Decommissioning Market to Boom to 2040
By Ben Wilby, Analyst, Douglas-Westwood
Which Way is Up? The Six Things You need to Know Now
Subsea Well Removal is a Leading Cost Driver
North Sea decommissioning has long been considered an area of huge potential opportunity for a variety of companies, which to date has not been fully realized. Decommissioning has moved extraordinarily slowly – there have been limited removals within the region as platform operators have preferred to pay steady maintenance and operations costs each year, rather than the substantial amounts required for decommissioning work. Nevertheless, times are changing.
Typically, producing fields are less affected by fluctuations in oil prices than those at the pre-sanctioning stage; however, the long-term nature of the current oil price collapse has forced operators to consider revising their standard operating model in favor of decommissioning. Many North Sea platforms are late in life – far past their initial production expectations – and are only producing through utilizing costly life extension practices. As a result, high oil prices are required just to break even on these fields. This was not an issue at $100 oil, but it has become a growing problem with prices dipping below $30. Recent growth to ~$40, while positive, is unlikely to stop major decommissioning work.
A rapid recovery in oil price is not expected, with many forecasting Brent to remain under $100 per barrel in 2020. When field operators take the age of many North Sea assets into consideration, it becomes clear that it does not make financial sense to keep running them. Consequently, Douglas-Westwood (DW) expects a spate of abandonments by the end of the decade, with decommissioning concept selection starting at this time as well. The North Sea is an extremely mature region; large scale oil and gas production started in the 1960s and many platforms installed at this time are still in the water, with a number still producing. The high level of initial installations has led to substantial numbers of assets that are of a significant age – maintenance costs of these are high and tend to rise year-on-year (though the oil price collapse has stymied this somewhat). This will be of major concern for operators who have seen their budgets slashed repeatedly over the last 18 months, resulting in a tightening of their available operating expenditures.
The Impact of Single Lift Vessels
In DW’s North Sea Decommissioning Market Forecast 2016-2040, which covers Denmark, Germany, Norway and the U.K., decommissioning expenditure has been split into two different scenarios. In Scenario 1 (S1) DW assumes that all decommissioning will be completed using currently available methods, with most removals utilizing the reverse installation method. In Scenario 2 (S2) DW includes the potential impact that Single Lift Vessels (SLVs), such as the Pioneering Spirit could have on the market.
The difference to overall spend is clear. In S1 DW anticipates a total decommissioning cost for the four countries of $82 billion 2016-2040, but this decreases to $70B in S2. This is due to the fact that much less time will be required at the field itself, bringing down the costs of hiring vessels which are one of the main drivers of spend. In addition, the harsh weather conditions typical in the North Sea mean that decommissioning work for a field could see long delays when conditions are unfavorable – bringing the cost up significantly. With SLVs the actual lifting work can be completed quickly, reducing this issue substantially.
It should be noted however, that S2 will only become a reality if early jobs by the Pioneering Spirit are completed successfully, the day rate is competitive, and operators, who have often been unwilling to try new techniques, fully embrace the SLV concept. If there is the demand from operators, DW anticipates that the SLV fleet size will begin to grow as additional vessel companies compete.
Well P&A and Removal to Represent over 50% of Expenditure
The North Sea has had a large number of well installations, both surface and subsea, since first production in the 1960s. DW forecasts that over 50 percent of these will need to be removed over the forecast period, with costs being over 50 percent of the total spend in both scenarios as well. This will be primarily driven by subsea trees in Norway and the U.K., with the costs of subsea well plugging, abandonment and removal being far higher than for surface wells. This is a result of the need to utilize vessels to work on subsea wells, which massively increases costs compared to surface well work. Well work is a fairly niche area, with a limited number of companies in the market which makes this a potential area for bottlenecks and high costs.
Outside of well abandonment the cost for essential decommissioning works varies between the two scenarios. Removal of the topside and substructure will account for a huge amount of expenditure in S1 (26 percent) but only 10 percent of the total in S2. This demonstrates how cost savings can be made by utilizing SLVs, which can complete the removal of the heaviest platforms with one lift rather than via reverse installation methods. Deconstruction work onshore will cost 38 percent more in S2, compared to S1. This is because the topside is delivered in one large piece, meaning that more of the topside deconstruction work is completed onshore than in S1 where modules are often removed one at a time. In theory, despite higher onshore deconstruction costs the benefits of SLV use far outweigh the negatives as this method will be less time consuming, cheaper overall and, crucially for operators, safer.
U.K. to Dominate Spend
The U.K. has high levels of installed infrastructure (more than the other countries in the report combined) and also has an extremely mature basin. As a result of this the U.K. will dominate removals which will also lead to the highest spend – well over half of the amount of all countries in the report.
In total, DW anticipates removal of 285 platforms and over 4,000 wells in the U.K. over 2016-2040, leading to expenditure of $50B in S1 and $44B in S2. Consequently, the U.K. represents over 50 percent of spend over the forecast period in both scenarios. Large-scale decommissioning work is also expected to start earlier in the U.K. than in other countries and DW forecasts that 146 platform removals will take place 2019-2026 – 51 percent of all removals in the U.K. over the forecast. Due to this, the country should be an area of focus for companies looking to capitalize on the need to remove infrastructure. Those companies that obtain a strong reputation in the U.K. will benefit when countries such as Norway require high levels of decommissioning in later years.
Norway will see the second highest spend which will be concentrated at the end of the forecast period, with the country being less mature than the U.K.. As a result it will account for 32 percent of all spend over the forecast with 79 percent of this coming in the last ten years. However, as a direct result of the low oil price there have been a number of Norwegian projects that have already been shut in early or are scheduled to be abandoned in the next year. This includes Det Norske’s Jette field which is shutting down production after only three years and ExxonMobil’s Jotun field which has both a fixed platform and FPSO.
Though it has a much smaller offshore industry, it is important to consider the impact Denmark will have on the forecast. Due to its smaller size decommissioning will peak in two different periods, with no decommissioning activity expected outside of these peaks. The first will be the removal of the Dan and Halfdan hubs; while in the mid-2030s DW expects to see decommissioning work start on the Siri and Gorm hubs.
Overall, the ramping up of the decommissioning industry represents a terrific opportunity for specialist companies tasked with removing the large tonnage installed in the North Sea over the last 50 years. Companies that can operate safely, efficiently and establish strong, competitive reputations will be in an excellent position to capitalize.
For platform operators responsible for undertaking decommissioning work, the current downturn represents a chance to be rid of operating assets that were only commercial at high oil prices, as well as abandoned platforms that are current liabilities, requiring extensive maintenance work for no material return. However, there will be huge costs involved to remove these assets, causing problems for many companies in the short-term.
The Pioneering Spirit and other SLVs point towards a new way of operating that could potentially be quicker, cheaper and reduce risk. The proof, however, will be in the success of early jobs completed by the Pioneering Spirit – if both the Yme and Brent removals are completed with little incident and day rates are competitive, SLVs will be an ideal solution for removing the largest platforms in the North Sea.
Douglas-Westwood’s North Sea Decommissioning Market Forecast 2016-2040
considers the potential market for decommissioning in Denmark, Germany, Norway and the U.K.. It features details on the number of platforms and wells to be removed, the weight of these removals and the cost, which is split into the various components that impact it.