SPECIAL REPORT: Mature UK sector sets pace for N. Sea decommissioning

Feb. 11, 2008
While decommissioning of platforms in the mature UK North Sea represents a looming problem for oil and gas producers, high commodity prices and new technology are extending the lives of some equipment.

While decommissioning of platforms in the mature UK North Sea represents a looming problem for oil and gas producers, high commodity prices and new technology are extending the lives of some equipment.

Many operators have delayed decommissioning over the past 4 years because continuing production makes economic sense. Extending platform lives has encouraged development of small, otherwise uneconomic fields via tie-backs.

Even so, North Sea production platforms and other offshore structures eventually will have to be removed at the end of their economic lives. Of the two main producing sectors, the need is more imminent on the mature UK side, where equipment already is retiring and where companies and trade groups actively grapple with associated financial, regulatory, and operational issues.

Off Norway, less mature as a producing province, the main difficulties are expected to be removal of concrete gravity-based structures, high costs for heavy lifters, and a lack of new technologies. Norway doesn’t have an official timetable for abandonment, and the variables of timing, new technologies, and the feasibility of plans make it hard to estimate costs.

North Sea requirements for total removal of offshore structures represent a decommissioning approach very different from that of the US, where hurricanes have complicated questions about handling equipment that no longer can be used.

UK needs

In the North Sea, the UK sector presents the most imminent decommissioning needs.

According to Oil & Gas UK, the trade association, of 470 offshore installations on the UK Continental Shelf (UKCS), an estimated 10% are floating structures, 30% are subsea, 50% are small steel, and 10% are large steel or concrete. Each type of structure requires its own decommissioning method.

The group estimates decommissioning costs of the UKCS, with 25 billion boe of oil and gas yet to be recovered, at £15-20 billion. The total might rise further depending on technology, product costs, and timing.

In addition to platforms and similar structures, the UKCS has 10,000 km of pipelines, 15 onshore terminals, and 5,000 wells that eventually must be decommissioned.

Of 400-500 fields on the UKCS, fewer than 100 have financial provisions in place to cover decommissioning, according to Oil & Gas UK.

Financial questions

UKCS decommissioning requirements have raised a number of financial questions.

Concern has arisen that some of the independent producers that in recent years have replaced major operators might not be able to meet financial requirements of decommissioning under British law. A requirement for bank letters of credit has proven to be costly for some companies.

The government wants to ensure that it doesn’t pay for decommissioning if companies default as it nearly had to do with Ardmore (formerly Argyll) oil field in 2005 (OGJ, Aug. 22, 2005, p. 45).

Operators have suggested different means to tackle the financial security issue.

One would be to set up a “sinking” fund for decommissioning costs, but tax relief would be required to make it successful.

Under another recommendation, companies would set up an insurance club through which members could effectively insure each other against their liability.

Subsidiary companies want the government to be satisfied with guarantees from parent firms to cover decommissioning costs, but so far this proposal has been rejected.

Oil companies have other decommissioning-liability concerns.

Under the Petroleum Act 1998, any company that has had an interest in an offshore installation must propose a decommissioning plan, even if it sells its interest or the entire asset to another company. Under Section 34, the government can call back a company for decommissioning even if it was exempted under special circumstances.

This, of course, raises additional financial obligations and other responsibilities.

Operators also are concerned because they are liable in perpetuity to monitor the environment when structures are left on the seabed after decommissioning. One industry source told OGJ the liability “contains more work than is strictly desirable.”

Difficult execution

Executing decommissioning plans is difficult because of shortages of skilled personnel and of heavy-lift vessels able to handle structures weighing more than 10,000 tonnes.

Further, because decommissioning is a relatively new activity in the North Sea, operators are still learning from experience.

Three major projects are under way in the North Sea: BP PLC’s North West Hutton platform in the UK sector, Total SA’s Frigg platforms straddling the UK and Norwegian boundary, and ConocoPhillips’s Ekofisk-1 platform in Norwegian waters (see sidebar).

All of these problems are hindering asset trading among companies, which jeopardizes investment in the UK North Sea.

“The costs of decommissioning have risen sharply over the last few years,” said Malcolm Ricketts, senior analyst for Europe energy research at Wood Mackenzie Ltd., Edinburgh.

Ricketts also cites increases in the costs of drilling, operating facilities, and abandonment as well as uncertainty about the future direction of the OSPAR Commission, which administers the 1992 Convention for the Protection of the Marine Environment of the Northeast Atlantic.

“Right now, although OSPAR’s Decision 98/3 requires the complete removal of all offshore installations, companies can apply for a derogation to allow part of a structure to be left in place on the grounds of safety and/or technical limitations,” Ricketts said. “This exemption may be applied for if a structure weighs more than 10,000 tonnes above sea level. If this threshold is increased, then this could become more challenging for companies.”

