While oil and gas companies have cut exploration and production budgets this year amid the Covid-19 pandemic and low oil price environment, operators are now likely to increase spending on decommissioning work, according to an Oslo-based energy research consultancy
Norway’s Rystad Energy estimates the total value of the global pool of decommissioning projects that will accumulate through 2024 could reach US$42Bn. That is good news for offshore support vessel, marine construction, crane and heavy-lift vessel owners.
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 do not 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 favourable service contract prices.
Rystad Energy reported that only about 15% of North Sea assets have been decommissioned to date and expects an average of 23 assets to cease production annually over the next five years. Much of this work will be in the UK accounting for 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 US$17Bn. By comparison, decommissioning costs in the US for the same period are estimated at US$5.7Bn.
“A protracted low-price environment can potentially motivate operators to leverage low contract prices and commit to their asset retirement obligations, spurring decommissioning activity in the northwest Europe region,” said Rystad energy service analyst Sumit Yadev. “This will also provide welcome opportunities for contractors in an otherwise gloomy oilfield services market,” he added.
Some of the leading assets that will drive the decommissioning market in the region include the Brent, Ninian and Thistle fields in the UK and Gyda in Norway. Shell’s Brent project would emerge as the single largest asset ever decommissioned globally, representing an outlay of nearly US$3Bn over the coming decade. Ninian and Gyda would collectively present contracting opportunities worth nearly US$2Bn.
Rystad Energy said increased spending on decommissioning may limit the room for operators to invest in other segments such as exploration, development and enhanced oil recovery projects. Leading players such as Shell, Total, Repsol and Premier Oil are expected to assign 10% or more of their North Sea spending in the next five years to decommissioning activities.
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 US$11M each to abandon, compared with US$5M for an average platform well.
The low oil price could play a pivotal role in boosting decommissioning spending in the UK if it persists beyond the end of this year. Nearly 10% of all UK offshore assets have lifting costs above US$25 per barrel, which will hamper their life extension prospects and make decommissioning a better financial option if low prices persist.
Operators implemented strong cost optimisation 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 US$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%.
“While decommissioning is becoming a pressing concern for North Sea operators, the prevailing low-price environment presents an opportunity for driving down costs,” said Mr Yadev. “For instance, after the oil price slump of 2014, rig and vessel rates declined by 30% to 40%. We expect rig and vessel rates to exhibit a downward trend this time as well, with declines likely lasting until 2022,” Mr Yadev concluded.
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