Decommissioning in Western Europe is set to boom after numerous false starts, says Douglas Westwood’s Ben Wilby.
The Troll A platform. Photo: Statoil/Øyvind Hagen.
Decommissioning has long been considered an area of huge potential within the oil and gas industry. The large amount of infrastructure to be removed gives companies that can complete decommissioning work, such as heavy lift operators, access to an emerging multi-billion dollar industry. Despite many previous predictions, large-scale decommissioning has yet to begin, with limited removals to date due to operators preferring to pay steady maintenance and operations costs each year, rather than the substantial costs required for decommissioning work. This approach has been bolstered by a strong oil price and enhanced recovery techniques that have kept fields such as Brent and Forties producing long after their initial design life, however, things are beginning to change.
Decommissioning activity has been brought forward due to the depressed oil prices over the last few years, which saw prices go from above US$110/bbl in 1H 2014 to a low of below $30/bbl in January 2016. This downturn led to a spate of abandonments globally, as fields became uncommercial. This affected mature regions with high opex, such as Western Europe, more severely; and UK fields, such as Dunlin and Athena, were among those abandoned earlier than expected.
Compared to last year, however, there is a more positive outlook for the future of the oil and gas industry, with oil prices recovering in the wake of OPEC’s decision to cut production. This has shifted abandonment dates for many projects that were previously expected to begin decommissioning activity in 2018-2019 into the early parts of the next decade. Crucially, however, improvements in the oil price will only delay decommissioning, rather than stop it from moving forward, with many fields in the region at the end of their producing life regardless of oil price.
Large-scale oil and gas production in Western Europe started in the 1960s and many platforms are still in place. The average age of most platforms in Western Europe sits at over 25 years, driving high average opex costs in the region. While this has been somewhat stymied by the oil price crash and a subsequent drop in demand, this will not be the case indefinitely – with operating costs likely to rise in line with oil prices as supply chain pressures ease.
Allseas’ mega-vessel Pioneering Spirit gets into position to remove Yme’s topsides in August 2016. Photo from Allseas.
Douglas Westwood (DW) estimates that from 2017-2040, the cost of decommissioning in Western Europe will reach $103 billion. This will be driven by activity in the UK and Norway, contributing a combined 81% of total spend. This will be split among several service lines, with well decommissioning activity having the highest expenditure, followed by topside removal.
Western Europe has had a large number of well installations, both surface and subsea, since first production in the 1960s. A high proportion of these will need to be removed over the forecast period and this will have a high associated cost. Well decommissioning is forecast to account for the majority of expenditure, representing 65% of the total market over the 2017-2040 period. This will be primarily driven by wells in Norway and the UK, which have the highest number of wells installed, including the vast majority of subsea wells in the region.
Topside and substructure removal is also expected to account for a large proportion of decommissioning expenditure in the region, totaling over $20 billion and representing 21% of total spend. Within this, there are a large number of extra-large platforms in the UK and Norway that will require extensive reverse engineering work. While there are potential cost savings to be made by using Allseas’ new single lift vessel (SLV) Pioneering Spirit, which will allow the platforms to be removed in a single operation, bringing potential time and cost savings, there are a few issues outstanding. First, the Pioneering Spirit is the only SLV available, which will also be used for construction activities – leading to questions over availability. Secondly, the concept is still unproven and has only been used for one removal to date, the Yme platform in Norway (OE: September 2016). The vessel is due to see its second decommissioning workscope later this year with the removal of the Brent Delta topside. However, to enable a single life operation the platform required the installation of more steel to ensure that it could be lifted safely. Should other platforms also require this amount of preparation, the time and cost benefits will be lessened.
UK to dominate spend
With the highest levels of installed infrastructure and an extremely mature basin, the UK will dominate both removals and expenditure over the forecast, accounting for 54% of decommissioning expenditure from 2017-2040.
In total, DW anticipates the removal of 290 platforms and over 3000 wells in the UK – over 2017-2040 – 44% and 54% of the total, respectively. This high level of removals, in addition to the weight of the platforms to be removed, will result in total UK expenditure of over $55 billion. The UK is likely to be at the forefront of decommissioning activity and, thus, it will likely become the leader in terms of establishing how large-scale decommissioning can be managed worldwide. 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 UK will be able to transfer their knowledge and experience elsewhere, with operators elsewhere likely place a heavy reliance on those with strong track-records wherever possible.
Norway will see the second highest decommissioning spend over the forecast, totaling $28 billion, despite having a smaller number of installed platforms than both Italy and the Netherlands. This is due to the number of platforms that weigh over 5000-tonne – resulting in a higher number of removal days per platform. Due to large reservoirs, such as Troll and Åsgard, Norway has the second largest active wellstock, with a high proportion being subsea. As a result, the cost requirements for well decommissioning in Norway are expected to amount to $20 billion alone, 72% of the total – a higher proportion than any other country. Unlike the UK, responsibility for decommissioning in Norway will be focused on one operator – Statoil. The company operates 69 of the 124 currently producing fields in the country while also holding stakes in others.
Italy and the Netherlands have very similar offshore sectors, categorized by stable weather conditions, allowing fields to be developed with smaller platforms (<1000-tonne). Both countries also have smaller reservoirs than Norway and the UK, meaning that the number of well removals in both countries are low in proportion to the number of platforms. Overall, DW expects expenditure in Italy to total $6 billion and the Netherlands to total $8 billion over the forecast period.
Overall, the ramping up of the decommissioning industry represents a significant opportunity for specialist companies tasked with removing the large tonnage installed and decommissioning the high wellstock built up 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, both within Western Europe and beyond.
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 and the governments who will also assume much of the liability for these fields.
Ben Wilby is an analyst in Westwood Global Energy’s Research team based in Faversham. Having joined in 2013, he primarily works on the continual updating of the SECTORS Database. He has authored numerous reports including the ‘World Floating Production Market Forecast,’ and the ‘Western Europe Decommissioning Market Forecast.’ Wilby graduated from the University of Chichester with a degree in history.