Energy bill provisions

The new UK energy bill empowers the UK secretary of state to seek financial information and security for decommissioning at an earlier stage than previously required (OGJ, Jan. 21, 2008, p. 40).

This is significant because of the influx of small producers. According to legal firm Herbert Smith, “These do not amount to an overhaul of the current decommissioning regime; rather, they are an enhancement of the current regime to give the government greater comfort that decommissioning obligations will be met in the future and will not fall on the government or the taxpayer.”

Moreover, Herbert Smith said: “Costs of obtaining and maintaining security for decommissioning will need to be factored into companies’ plans earlier than they might otherwise have been. Those persons potentially subject to a Section 29 notice [of Petroleum Act 1998] will need to review and assess their preparedness to meet the requirements of the decommissioning regime proposed by the bill.” Petroleum Act 1998’s Section 29 covers decommissioning responsibilities (OGJ, Oct. 22, 2007, p. 30).

Tax relief problems

Operators were also uncertain about tax relief they would receive to offset decommissioning costs, particularly as the UK tax regime has changed several times in the past 5 years. Industry tax payments reached £9 billion in 2006.

According to Derek Leith, head of oil and gas tax at Ernst & Young, the current tax law permits a 3-year carry-back of losses in relation to decommissioning expenditure. This encouraged companies to decommission their fields early while they still had profits to help absorb the costs.

Following an industry consultation last fall that evaluated the fiscal elements of decommissioning, the law will change to allow producers to extend their loss carry-back period to 2002 to offset decommissioning costs, instead of 3 years as before, Leith said (OGJ Online, Dec. 4, 2007).

“There should be sufficient profit for companies to get increased tax relief, and this change will become effective in relation to losses incurred in accounting periods on or after Budget Day 2008,” Leith said.

Last October, Oil & Gas UK launched the Decommissioning Cost Provision Deed (DCPD) following 2 years of intense negotiations with PILOT, the industry and government forum for the oil industry (OGJ, Oct. 22, 2007, p. 30).

The DCPD aims to clarify decommissioning liabilities by offering different options for joint-venture partners in their plans for offshore assets. The government will review DCPDs approved by asset buyers on a case-by-case basis. When satisfied, it will release sellers from decommissioning liability. It will measure the program’s success by how many companies take up the DCPD.

The US approach

US decommissioning of offshore structures differs in important ways from the UK approach.

In the northern Gulf of Mexico, 4,000 platforms produce oil and gas, mostly off Louisiana and Texas. From 1994 to 2003, platform decommissioning averaged 156/year—58 nonexplosive and 98 explosive.

The three main removal methods so far are complete removal, partial removal (reefing in place), and remote reefing (reefing off site). These methods use explosive or nonexplosive severing, lifting, transporting, and disposal.

Damage from hurricanes in 2004 and 2005 brought new attention to decommissioning in the gulf.

Steve Trammel, senior product manager for new product development at IHS Inc., told OGJ: “Key difficulties seem to be the number of platforms damaged and the fact that a damaged platform could be twisted, bent, toppled and sunk by the storms, making the removal more problematic, dangerous, and costly.”

Costs of decommissioning damaged platforms and pipelines can be 15 times those of conventional abandonment, according to some estimates.

The US Minerals Management Service expects decommissioning of hurricane-ravaged platforms to continue until 2013 because of equipment scarcity and delays.

BJ Kruise, petroleum engineer for the field operations office at MMS, said, “The timetable for decommissioning depends on whether the lease is on production, and operators have a year to do the work if the lease has expired.”

Kruise said issues raised by platform destruction include hazards to marine traffic and the obligations of lessees to return the seafloor to its condition prior to oil and gas activities. Environmental safeguards in place at the time of the hurricanes reduced pollution risks.

“Wells that were sheared off at the mudline had their subsurface safety valves shut in as the platforms were destroyed because of the force of the waves,” Kruise said.

Beyond decommissioning associated with hurricanes, the MMS official said, “The major challenge will be handling the decommissioning of deepwater platforms as more operators move to develop deeper prospects.”

Techniques for decommissioning could be improved if contractors were better at sharing information about their practices, according to Kruise. “We also need industry [professionals] to share their experience with each other through the American Petroleum Institute and the Society of Petroleum Engineers and open dialogue with their experiences all over the world,” he said.

The gulf has pursued a “rigs-to-reef” program since the mid-1980s—an approach blocked in the UK North Sea by environmental protests. The program creates a habitat for fish.

“Studies as to the effectiveness and safety of rigs to reefs are still under way in both the gulf and the North Sea,” said Trammel of IHS. “Both areas have a similar mud-bottom environment that can apparently benefit from manmade structures being put in place to generate coral growth and more marine life as a result.”