Decommissioning – will the time ever be right?
Once thought of as a North Sea problem, decommissioning is quickly becoming one of the biggest issues in the global oil and gas industry today. On one side we have oil companies who have to start the process and on the other side we have an unprepared supply chain, unsure of when to take their first steps, but keen to avoid missing what could be a golden opportunity.
We forecast companies will face a decommissioning bill of US$32 billion between 2018 and 2022 (view our report here) but does the supply chain have an appetite to make the investment needed and will it be able to pull together a sound offering?
One of the major challenges for the industry is uncertainty. We assume that operators will defer where possible due to the high costs associated with decommissioning but this constantly evolving picture makes it difficult for the supply chain to make investment decisions. With everyone keen on avoiding major bottlenecks in the supply chain, the time for the supply chain to step up to the challenge is nearing.
So what are the major issues surrounding decommissioning and how can the industry and governments prepare? We believe the following are the main challenges:
- Operators will have to face big bills. Opportunities to lock in lowering decommissioning costs are time constrained as the market has adjusted to the “lower for longer” environment.
- Deferment is not a forever solution, many offshore facilities are already past their design life
- No global consistency in regulation and even where it does exist, there remains confusion
- Operators leading the decommissioning process will set the standards, and those standards may be unduly high for regions that follow
- The supply chain are under prepared and unsure about when to make the investment needed to capitalise on the opportunity decommissioning presents
- Governments in most regimes are responsible for a share of the costs. In the UK we forecast the government will spend around £25 billion on tax relief in the future (45% of the total remaining UK decommissioning bill), in Norway, it's likely to amount to US$90 billion (that's 78% of their decommissioning bill).
How can companies reduce the bill?
While deferment cannot be a permanent solution, companies can look to reduce the bill. Top of the list for reducing costs are learning from past experiences, deployment of new technologies, cluster decommissioning and divesting assets with large decommissioning costs (as Shell did when it divested US$3 billion of assets to Chrysaor – slashing its UK decommissioning liability by 25% in one deal).
Regulation, the glue that binds this industry together
The main issues of interest to oil and gas companies, as well as the banks lending money to finance decommissioning projects, are covered by various legislation relating to the scope of decommissioning; taxation; and liabilities/ownership issues.
In our full insight, the first in a new series on decommissioning, we compare the status of regional regulations in Asia-Pacific, Gulf of Mexico Deepwater and the North Sea. We also look at the top 10 companies by decommissioning spend, which are expected to total US$14 billion (pre-tax) over the next five years.
Can the supply chain ready itself to reap the rewards from decommissioning and how long will operators and governments have to wait before they are free from a legacy of costly liabilities? These answers remain unknown for now, what we do know is that while decommissioning costs can be reduced, the time for the supply chain to prepare has arrived, and the time for routine deferment has surely passed.
Homepage photo credit: Allseas