Decommissioning Insight 2018

DECOMMISSIONING INSIGHT 2018

Looking at a slightly longer time horizon, last year decommissioning expenditure over the 15 years from 2012 to 2027 would have run to £25.3 billion. It is now forecast to be £21 billion, a fall of 17 per cent. A lot of this reduction is due to work being moved to the future, as discussed in section 3.4 and whilst great care should be taken to avoid forecasting success through a turbulent cycle, the evidence is also building that the industry is delivering on its ability to take 35 per cent out of decommissioning costs over time.

3.4 Decommissioning in Context

Decommissioning activities must also be examined in context with the recent performance of the oil and gas industry.

Wider efficiencies are slowing the pace of decommissioning — The long period of rising oil prices over 2003–14 reduced industry impetus to operate on a low-cost model, and the rapid fall in prices from late 2014 onwards made these inefficient operational models unsustainable. However, the North Sea market has since responded with a renewed drive for sustainability and efficiency.

Since 2014, the UKCS has seen:

• Unit operating costs (UOCs) and unit development costs (UDCs) fall by 50 per cent, driven mainly by more efficient working, activity optimisation and challenging the scope of operations and projects • Production increase by 16 per cent, the result of improved production efficiency and a wave of new field developments approved prior to 2014 • A more stable and predictable fiscal regime, as outlined in the UK Government’s Driving Investment Strategy • Improvements in oil and gas prices, both around 30 per cent higher than the 2017 average, and oil prices around 60 per cent higher than in 2016 • The formation of a new regulatory regime led by the Oil and Gas Authority focused on Maximising Economic Recovery, including a mandate to reduce decommissioning costs by at least 35 per cent over time Decommissioning is an inevitable part of the life-cycle of an oil and gas asset, and significant progress has been made in the sector in recent years. Most companies are now fully engaged with regulators, acknowledging that decommissioning is part of the operational life-cycle of a mature oil and gas basin, closely linked to operations. However, the increased resilience has meant there has been no rush to decommission, as was also borne out in last year’s report. Improved preparation and planning are also factors — The downturn has encouraged greater preparedness for decommissioning, with operators looking to shape annual expenditure and tailor activities within their portfolio to meet operational and regulatory requirements. This results in stable forecasting, provides greater transparency for operators and makes expenditure easier to track for regulators and Treasury. Significant resource potential remains on the UKCS, with an estimated 10-20 billion barrels of oil equivalent (boe) still to be recovered. With around 45 billion boe having already been produced, almost one-third of the basin’s potential is still to be realised. Whilst the imperative of cost control across portfolios has driven the shutdown of some mature fields, improved production efficiency coupled with continued brownfield investment is extending the life of many assets.

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