PE Live: Decommissioning throws up opportunities
Picking up the tab for end-of-life liabilities is inevitably a thorny issue in a mature basin. But decommissioning offers pros as well as cons
“The decommissioning issue has been vexing everyone in the industry for decades.” John Conlin, partner at law firm Bryan Cave Leighton Paisner, does not mince his words on the magnitude of the subject.
It touches on “almost every activity, from field development through to M&A and onto the funding of decommissioning security agreements”, says Conlin. “And I think it could be a potential opportunity for the UK continental shelf [UKCS] and its supply chain. If you look at the current cost estimates for decommissioning in the basin, it is c.$50bn.
“That presents a potential growth story for specialist companies focused solely on decommissioning solutions, such as Petrodec or Fairfield Decommissioning. The benefits of these specialist companies are that they build up extensive knowledge and experience of the rules and regulations and good practices around decommissioning and develop potentially innovative technical solutions.
“They establish trust and confidence with the regulator, and they can create significant economies of scale and contribute to reducing decommissioning costs, e.g. through cohesive campaigns of different fields being retired at the same time,” says Conlin.
“Our main goal really is to defer decommissioning as long as possible,” says Clara Altobell, vice-president ESG and business innovation at UKCS independent Serica Energy. “We have already deferred it by a year since we took over operatorship. And the longer we can push it back, the more reserves we can recover.
c.$180bn – Decommissioning globally in next 20 years
“We have to try to keep costs down and throughput up. We have made it known that we are open for third-party business, as the more production we can get flowing across our platform, the lower our unit costs become and the further we can defer decommissioning. We are looking at infill wells and near-field exploration—anything to keep the infrastructure in place, and available for subsea tiebacks from new discoveries in the area, for longer.
“The OGA’s MER strategy, or, as it is now simply called, the OGA strategy, calls for keeping infrastructure available for CCUS projects. We would be very happy to help post-decommissioning if the asset could be repurposed,” Altobell continues. “But your planned decommissioning date has a knock-on effect on your asset integrity plan—how often you inspect your pipelines, jackets, vessels, etc.
“If the assets are required to be around significantly longer for CCUS projects, you would need to know fully in advance and have an active campaign to ensure asset integrity, safety and no environmental issues further down the line. That comes at a cost and should be incorporated into any CCUS planning for existing infrastructure”.
“The decommissioning issue has been vexing everyone in the industry for decades” Conlin, Bryan Cave Leighton Paisner
Obligations under decommissioning security arrangements (DSAs) are “putting a strain” on some companies’ liquidity at the moment, warns Geraldine Murphy, partner at investment bank Tudor, Pickering, Holt. “If we are looking at sustained low oil and gas prices which may bring forward end-of-life for some ageing assets, more security will need to be posted as plans are adjusted. That is putting some stress into the system.
“And it is not just smaller firms, even players at the larger end of the spectrum have recently experienced credit downgrades. When companies lose their investment grade status, they also lose qualification for guarantees around decommissioning. So, they have to go out and find alternative financing in relatively short timeframes. That could be a problem.
“We have also seen seizing up of some of the surety bond markets that had been pretty supportive of the smaller companies for decommissioning. We really need a quicker pace of recovery so that these issues do not compound.”
Decommissioning cannot be postponed indefinitely, cautions Jon Story, vice-president for upstream at consultancy IHS Markit—with older, higher opex, lower reliability platforms particularly vulnerable.
“A lot more money has been spent on enhancing recovery than on decommissioning. But there is c.$180bn worth of decommissioning coming globally over the next 20 years, around half of which is in the North Sea. But there has been relatively little work done on addressing those costs.
Plugging and abandoning wells and the platforms are the two key cost centres. There have been some R&D efforts, but the cost reduction prize remains very high, says Story. “We are looking at being able to take c.25pc out of these costs, which would benefit both the stakeholders and governments.
“Decommissioning could also be done a lot more efficiently if run as coordinated campaigns, rather than one-by-one efforts. This may be something the OGA is considering.”