Proactive Investors - Run By Investors For Investors

Decommissioning of aged North Sea oil rigs gathers pace

Decommissioning of aged North Sea oil rigs gathers pace
A whole new industry will come from decommissioning North Sea infrastructure.

‘If you can’t beat them, join them’ seems to be the mantra adopted by Fairfield Energy.

Launched a decade ago with US$200mln from a clutch of heavyweight investors, including American buy-out company Warburg Pincus, Aberdeen-based private group Fairfield’s plan was to buy up old oil fields in the North Sea cast off by industry giants and breathe new life into them.

Everything did not quite go according to plan and six months ago, with production seriously on the wane, Fairfield decided to take the first steps to transform itself into a decommissioning specialist. It started to sell off or close all its old oil fields and hired experts to advise on dismantling platforms.

Describing all this, the Sunday Times said: “Rather than styling itself a saviour of Britain’s oil industry Fairfield has decided there is more money to be made from feeding on its carcass.”

Decommissioning of the North Sea’s aging infrastructure became a buzzword in 2009 after the oil price had fallen dramatically. Decom North Sea, a non-profit organisation, was set as an industry body in that year with funding from Scottish Enterprise and the Department for Energy and Climate Change (DECC), to co-ordinate the UK’s decommissioning activity.

But the oil price recovered quickly, going up to US$100 a barrel and more and staying there for five years. Meanwhile, costs began to rise. Powerful trade unions stared to push up wages. Contractors also started to steeply rack up costs.

Fairfield Energy said recently its operating costs had doubled in five years. The North Sea had become one of the most expensive basins to operate in in the world. But decommissioning was largely forgotten.

Everything started began to change in 2014 when in June of that year the oil price at US$115 began its descent to the US$40 a barrel level it is today.

This is the straw that broke the camel’s back for North Sea operators. Only about a quarter of the 120 operators in the North Sea are now profitable.  

Decommissioning started to gain traction. In 2014, for the first time the spend on dismantling in the United Kingdom Continental Shelf (UKCS) topped £1bn.

After years of planning, next year the first of four platforms will be taken apart and brought on shore from the iconic Brent field, 110 miles east of the Shetland Islands.

The reservoir pumped 4bn barrels before it was largely shut down in 2011. It will be the largest decommissioning project yet. Apart from the Brent field the Murchison field is currently being dismantled with plans in place for more to be delivered in the next five to seven years including Brae, and Miller.

Fairfield is preparing to decommission its Dunlin field cluster in the Northern North Sea. This includes not just the Dunlin fields but also the Osprey and Merlin fields. These fields have produced more than 522 barrels of oil in their 37 years of life.

The cost of decommissioning this cluster has been tentatively put at £400mln (US$600mln). But Fairfield will not have to pay for all of it. In order to support the work the Government introduced a Decommissioning Relief Deed (DTRD). This can amount to 50% of the total. In any event, Fairfield seems to be using Dunlin as a learning curve.

A spokesman for Dunlin said: “In time their ambition is to become a decommissioning company, advising others on the process and best practice.”

The North Sea industry body, Oil & Gas UK, is working closely with Decom North Sea on decommissioning, while trying to ensure the remaining oil and gas in the North Sea is exploited. UKOG reckons that 43bn barrels have already been extracted and has estimated there could be over 12bn recoverable barrels of oil equivalent (boepd) still there.

OGUK also said that there are 600 platforms in the North Sea 470 of them in the UK sector. The aging infrastructure also consists of 5,500 oil wells and 10,000 kilometres of pipelines.

It has been estimated that over the next decade (2015-24) decommissioning spend will amount to £16.9bn as 79 platforms and 1,200 wells are taken out of action.

Some experts men might believe that when the oil price recovers, it will be business as usual. But it won’t. The North Sea’s decline is not yet terminal but it is severe. Output is down from a 1999 peak of 4.5mln barrels of oil equivalent a day (MMboepd) to 1.5 mmboepd today.

Decom North Sea membership has increased by more than a third recently to over 300 members, comprising a whole raft of service companies. A whole new industry is being created which over the next 35 years could employ 40,000 people in Scotland and the North-East and be worth £50bn. This would be no bad thing for the UK.


Copyright ©, 2019. All Rights Reserved - Proactive Investors North America Inc., Proactive Investors LLC

Market Indices, Commodities and Regulatory News Headlines copyright © Morningstar. Data delayed 15 minutes unless otherwise indicated. Terms of use