Industry Perspectives

Meeting the Decommissioning Challenge

Over the next two decades, the industry will begin to decommission many of the installations that have been producing oil and gas during the past 30-40 years. It is a complex process, representing a considerable challenge on many fronts and encompassing technical, economic, environmental, and health and safety issues. There are approximately 470 installations to be decommissioned, including very large ones with concrete sub-structures, small, large and very large steel platforms, and subsea and floating equipment, the vast majority of which will have to be totally removed to the shore for dismantling and disposal. Some 10,000 kilometres of pipelines, 15 onshore terminals and around 5,000 wells are also part of the infrastructure planned to be gradually phased out.

Figure 50: UKCS Decommissioning Profile 2006-2030+

An indicative profile of the installations to be decommissioned is shown in Figure 50. However, the precise timing of decommissioning is highly uncertain and has, in a number of cases, already been delayed from what is shown. Decommissioning timing will be influenced by a range of factors including:

• Long-term trends in oil and gas prices – which will determine whether it remains economic to keep a field in operation;
• Long-term certainty of both fiscal and regulatory regimes – which will influence the future investment environment;
• Increased recovery – from existing fields, new exploration and tie-back of new fields, which will extend the productive life of these assets and infrastructure;
• Reduction of decommissioning cost – through greater co-ordination with the supply chain and a more systematic approach across the industry;
• Technical innovation - which will increase oil and gas recovery, extend the life of many existing facilities and ultimately reduce the costs of decommissioning.

The costs involved in decommissioning infrastructure are variously estimated to be in the range of £15 - £20 billion which reflects the many uncertainties, including the total extent of decommissioning liabilities. Oil & Gas UK’s own activity survey of members in late 2006 places decommissioning costs at £12 billion (2006 prices) for existing assets, £3 billion higher than estimated four years ago. It is expected that additional new investment, over and above current plans, will increase decommissioning activity by a further £3 billion, bringing the total to around £15 billion. It should also be noted that, during the last four years, decommissioning has generally been delayed by about two years, as a result of the increase in oil prices and improved projections of recovery.

Figure 51: Evolution of UKCS Decommissioning Costs, Oil & Gas UK Survey 2002-2006

If industry succeeds in bringing further reserves into production from both existing and new fields in the longer term, decommissioning could be delayed by 10-15 years in many infrastructure systems (see an example for a major hub in Figure 52 below). Extending the life of infrastructure allows more reserves to be recovered from both existing fields and any developments arising from new exploration activity. Once infrastructure is removed, nearby exploration potential becomes very expensive to develop, thus reducing ultimate recovery from the UKCS.

Figure 52: Example of the life extension of a major gas hub

Whilst for most fields decommissioning is not an imminent activity, it already has had an impact on the economic life of the UKCS as a whole. There are profound concerns about whether the current requirements regarding financial securitisation of decommissioning liabilities and their fiscal treatment are creating an unnecessarily costly and rigid framework in which to operate. This is hindering and even preventing the sale of assets by existing investors to new investors, thereby reducing commercial activity, restricting the number of new entrants and, ultimately, reducing the recovery of the UK’s oil and gas reserves.

It is increasingly recognised that changes are required to the regulatory framework and fiscal treatment of decommissioning liabilities, if the UK is to continue to attract new entrants and extend the economic life of the province. Under the auspices of PILOT (the government - industry forum chaired by the Secretary of State), discussions are continuing between the industry and the DTI, HM Revenue & Customs and HM Treasury on a series of necessary proposals for regulatory and fiscal change. It is to be hoped that these will be successful.