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Collapse in Crude Brings North Sea Fields Near End of Production

Published in Oil Industry News on Wednesday, 3 February 2016

Graphic for News Item: Collapse in Crude Brings North Sea Fields Near End of Production

As many as 50 North Sea oil and gasfields could cease production this year after a collapse in crude prices to 12-year lows, industry experts have warned.

This would accelerate the North Sea’s decline, potentially bringing forward billions of pounds in spending on decommissioning.

Dozens of smaller fields with high production costs that are approaching the end of their lives have been identified by energy consultants Wood Mackenzie as prime candidates to be shut. Halting output is the first step towards abandonment.

This, in turn, could speed up decommissioning — when operators abandon fields and dismantle decades-old infrastructure, including platforms and pipelines.

Wood Mac said oil companies were likely to halt output at 140 offshore UK fields during the next five years, even if crude rebounded from $35 to $85 a barrel. This compares with just 38 new fields that are expected to be brought on stream during the same period.

Industry executives believe the decommissioning industry, still in its infancy, will grow. Royal Dutch Shell is preparing to take apart the first of four platforms in its Brent field, while Riverstone-owned Fairfield is to abandon Dunlin.

As the sector declines, service providers anticipate that decommissioning may help them plug the revenue gap left by diminishing exploration.

Fiona Legate, Wood Mac’s UK research analyst, said: “It will be a huge opportunity but the problem is the small amount of decommissioning activity to date means there is limited decommissioning experience in the UK sector. If you’re a company wanting a piece of that cake, the timing of market entry is very hard to gauge.”

To abandon one of the North Sea’s bigger platforms, and plug up to 30 wells, can cost more than £700m. As a result, even at $30 a barrel, some operators may prefer to keep pumping.

At Able UK’s Seaton Port facilities, on Teesside, work is nearly complete on a £20m project to strengthen 120 metres of quay, ready for the contract the company won to dismantle and recycle the Brent platforms.

Neil Etherington, its development director, said that Able was pursuing a number of North Sea decommissioning opportunities: “In many ways it’s still an emerging market. Even from the mid-1980s people have talked about a Klondyke which will emerge. But it has been relatively slow to develop.”

“You’re paying to turn the lights off and you’re going to do that as slowly and carefully as possible,” said Mike Tholen, of industry lobby group Oil & Gas UK. It predicted total decommissioning expenditure of £16.9bn from 2015 to 2024. But many of those shut first, in contrast to Brent, will be much smaller assets near the end of their lives or where floating production storage and offloading vessels are used to extract oil, rather than fixed platforms.

Indeed, some have warned against an abandonment boom. “If we accelerate decommissioning out there, then the industry is definitely finished,” said Dennis Clark, chairman of Tyneside fabricator OGN.

Its empty yard is testament to the dearth of new North Sea business. OGN’s order book is bare and the workforce has slumped from 2,500 in mid-2015 to just 35 now. “We need all the facilities and hubs we have got in the North Sea so we can exploit what is left,” Mr Clark said.

The Oil and Gas Authority, the industry regulator, is looking at how to cut decommissioning costs and develop technology that can be exported in order to maximise economic recovery. Andy Samuel, its chief executive, said: “There are clear potential efficiencies to be gained, such as encouraging companies to carry out joint campaigns and share equipment.”

Companies, meanwhile, are trying to persuade ministers to relax rules on decommissioning liabilities. They want the government to drop the requirement that companies retain ultimate abandonment liabilities even after selling an asset. This, they argue, would encourage dealmaking.

Paul Charlton, chief executive of engineering consultancy PDL, said operators tended to start planning for decommissioning a decade in advance. More may now be reviewing their options. But he added: “I don’t think we are going to see a bow wave of decommissioning as a consequence of the fall in the oil price.”

He also wants to avoid rapid decommissioning. Rather, the industry should co-operate to keep fields producing. “Once they are gone, they’re gone.”

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