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Low Oil Price Domino Effect to Shut More North Sea Fields Early

Published in Oil Industry News on Wednesday, 15 July 2015


Graphic for News Item: Low Oil Price Domino Effect to Shut More North Sea Fields Early

Low oil prices have tightened the screws on some of the most depleted and costly oilfields in Britain's North Sea, forcing operators to cease production earlier than planned and adding to fears of a domino effect in mature areas.

For years North Sea producers have delayed expensive decommissioning projects, supported by high oil prices that have helped paper over soaring operating costs.

But with oil prices halving over the last 12 months, some companies are faced with the unenviable choice of operating at a loss during a field's twilight years, or limiting losses by bringing decommissioning forwards. Unsurprisingly, the industry is looking at the second option very closely.

"It's a sign that many of the meetings I'm going to, the first issue on the agenda is decommissioning," Gunnar Olsen, business development director at Total E&P UK, said.

The most recent casualty is Fairfield's Dunlin cluster in the Northern North Sea, which shut down in June. Fairfield's chief executive David Peattie cited the depressed oil price and challenging operational conditions as contributing factors.

As more platforms and fields cease to operate, terminal and pipeline costs for neighboring fields in the same chain are expected to rise. This is of particular concern in mature areas such as the Northern North Sea, where interdependence is high.

"Dunlin will shut five years before plan, which will mean all the other fields going into Sullom Voe (oil terminal) will have increased operating costs," said Olsen, speaking at a Society of Petroleum Engineers (SPE) conference in June.

"The domino effect is now a significant challenge. If some of these fields are shut in, it will affect the whole basin."

Fairfield said the Dunlin Alpha platform would continue to export oil from third parties into the Brent system pipeline until decommissioning gets underway. But the ticking clock puts pressure on its neighbor EnQuest to find a work-around, as its Thistle and Don fields currently export oil via Dunlin.

Although decommissioning is still in its infancy, major removal projects such as Shell's Brent complex are underway. More announcements are expected the longer mature fields operate significantly below break-even.

CLOSER TO ABANDONING

"A low oil price will force you to decommission earlier," said Ian McLelland, global head of oil and gas at Edison, an investment research firm. "The cashflow from an asset is very different in a $60 (a barrel) world compared with a $100 world. It means some will be much closer to abandoning a field than was previously thought."

Sir Ian Wood's strategic review of the UK North Sea, published in February 2014, warned that up to 2 billion barrels of oil equivalent, worth $120 billion at current prices, were at risk from early decommissioning of existing infrastructure.

Trade body Oil & Gas UK has since estimated that decommissioning expenditure could surpass 2 billion pounds in 2018, up from 1 billion pounds in 2014. It added that the full impact of the low oil price had yet to be felt, and the numbers could rise "significantly" over the remainder of the decade.

"The maturity of the UK North Sea has really started to show and with the fall in the oil price, companies are placing a lot more scrutiny on projects and fields and taking a view on whether they can continue to produce economically," said Fiona Legate, a research analyst at Wood Mackenzie. "We expect to see more announcements like Fairfield's."

She noted the FPSO contract for the Athena field had been renegotiated this year, so producer Ithaca Energy only has to give 60 days' notice to terminate the lease, allowing it to cease production earlier if necessary.

The problem isn't confined to the Northern North Sea – the Southern gas basin is also challenged by falling production and high costs.

Andy Bevington, director of UK operated assets at Centrica, also speaking at the SPE conference, said the A-fields, Audrey, Annabel, Ann and Alison, were all in negative cashflow, with revenue of about 5 million pounds and operating expenditure of about 31 million pounds per annum in total.

The gas from these fields is currently exported via the Conoco-operated LOGGS pipeline system, but this is proving costly for Centrica.

"The A-fields are tied into an historic processing and operating services agreement with Conoco and in terms of the domino effect, that's just a cost share for all the operators, so as they fall away your costs go up and up," he said.

WoodMac's Legate said another problem for the gas producers in this basin was the risk that LOGGS would not continue to operate for as long as everyone needed it to.

The cost of operating pipeline systems in the UK has shot up in recent years, partly because ageing infrastructure requires more maintenance, but also due to legislative changes.

"That has been quite costly and pipeline operators have passed that cost on to the users. For smaller producers, who have to pay this cost on top of their tariff to use the system, it has been damaging to their economics. So we are likely to see some fields cease production earlier than expected," she said.

Source: www.reuters.com

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North Sea Oil and Gas, North Sea Jobs, North Sea Decommissioning








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