Decommissioning of North Sea oil infrastructure is opportunity for the region

Last year saw the spend on decommissioning top £1bn for the first time

Murchison oil field
Murchison oil field

The falling oil price, rising costs and ageing infrastructure means the massive exercise of removing redundant facilities from the North Sea is gathering momentum. Peter McCusker reports.

Last year was not only a record one for capital and operational expenditure, it was also the first time decommissioning spend on the UKCS (United Kingdom Continental Shelf) topped £1bn.

Oil & Gas UK’s 2014 activity report says that figure could surpass £2bn a year by 2018, as the rate of decommissioning activity accelerates.

Ageing North Sea infrastructure is leading to rising operational costs, and this, combined with a falling oil price, means 25% of fields are now making a loss.

Later this year work will start dismantling the massive Brent oilfield with North East company Able UK winning the contract to handle the topsides at its Billingham facility (see panel).

Over the next 35 years over 5,500 wells, 400 facilities and 10,000km of pipelines will be decommissioned at an estimated cost in excess of £50bn - creating almost 40,000 new jobs.

As well as the Brent field, the Murchison field is currently being dismantled with plans in place for more to be delivered in the next five to seven years including Brae, and Miller.

Industry body Decom North Sea, established, with funding from Scottish Enterprise, Highlands & Islands Enterprise and the Department for Energy & Climate Change (DECC), co-ordinates the UK’s decommissioning activity.

Nigel Jenkins, chief executive of Decom North Sea, said its membership has increased by 15% in the last year to 260 companies, and now includes 20 North East businesses.

Decom North Sea is encouraging the supply chain to respond to the economic, technological and strategic challenges ahead.

Mr Jenkins said: “We can see the work coming and our job is to get the supply chain ready, with subsea companies well-placed to win a lot of work.

“The market is already starting to become more active and there are some enormous jobs coming through. Eni, Centrica, Conoco and Talisman are all pressing ahead with decommissioning plans.

“The decommissioning programmes take a lot of planning and development. The Murchison scheme took four years and has now begun.”

Oil & Gas UK’s activity report says that in the last year there has been a 6% rise in the total number of fields planning to cease production.

It says: “This increase is primarily due to fields ceasing production earlier than previously anticipated as higher costs and lower revenues mean they reach their economic limit sooner. As the data were collected in quarter 4 2014, the full impact of the oil price fall is yet to be felt.

“It is anticipated that without fresh intervention the number of fields reaching cessation of production over the remainder of the decade may rise significantly.”

Last year’s Wood Review came up with recommendations to ensure that all was done to ensure the maximising the recovery of the reserves from the UKCS.

This work will be co-ordinated the by the newly established Oil and Gas Authority (OGA). It is headed by Dr Andy Samuels who told Journal Energy he had concerns over the effect shutting down a facility too early may have.

He said parts of the basin are on a ‘knife edge’. He elaborated: “If one operator shuts down a platform this could have a knock-on, domino effect on those operating nearby.”

Mike Tholen, economics director of Oil & Gas UK, echoes these concerns in relation to areas of the basin such as the North North Sea.

He said: “The Cormorant was one of the first fields developed in the 1980s and a lot of the infrastructure out there is now old and frail.

“If there are one or two breaks in that chain then there is the risk of a domino effect on the nearby facilities, and then a further knock-on effect at Sullom Voe (the main terminal on The Shetlands.)

“We have to ensure we do not rush to shut down these assets too early. DECC say there remains something like a further one billion boe (barrel of oil equivalent) in the North North Sea.

“There is a need to ensure we can work together, to maintain and develop these assets and maximise the recovery of these reserves.”

In February’s first OGA report on the state of the basin, compiled by Dr Samuels, he said: “Decommissioning represents an excellent opportunity for specialisation and international competiveness of the UK supply chain (equipment, services and facilities) and consequently jobs and the broader economy.

