsible for decommissioning liabilities for infrastructure transferred to them at the end of the life of a producing field, despite such infrastructure being used for the benefit of the outgoing oil companies for decades.
Small and medium-sized oil companies are particularly likely to be affected by this uncertainty. These firms typically take over marginal fields or those nearing the end of their life cycle. By tightening costs and adopting new technology, they're able to extract value from fields which are no longer of interest to major oil companies.
These companies require as much certainty as possible with respect to potential decommissioning liabilities and costs to be able to make accurate projections and to decide whether to invest. Uncertainty over these issues could discourage players from entering the region and result in stranded reserves.
Likewise, when oil companies work as part of a consortium, often joint operating agreements are signed which allocate liability for decommissioning on a proportionate basis. This can be difficult to agree if there's uncertainty over liability. This could dissuade major oil companies from partnering with smaller ones, or local partners, to avoid bearing the full cost of decommissioning if partners are unable to meet their share of the costs.
There has also been little guidance on the standards to follow in the region. While mature jurisdictions have developed a significant body of laws, regulations and guidelines, the Middle East has not. This may be a disadvantage to both governments and companies. Oil companies could argue that they've complied with decommissioning obligations where the standard of work falls short of international best practices. Governments could also impose strict obligations on contractors in excess of international standards, which may be difficult to comply with in practice and cost more than contractors have budgeted. Therefore, more certainty regarding decommissioning standards would be advantageous to all stakeholders.
One approach could be for the jurisdictions within the region to each set up a regulatory body with the relevant capacity and expertise to oversee the decommissioning process. For example, in the UK the Offshore Petroleum Regulator for Environment and Decommissioning fulfils this role.
The regulator may then consider in situ requests from operators. Typically, regulators will only consider such requests where the operator has demonstrated, through extensive assessments, the adequacy of the site and structure, as well as the future impact on the environment. Those regulators will also examine whether alternative options are feasible and if there are satisfactory proposals for ownership of the infrastructure, and their responsibility for future residual liabilities.
For decommissioning offshore facilities, a consultation within the Oil Spill Prevention, Administration and Response (OSPAR) framework may be an appropriate way forward. The regulatory body will also need to formulate policies for facilities, such as pipelines and cables, which aren't covered by OSPAR, and for onshore infrastructure.
Mature jurisdictions such as in the US and Norway also encourage the reuse and recycling of facilities. The regulatory body will have a role in promoting and regulating the recycling of infrastructure in the region. No doubt, establishing such regulatory bodies is likely to be a challenge, but clear guidelines will be of benefit to both investors and governments alike.
Steve Gilbert is a Director of Asset Management & Decommissioning at Lloyd's Register, a leading oil and gas consultancy. Ana Severova and Richard Devine are partners at Devine & Severova, a boutique oil and gas law firm based in the UAE.