The UKCS Cost Reduction Challenge

Back in 2017, recognizing that decommissioning activity was a burden, not just on operators’ budgets but also taxpayers – who in the UK subsidize decommissioning activity through tax allowances – the UK’s regulator, the Oil and Gas Authority (OGA), set a target to reduce how much it costs to do it.

At the time, the total cost of decommissioning all UK Continental Shelf exploration and production infrastructure had been estimated at £59.7 billion, based on 2016 prices. The goal was a 35% reduction, to £39 billion – or less – by 2023. According to Oil & Gas UK’s latest annual Decommissioning Insight Report, the estimate, having fallen 23% in 2020, was still £46 billion in the latest estimate, a fall of just 4% in 2021, leaving a big gap to fill to meet the 2022 target. With capital spending expected to increase in coming years (see story by NorthStone Advisors), it could be a tough environment for the industry to meet its 35% reduction target.

Speaking at the Offshore Decommissioning Conference in St Andrews late last year, Pauline Innes, head of decommissioning at the OGA, formerly decommissioning director at the Offshore Petroleum Regulator for Environment and Decommissioning (OPRED), said that the target was “no doubt achievable, but challenging.” She said that ways to reduce cost included giving suppliers more visibility and sharing data and aligning activities to create scale – something that various bodies have been trying to make happen.

Focusing on plugging and abandonment

Innes says the OGA has been focusing on plugging and abandonment (P&A) – the largest chunk of the decommissioning bill, at around 50% of the total cost in 2020, up from an estimated 45% of the share in 2019 – targeting those with wells that can be aggregated into campaigns. That means encouraging data sharing, she says.

Initiatives like the Energy Pathfinder website and an open access database of all suspended exploration, appraisal (E&A) and development wells, that are awaiting full abandonment treatment, are aiming to help that. However, a recent “world first” agreement between six oil and gas operators in the Netherlands and Oceaneering for E&A well decommissioning hints at the novelty of operators working together en-masse in this space.

There’s no lack of wells to go after, including a significant backlog of suspended wells (E&A, as well as development), that the OGA also wants operators to deal with. But in 2020, in the UK, just 84 wells were plugged and abandoned, compared with a forecast of 116, which itself was a drop on 2019 – activity levels blamed on Covid. It’s a big gap compared to what had been predicted in 2019. Back then, the 2019 Decommissioning Insight Report had predicted that 220 wells would be decommissioned a year up until 2024, then rising to 327 wells a year from 2025 until the end of the period.

Photo courtesy Oil & Gas UK.

“It’s important we don’t just do what we’ve always done in the short period of time we’ve been plugging and abandoning wells. At best, we will flatline in cost.” Keith Hogg, NZTC.

Flatlining Abandonment Costs

Year-on-year, costs have remained relatively flat, increasing slightly to £2.98 million/well for platform wells (from £2.95 m the previous year, and compared with the £4.28 m/well forecast in 2018) in the central and northern North Sea and West of Shetland, with subsea wells there costing £8 million a go. Costs in the shallower Irish Sea and southern North Sea waters have dropped slightly from £2.34 m/well for platform wells (£2.44 m/well in the 2020 report) and £6.06 m for subsea wells (£6 m/well in 2020).

Bringing in new technology is seen as a key lever to cost reduction. However, the investment organizations like Aberdeen’s Net Zero Solution Centre (NZTC, previously the Oil & Gas Technology Centre) would like to see from operators has been “underwhelming.”

NZTC has been supporting a number of technology developers in the space, as regularly outlined in these pages. But Keith Hogg, project manager at NZTC, says operators spent an average of just 6% of their technology development budgets on P&A technologies last year. “That’s really underwhelming,” he says. “We need to commit more cash in terms of technology development in P&A. It’s important we don’t just do what we’ve always done in the short period of time we’ve been plugging and abandoning wells. At best, we will flatline in cost.”

Operators are also shy on the technology adoption side, but “we need to embrace it, if we are ever going to realize cost reduction as an industry,” says Hogg. “If we don’t see that adoption coming to fruition, people (technology developers/innovators) will spend money elsewhere, and there’s a risk we don’t develop the technology in time for the huge scope in well P&A.”

A focus for the NZTC has been rigless P&A. However, Hogg says the organisation will no longer be supporting higher technology readiness level technologies, unless it’s part of a collaboration with operators, says Hogg, as a direct sign to operators that they have to be in the game to benefit from it – instead of expecting others to do all the work. Collaboration will also mean a minimum number of operators each pitching in £100,000 a year to support technology development across areas, including alternative barrier materials, inspection and verification, and P&A enabling technologies.

A part of the issue, he says, is a concern that the regulator would not support a specific solution. But, says Hogg, “The regulator is not there to accept anything specifically. There’s a clear mandate; if what you’re doing is going to meet or exceed industry best practice, they have no issue with the technology or the methodology.”