UK’s oil & gas decom cost forecasts drop to around $54 billion

UK’s regulator North Sea Transition Authority (NSTA) has outlined in its new report that the decommissioning cost estimate on the UK Continental Shelf (UKCS) has dropped 25 per cent to £44.5 billion (about $54.2 billion). This cost reduction is equivalent to saving £15 billion (around $18.3 billion).

The North Sea Transition Authority’s Decommissioning Cost Estimate Report 2022 highlights the industry’s ability to generate “huge savings” for the Exchequer and carry out projects in a “more cost-effective manner,” as the cost of decommissioning oil and gas infrastructure has been cut by 25 per cent in the past five years.

The UK regulator points out that the forecast fell by £1.5 billion (2 per cent) to £44.5 billion last year, contributing to a total cut of £15 billion (25 per cent) since 2017 when the NSTA introduced a baseline estimate of £59.7 billion (over $72.7 billion) and set a target of reducing costs by 35 per cent to £39 billion (about $47.5 billion) by end-2022.

Pauline Innes, NSTA Head of Decommissioning, remarked: “Delivering potential savings of £15 bn during a short period marked by extremely turbulent economic conditions should give the sector confidence as it looks to the future. The decommissioning market is worth tens of billions of pounds in the UK alone. Our industry is demonstrating that it can complete projects safely, efficiently and economically in the North Sea, and that places it in a strong position to compete for what is a big international prize.”

The NSTA explains that the decommissioning of offshore oil and gas installations is required by law “but has long been an expensive and lengthy process.” However, the introduction of the target coupled with the industry’s “ability to learn from experience, share lessons and execute projects more efficiently has been hugely effective,” according to the UK regulator.

The regulator underlines that the “highly ambitious” 35 per cent target was always intended to be “challenging and the significant savings” already delivered “greatly benefit” companies, which can invest more in production and emissions reduction projects, and taxpayers by reducing the cost of decommissioning tax reliefs to the Exchequer.

Furthermore, the industry made “swift progress” in the first two years of the target, cutting the estimate by 17 per cent, and while that has slowed, partly due to the logistical and economic pressures of the Covid-19 pandemic, progress has continued, says the NSTA. Moreover, the regulator underscores that the scale of reductions to the estimate is reflected in the final costs of completed projects, which are on average 20-25 per cent lower than initially predicted, over the five-year period. 

In lieu of this, decommissioning expenditure totalled £1.2 billion (around $1.5 billion) in 2021, lower than the forecast £1.4 billion ($1.7 billion), due to improved project execution and Covid-related deferrals of activity. The NSTA claims that this was a “sizeable investment in the face of unprecedented logistical and economic pressures,” pointing to the industry’s determination to carry out planned work and meet its decommissioning obligations.

The UK regulator expects the decommissioning spend to ramp up to a peak of more than £2.5 billion (more than $3 billion) per year over the next two decades, offering a “long-term opportunity for the supply chain to develop cost-efficient services and win more work overseas.”

Although, improving performance on costs is likely to be challenging in the short term due to market inflation and competition for resources from other energy sectors, based on NSTA’s report. Due to this, the report calls on the industry to redouble its efforts, ensuring that it plans effectively, collaborates on innovative commercial models, deploys new technologies and, where possible, reuses and repurposes infrastructure – all of which are priority areas in the NSTA Decommissioning Strategy.

In addition, repurposing infrastructure for energy transition projects, including carbon storage, can also make a significant contribution to the UK’s drive to net-zero, explains the regulator. The NSTA feels encouraged after well-decommissioning campaigns, “which deliver better value and fewer emissions,” have gained traction in the UKCS, as shown by recent, longer-term contract awards.

The UK regulator is also harnessing data and digital solutions, such as the Energy Pathfinder portal, Decommissioning Data Visibility pilot project and Suspended Wells application, to provide suppliers with a much clearer picture of upcoming work, “giving them the confidence to invest in skills and technologies.”

Additionally, as the 2017 target helped to sharpen the industry’s focus on costs, the NSTA is providing “fresh impetus” by engaging with the sector to launch a new baseline estimate and cost efficiency target, effective from the start of 2023.

“The sector must not lose focus and allow inflation to drive up prices. Now is the time to build on the progress already made. The NSTA is determined to help the sector pick up momentum, including through the introduction of new estimates and targets,” concluded Innes.

The UK regulator confirms that a final report on progress against the 35 per cent target, which expires at the end of 2022, will be published in mid-2023.

In other news related to the NSTA, the UK regulator appointed a new Chief Executive last month, which will replace its current one, who is due to leave at the end of the year.

The new boss is expected to support the industry on “vital projects” involving electrification, carbon storage, energy hubs and exploration.