OGA publishes UKCS Decommissioning 2018 Cost Estimate Report

OGA publishes UKCS Decommissioning 2018 Cost Estimate Report which projects a fall in decommissioning costs of almost £2bn on 2017 costs

With existing field infrastructure approaching the end of its productive life, offshore decommissioning activity has inevitably increased in the North Sea. With this in mind, the Oil and Gas Authority (“OGA”), jointly with the industry, set a shared objective in 2016, to reduce UKCS decommissioning costs by at least 35% resulting in a target of <£39bn (2016 prices). According to the UKCS Decommissioning Cost Estimate Report published by OGA on 27 June 2018 significant progress towards this target has been made by the industry.

The report tracks the industry’s progress since OGA estimated that the UKCS decommissioning costs for 2017 onwards would be £59.7bn (2016 prices) and identifies that costs are in fact lower than estimated and that a number of improvements have been made. It is reported that, despite including more assets and infrastructure than the previous year there has been a strong reduction in underlying costs, and estimated costs from 2018 onwards are lower, at £58bn in 2017 prices. Comparing this to last year, estimated costs from 2017 onwards have reduced by 7% to £55.7bn (2016 prices). Alongside the issue of the Report, OGA launched an interactive learning microsite with the intent of promoting late life and decommissioning learnings; the site can be accessed here.

Changes and improvements

It is suggested that the key to achieving this 7% reduction was rapidly improving planning and execution practices, which has in turn led to large reductions in the cost of:

• platform well plug and abandonment (“P&A”) in the Northern North Sea (“NNS”) and Central North Sea (“CNS”);
• platform running costs in the NNS;
• topsides and substructure removals in the NNS; and
• the contingency associated with improved estimating definition.

OGA have recognised that increased competence and cost effectiveness of operators and their contractors is fundamental in achieving the targeted 35% savings relative to the 2017 baseline, with many operators already seeing step changes in their cost outcomes. OGA have taken steps to support and facilitate this progress through:

• the use of benchmarks;
• the creation of metrics from the UKCS Stewardship Survey;
• working with operators to ensure shared learning;
• improvements to the decommissioning component of the UKCS Stewardship Survey;
• promoting the development of innovative and collaborative contracting solutions and enhanced supply chain capability; and
• working with the industry and the Oil and Gas Technology Centre to promote the development and application of cost effective technologies.

The report summarises the geographic distribution of decommissioning costs and it is noted that the costs in the CNS are disproportionately high, with the region contributing £25bn to total decommissioning costs. This is due to there being many expensive to decommission subsea wells in this region and a substantial number of large production platforms.

In all geographical regions, well P&A makes up the largest proportion of decommissioning costs, suggesting that the cost efficiency of decommissioning these structures is an area in need of significant improvement if the 35% target is to be achieved.

Future opportunities

OGA recognise the potential for improvement in well P&A along with other opportunities that have arisen from the positive progress to date. These opportunities include:

• applying 2016/17 learning to the NNS and CNS, as they currently comprise 77% of the current cost of decommissioning;
• focussing learnings from P&A of platform wells to the P&A of subsea wells, an area that is currently disproportionately costly;
• encouraging new entrants to the market to initiate different, lower cost approaches and contracting solutions;
• further improving asset stewardship; and
• implementing innovative cost reducing technologies or techniques for well P&A activities.

Risks

As well as opportunities, OGA recognise a number of risks that threaten to disrupt the achievement of further cost reductions:

• the currently depressed supply chain market has enabled cost reductions - however, decommissioning will continue for decades over multiple economic cycles and potentially less attractive price offerings;

• if there is a failure to substantially reduce subsea well P&A costs, operators may not have the ability to compensate for this through the reduction of decommissioning costs in other areas;
• operators may not allow time for sufficient planning, therefore eliminating the potential for more cost efficient alternatives;
• cost reduction opportunities may not be fully captured, specifically concerning technology, where there is a lack of investment in new technologies and the transfer of existing technologies from other sectors;
• operators may be overly optimistic when developing provisional estimates resulting in incorrect values and projections; and
• the challenging of norms cannot always be ensured when planning, managing and executing projects as there is a risk of operators and contractors reverting back to traditional development project and contracting approaches.

Although the 2018 report shows progress has been made towards the shared objective set in 2016. OGA recognises there is still progress to be made before the 35% decrease in decommissioning costs is achieved and urges the industry to keep focussed.

The full OGA report can be found here.