Mark Williamson: North Sea regulator puts focus on decommissioning costs

With hundreds of platforms and wells and miles of pipelines to be dealt with, the costs will run into billions. That could generate valuable revenue for oil services firms which develop the required expertise. Many of the firms that help operators to develop and run North Sea facilities have fallen by the wayside amid the slump triggered by the coronavirus crisis. The coming end of the furlough programme in September will heap further pressure on survivors.

READ MORE: Costs of North Sea tax breaks laid bare in filing by giant

But decommissioning will add to the burden on taxpayers at a time when public sector borrowing has ballooned amid Government efforts to help people and firms cope with the crisis.

As the costs of decommissioning are tax deductible, the subject will matter to people who may not have an inkling of the scale of the numbers concerned.

Royal Dutch Shell alone has been repaid more than $500m by the UK Government since 2015 because the costs of decommissioning assets such as the massive Brent field have outweighed the profits it has made on its North Sea production. Shell started production from huge developments West of Shetland in the period concerned although it sold off assets deemed non-core and laid off hundreds of people.

In 2017 the OGA estimated that the decommissioning bill would total £59.7bn. It set the target of reducing the estimate by 35 per cent, to £39bn by the end of next year.

Former energy minister Tim Eggar chairs the Oil and Gas Authority Picture: OGA

Even at the reduced level of £39bn decommissioning will put a big strain on the Treasury.

On the positive side, the progress report on decommissioning issued by the regulator last week suggested firms are getting to grips with the challenge of how to make decommissioning less burdensome.

The total cost estimate has reduced by £2bn since last year, to £46bn. That is around £14bn less than the 2017 figure.

The OGA said: “This year’s £2bn (4%) reduction contributes to a total cut of 23% thus far, an average of almost 6% a year, and industry needs to maintain this level to cut the total cost by 35%.”

It noted that the fall in estimated costs was accompanied by good results in terms of actual spending.

Decommissioning expenditure in 2020 was £409 million lower than estimated the previous year.

READ MORE: Oil firm to shed 500 North Sea jobs after calling time on fields

The OGA added: “The industry is demonstrating a growing culture of continuous improvement, allied to knowledge-sharing and learning from experience which is helping it to reduce costs despite the fragmented nature of the market.”

But the pat on the back came with a significant caveat from the regulator, which cautioned: “Despite the overall positive performance, reductions have begun to slow, and if it continues at the same pace as the past two years, the target will be missed.”

It was notable that the primary threats identified by the OGA included “operator commercial misalignment or lack of collaboration” and “oil sector cost inflation”.

“Because collaboration and knowledge-sharing is key, companies must forget rivalries and work together in this area,” said Stuart Payne, OGA Director of Supply Chain, Decommissioning and HR.

Industry leaders have been saying since the last downturn that an increase in collaboration will be vital if the North Sea is to survive the challenges it faces. In addition to the strains caused by oil and gas price turbulence these now include the threat to firms’ social licences to operate that has been highlighted by the OGA amid concern about the industry’s impact on the environment.

READ MORE: North Sea collboration drive stalls amid oil and gas supply chain tension

But there have been other signs that firms are not getting the message about the need to modify competitive behaviours that became engrained in an age when shareholder ‘value’ was all that seemed to matter.

In January a report by Deloitte and industry body OGUK found that collaboration appeared to have increased but only slightly in the North Sea last year, during which the oil price plunged.

The report found the pandemic and consequent economic downturn also led to “disadvantageous commercial behaviours” such as cancelled or modified contracts.

The Collaboration Index increased to 7.1 last year, from 7 in the preceding year. Ten is the top score.

That miniscule increase only took the index back to where it stood in 2018.

In 2019 the index fell by 0.1. The fall was the first recorded since the index was introduced in 2015, amid the slump caused by the oil price plunge from 2014.

READ MORE: Can renewables jobs make up for Scottish oil industry decline?

The authors of the 2019 report appeared concerned the partial recovery in the crude price since late 2016 could encourage firms to ease up on the reform effort.

We may be in similar territory now. The price of Brent crude plunged to an 18-year-low of less than $20 per barrel in April last year but has rallied to around $75/bbl on expectations that coronavirus vaccines will fuel a strong recovery. Brent crude and natural gas are both selling for more than they fetched in January last year.

The price increases could make firms less worried about the need to collaborate and lead to inflationary pressures in the supply chain.

Against that backdrop there must be worries that an approach to decommissioning cost reduction that relies on oil and gas firms making voluntary moves is doomed to fail.