“However, it is important that decommissioning is planned in such a way as to minimise disruption to neighbouring fields and additional development opportunities. Equally it is important to execute decommissioning in a safe, environmentally conscious and cost effective way.”

Mr Jenkins said: “We will be working closely with the OGA to determine the right time and place for decommissioning.”

The OSPAR Convention of 1998 stipulates the onshore recovery of almost all man-made structures from the North East Atlantic.

In order to support this work the Government introduced a Decommissioning Tax Relief Deed (DTRD), which guarantees the certainty of future tax relief on decommissioning costs.

Mr Tholen says this alleviates concerns for oil companies as it provides certainty on how much of the decommissioning cost they are liable for.

The DTRD essentially means that an operator is able to claim relief on its profits during a substantial period of its operating life meaning, in most cases, the Government paying around 50% of the costs.

He said: “The Government has taken the most of the profits over the period of the field’s life, with a tax rate up to 80%, and so it’s only right that it should contribute its fair share to the clean-up costs.

“The Decommissioning Tax Relief Deed is a guarantee that the money will be there to ensure the work is carried out.

“If a field is sold on then the new buyer has to show that it has the funds to carry out the decommissioning work, if the field is sold on then the same applies, but if that company ceases trading then the liability falls back on the original seller.

“This clears people minds straight way, it means the Government will not be left shouldering the entire burden.”

Many supply chain companies are now including decommissioning into their strategic plans and there is a growing interest from the North East with Decom North Sea now having 20 members from the region.

George Rafferty, chief executive of Durham-based NOF Energy, said: “Decommissioning will deliver extensive opportunities for the supply chain in the short and long term.

“While physical decommissioning of the majority of assets on the UKCS is some way off, there are opportunities for companies now. £1bn is being spent on decommissioning on the UKCS each year with spending due to increase significantly over the next three decades.

“Alongside the industry’s drive to improve efficiencies and control costs to maximise the recovery of resources, operators are already actively planning decommissioning programmes as set out in Oil & Gas UK’s 11 stage decommissioning process, which has to completed and agreed by the Department of Energy & Climate Change before production ceases to enable the process to begin.

“It is important that during this programme companies engage with operators and prime contractors to highlight their products and services to enable them to potentially secure a position in their supply chains for decommissioning operations.”

Brent field in the North Sea where Able UK are to decommission platforms

The decommissioning of the massive Brent field is the biggest task to have been undertaken on the UKCS, with the North East set to play a major part in its dismantling.

The decommissioning project will see the four topsides, with a combined weight of 100,000 tonnes, taken away on the newly-built £2bn, 1,250ft-long, 407ft-wide vessel, which has a total lifting capability of 48,000 tonnes.

The largest topside will be from the Charlie platform which is 32,000 tonnes and the structures will be transported to Able UK’s yard in Billingham. After arrival at Able Seaton Port, 100 miles south west of the oilfield, the topsides will be slid off on to a new quay.

Billingham-based Able won the Brent contract in competition against five yards from Norway and the work will create about 200 jobs. It is anticipated that over 97% of the structures will be reused or recycled.

Nigel Jenkins, chief executive of Decom North Sea, said: “Able took a close look at the market, saw what was needed, understood the cost base and invested in facilities, skills and infrastructure to allow them to bid for this and similar projects.

“There are going to be opportunities for the North East such as this one. One thing we want to encourage is the industry to work together and collaborate on cutting costs.”

Able has completed almost 20 decommissioning contracts for smaller gas platforms in the southern North Sea but this is the largest one to date.

Tees Valley is positioning itself as a key location for the sector. In addition to Able Seaton Port it has South Bank Wharf, which is an 80-hectare freehold site on the River Tees, with deep-water access.

Journalists

David Whetstone
Culture Editor
Graeme Whitfield
Business Editor
Mark Douglas
Newcastle United Editor
Stuart Rayner
Sports Writer