UK decommissioning costs fall but sector urged to pick up speed

UK’s oil and gas regulator has revealed that the decommissioning cost estimate has fallen to £46 billion (about $63.7 billion), which is the fourth year-on-year fall since the first cost estimate in 2017.

The Oil and Gas Authority’s (OGA) 2021 Decommissioning Cost Estimate report reveals a fall of over £13 billion from the baseline £59.7 billion to £46 billion, marking steady progress towards the £39 billion by end-2022 target called for in the 2017 report.

This year’s £2 billion (4 per cent) reduction contributes to a total cut of 23 per cent thus far, an average of almost 6 per cent a year, and the industry needs to maintain this level to cut the total cost by 35 per cent, the OGA explained on Wednesday.

Importantly, the reduction seen in the forecast estimate has been broadly matched by a 20 per cent cut in the costs of completed decommissioning projects. Actual decommissioning expenditure in 2020 was £420 million lower than estimated the previous year, in comparison to a £170m reduction in 2019 and £432m in 2018. The 2020 reductions were largely due to deferral of activity as a consequence of Covid-19 and the low commodity price.

The report makes it clear that industry must maintain the pace of cost-cutting because the opportunity is immediate; the next 20 years is when most decommissioning will take place and when the reductions must be made.

The OGA’s recently-published Decommissioning Strategy warns that the industry must change its commercial practices to prevent higher costs and focuses on four main strands to achieve savings – planning for decommissioning, commercial transformation – encouraging the supply chain to be more proactive in soliciting work, supporting energy transition from late-life into decommissioning, and technology, processes and guidance.

Since 2017, reductions of 25-35 per cent have been achieved across three of the largest cost categories – well decommissioning, removals and subsea infrastructure. Well decommissioning alone represents 45 per cent of the total cost estimate and removals a further 25 per cent, and these two categories account for more than £10bn of the overall savings to date.

However, despite the overall positive performance, reductions have begun to slow, and if it continues at the same pace as the past two years, the ambitious target will be missed, the regulator warned.

Therefore, there is a clear need to build on what has already been achieved by capturing remaining opportunities from collaboration and aligned, incentivised contracting.

According to the OGA, there are a number of opportunities to bring about further cost reductions. These include industry mainstream adopting campaign and proven collaborative models; the creation of an environment and culture of stability and certainty, increased sharing of lessons learned and good practices through improved communication, engagement and stewardship; and updated late-life operating models.

Stuart Payne, OGA Director of Supply Chain, Decommissioning and HR, said: “The industry is responding to the challenge to cut costs well, but it must maintain focus and increase the pace to hit the 35 per cent target. The prize is significant for the industry and the exchequer. So far around £13bn has been potentially saved and there are billions more up for grabs.

“We will continue to help; benchmarking costs and promoting best practice; robustly holding operators to their regulatory commitments and providing tools like the improved Energy Pathfinder site which has multiple opportunities for collaboration and innovation”.