Equally cursed as blessed: The decommissioning cost projection

The OGAs latest decommissioning cost projection has been captured in its 'UKCS Decommissioning - 2018 Cost Estimate Report'. The report cites that the estimated cost of decommissioning oil and gas infrastructure on the UK Continental Shelf (UKCS) has reduced from last year’s baseline. The recent assessment tracks progress with a reduction from £59.7bn to £58bn.

Our Director of Assessment Management and Decommissioning, Steve Gilbert discusses what this means for operators and stakeholders, and if this cost reduction trajectory is sustainable. It’s no secret that as the cost of decommissioning doesn’t lie solely with the operator, that the government has challenged the industry to reduce decommissioning costs by at least 35%. And it’s in everyone’s interest; the operator doesn’t want a weighty decommissioning cost liability on their books and the government doesn’t want to have to subsidise an activity that has no return on investment and depletes the public purse.

Since the oil price collapse of 2014, the operating cost of the industry has drastically reduced. The deflation in rig rates provides a ready example. Rigs that were once fetching close to $250,000 per day are now lucky to make $100,000 and this reduction is reflected throughout the whole service sector. For most this is good news, as costs have fallen in line with commodity prices, some E&P projects have become more commercial. This has also proved advantageous for decommissioning projects, where associated costs have also fallen. Many companies have taken the opportunity to write down their Asset Retirement Obligations (ARO) in line with falling supply chain costs.

It must be understood that the latest report shows that, in real terms, despite including more assets and infrastructure than the previous year, estimated costs from 2018 onwards are lower However it can be argued that this is due to lower supply chain costs and not necessarily improved methods of delivery.

The challenge is that reduced costs and improved commodity prices will create opportunities. These will inevitably lead to increased levels of activity and consequently stimulate an increase in operating costs. This is the challenge that the industry now faces with regard to decommissioning costs. For the past few years decommissioning has been something of a life boat for the industry. Valuable people and infrastructure has been diverted into decommissioning in order to protect them from the worst ravages of the down turn. As markets improve these resources will be diverted back into more revenue generating projects.

Costs reductions can be achieved in a few ways. Firstly, there is the reduction in unit costs, which we have seen through reduced levels of activity leading to much tighter competition on the supply side. Secondly there are the economies of scale, accessed by large multi operator campaigns. Thirdly an increased operating efficiency due to familiarity and lessons learned. There is also the prospect of new technology and techniques that may ultimately reduce time and therefore costs.

It is likely that there will be few opportunities soon for costs to fall further as a result of continued pressure on the supply chain. Resources are getting scarcer as both people and equipment retire or leave the sector. We may already be at the point where we do not have sufficient quality resources to service the industry as it is. Few if any large scale consolidated decommissioning programmes are currently being discussed, so the economies of scale are not easy to identify at this time. Similarly, the decommissioning industry is still in its early days so the increased efficiency due to task familiarity is yet to be realised.

The OGA faces a difficult task, many of the levers for cost reduction are not easily within its grasp. A re-evaluation of the decommissioning requirements could be an option to explore. A review of the work scopes currently mandated might be worth conducting. Nobody sensible would suggest cutting corners and endangering safety or the environment, but neither is it sensible to spend more than is necessary. A good proportion of this cost will be borne by public funds and what is spent on decommissioning cannot be spent elsewhere. Perhaps the one thing that could deliver the cost savings desired is to do less. It sounds like a simplistic answer to a tricky question but maybe the answer to spending 35% less is do 35% less.