Decommissioning faces a hefty clean-up bill
The industry will spend tens of billions of dollars closing down old offshore fields
The global decommissioning market is yet to take off fully. But as provinces mature, as fields near the end of their life, companies are preparing for the inevitable. They are scrutinising their decommissioning plans, the regulatory and fiscal regimes governing decommissioning and the costs of completing that work. The oil-price crash has made the task more urgent. In mature regions like the UK, higher oil prices allowed mature fields to keep producing beyond their expected economic life, but the price drop brought the day of reckoning nearer.
Over the past five years, almost 500 offshore fields globally have ceased production, with that number expected to rise to 735 fields from 2018 to 2022. Activity has centred on the UK North Sea, but field cessations have also been high in the deep-water Gulf of Mexico (GoM) and across the Asia Pacific region. The Netherlands, Denmark and Norway will also have to grapple with decommissioning in the coming years.
Decommissioning is not cheap. Over the past five years, the UK decommissioning bill was the highest, at $6.8bn. This covered 95 fields, but major projects tend to gobble up most of the cash and half of the total was spent on five fields alone. The total bill for the US GoM came in at $5bn. This covered 49 fields, 70% of which were subsea tiebacks, which are cheaper, easier and quicker to decommission than fixed platforms.
Wood Mackenzie expects the total decommissioning bill to 2064 will total $360bn. In reality, some projects will produce longer, pushing off the inevitable decommissioning cost, but the forecast is based on existing contract terms. The UK's bill over the next five years is expected to reach about $13bn. Norway faces a similar bill. Asia-Pacific has 190 fields due to cease production over the next five years, with an expected decommissioning spend of $4.3bn.
Given the costs involved, adopting a phased approach to decommissioning makes economic sense, especially for majors with hefty bills coming. The 10 companies expected to spend the most on decommissioning from 2018 to 2022 face a total bill of $14.4bn, much of which is earmarked for the North Sea. Shell, for example, is expected to spend $2.7bn on decommissioning over the next five years across five countries. But over 70% of Shell's decommissioning budget will be spent in the UK—and two-thirds of that is expected to be spent on the enormous Brent decommissioning programme.
$360bn—Cost to decommissioning offshore fields around the world through 2064
For producers, decommissioning is a costly obligation, but there are options to make the liability less painful.
One option gaining popularity in the UK is cluster decommissioning, an approach Wood Mackenzie estimates could cut costs by an average of 20%. This involves grouping together fields which lie close to each other and decommissioning them together.
Another option is to divest assets with large decommissioning liabilities. This has been a popular strategy for the majors in the UK North Sea. Even for deals that featured retained costs, it has significantly reduced their decommissioning liabilities. Take, for example, Shell's $3bn UK North Sea divestment in January 2017. While it retained some decommissioning costs as part of the deal with Chrysaor, Shell reduced its total UK decommissioning bill by a quarter. Expect to see more of this.
Governments have a different mandate. They need to ensure clear rules and the right environment for decommissioning. A lack of clarity around these regulations complicates asset financing, M&A transactions, service-sector resourcing and the handling of ceased fields.
The UK North Sea is one area where decommissioning regulations are well established. Through tax rebates, the government is liable for nearly half of the UK's total decommissioning costs, which is expected to total $66bn.
Elsewhere, it's a mixed picture. The number of fields ceasing operations over the next five years will be 50% higher than the past five years. Although it will increase, the global offshore decommissioning spend will still be less than 10% of total global spending by 2022. Having a plan in place to deal with the industry's dying oilfields will pay off for producers and governments.
Fiona Legate is Senior Research Analyst, North Sea Upstream Oil & Gas, Wood Mackenzie
This article is part of Outlook 2018, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here