EY UK Energy blog

Decommissioning: opportunity for the UK oilfield services industry

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Posted: Thursday, 8 February 2017 at 2.00pm

Decommissioning offers the UK oilfield services industry an excellent opportunity to grow a significant line of business with huge export potential

Since the rapid decline in the oil price the UK’s oil and gas supply chain has been under intense pressure to reduce prices and innovate to deliver services more effectively and efficiently. In the long-term, improved efficiency has the potential to strengthen the supply chain and the wider oil and gas industry but there is no denying that the ongoing relatively low oil price environment continues to put price and reduced demand pressure onto the supply chain.

An immediate and sustained increase in demand for decommissioning services would materially support the supply chain and help maintain supply side capacity which would reduce the likelihood of future price inflation when activity levels increase. But decommissioning is a complex issue for the North Sea with many interlinked considerations and there is no one simple approach to increase demand.

Given the low oil price environment, price forecasts and reduced supply chain rates, it may have been expected that there would be significantly more decommissioning activity underway, however there has been no rush to action seen in the industry.

Although some of the cost of decommissioning can be offset against previously paid tax, many operators with end of life assets either do not currently have the financial capacity to undertake decommissioning activity or are simply choosing not to spend on decommissioning activity and instead focus on running as leanly as possible, even if this is at a loss.

The lower than expected volume of decommissioning activity and the current uncertainty about the level and timescale for more is at odds with what the supply chain needs now; certainty and volume of demand in order to invest, innovate and generate competition to further drive down decommissioning costs.

The myriad of challenges facing operators are also a key consideration in the decommissioning debate. Factors include, limited capital availability, uncertain balance sheet decommissioning liabilities, significant reputational risk and significant technical challenges.

Helping to address all of these challenges presents an excellent opportunity for the supply chain, specialist late life operations and decommissioning companies to grow a significant UK line of business with huge export potential. 

In order to successfully progress past these issues there are four aspects that should be tackled simultaneously.

  1. Technology innovation, new approaches and new technology solutions are needed to reduce costs and cost uncertainty. This needs to be stimulated by a pipeline of demand, preferably aggregated, in order to give the supply chain confidence to make investment decisions in research and development and commercial propositions.
  2. New commercials models, with mechanisms to drive more cost certainty, commercial innovation, a degree of risk transfer and insurance, coupled with considering potential alternative approaches to long term operator liability will all help to encourage operators to make decisions on increasing demand for decommissioning services.
  3. Demand for decommissioning services should be specified in terms of outputs needed to avoid over-management and encourage supply chain innovation.  Linked to this the supply chain must be engaged early to work alongside operators before COP.
  4. To respond to increased demand, supply chain partnerships and specialist late life and decommissioning companies are needed that are able to offer operators a ‘one-stop shop’ for decommissioning to give operators a choice in how they approach decommissioning, to leverage economies of scale and maximise the efficiency of contracting and contractor management

Significant co-ordination, collaboration and support will be needed to progress each of these points. The Oil and Gas Authority, Oil & Gas UK, Decommissioning North Sea will have a vital role to play but the industry as a whole will need to engage and contribute in order to help deliver an optimum decommissioning solution for the UKCS and to take advantage of an important export opportunity in the years to come.

This first appeared in the Press & Journal Energy Supplement.

Read Review of the UK oilfield services industry


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