UK Oil Industry Faces Steep Decommissioning Bill

The UK North Sea, one of the world’s most mature oil and gas producing basins, will see spending on decommissioning of wells and infrastructure total nearly $24 billion (20 billion British pounds) over the next decade to 2031.

The decommissioning sector will outlast oil and gas production and will continue growing for years to come, Offshore Energies UK (OEUK), the leading representative body for the UK’s offshore energy industry, said in a new report this week.

Decommissioning of end-of-life oil and gas assets is a big opportunity for the supply chain operators, but new challenges have recently emerged in the sector due to extreme volatility in oil and gas prices and the UK’s windfall tax on North Sea operators, which could impact the pace and spending of decommissioning in the coming years, according to OEUK.

Another challenge is the growing competition for services and equipment from the offshore wind energy sector, which could cause bottlenecks in demand for oil and gas decommissioning services, the report says.

Current estimates show that decommissioning expenditure rose by almost a fifth to $1.5 billion (£1.273 billion) in 2021. This year, the spending could cross the $2.4 billion (£2 billion) mark for the first time. Over the next four years, spending on decommissioning is set to surge and likely range between £1.7 billion and £2 billion each year, OEUK said.

The industry body predicts an upsurge in activity as there are 612 wells, 59 topsides, 58 substructures, 1,820 kilometers (1,130 miles) of pipelines, and 14,029 tons of subsea infrastructure set to be decommissioned between now and 2024 alone.

“The decommissioning opportunity is snowballing and could be worth around £20bn to the supply chain between now and 2031,” OEUK said in the report.

Over the next decade, more than 2,100 North Sea wells are set to be decommissioned, it added, more than the 1,782 wells poised for decommissioning in last year’s forecast of OEUK.

Wells continue to dominate the decommissioning market with an overall 48% share of the spending, with topsides and subsea infrastructure removal also accounting for a significant portion.

Well decommissioning activity is set to grow until 2028 when it is expected to peak with 313 wells forecast, close to the 2019 total of 288, OEUK said.

The average UKCS subsea well costs $9.3 million (£7.8 million) to decommission now, compared with $8.3 million (£7 million) over the last three years, likely reflecting rising inflation and more complex decommissioning operations yet to be completed, OEUK said.

As more and more wells, platforms, and subsea installations and pipelines are decommissioned, expenditure in this segment as a share of all spending in the UK oil and gas industry is rising and will continue to rise in the foreseeable future. Around 10% of UK oil and gas expenditure went on decommissioning in 2021. This share is set to rise to 13.7% this year and to 19% by 2031. Overall, decommissioning will account for 15% of UK offshore expenditure over the next ten years, the industry association said.

“This signals an upturn in activities throughout the UKCS, which will pose a challenge for the UK supply chain. Continued pressure from new energies also adds to this challenge as the UKCS battles to meet increasing demand for labour and materials,” the OEUK noted in the report.

“The growth of renewables and demand for decommissioning services and expertise will create increasing pressure for resources,” said OEUK Decommissioning Manager Ricky Thomson.

“This is a great problem to have and it’s vital this opportunity is properly managed across the sector so that UK firms can capture the lion’s share of this £20bn opportunity.”

By Tsvetana Paraskova for Oilprice.com