Decommissioning spend set to overtake N. Sea investment by 2019 as crude oil price slump goes on

Jurassic-rig2Historic high oil price enabled North Sea operators to extend field life and delay decommissioning time and time again.

But today’s how Brent crude oil price (current sagging at below $50-barrel – and forecast to dive to $20 barrel by Goldman Sachs, the US merchant bank – has brought into stark relief that this cannot continue indefinitely;

A new analysis by Edinburgh-based Wood Mackenzie forecasts that while a small number of decommissioning projects have been completed to date, decommissioning activity and spend are forecast to accelerate over the next five years as mature fields are no longer economically viable in a low oil price environment.

Already the North Sea oil industry and supply chain has shed 65,000 jobs in the UK since June 2014 when crude prices began their 60% fall to today’s sub-$50-barrel mark.

Fiona Legate, UK oil exploration research analyst, said: “In 2015 operators have reacted to the low oil price environment by deferring spend and delaying sanction of new developments. We have analysed the impact of the low oil price on decommissioning activity looking at the timing of cessation, retained decommissioning liabilities from previous deals and batch decommissioning.”

Wood Mackenzie forecasts that around 140 North Sea oil fields will cease over the next five years even if oil prices return to $85-barrel.

Legate added: “However we may see around 50 fields ceasing even earlier than expected if the oil price returns to a level around $70-barrel. This is compared with 38 new fields that are expected to be brought onstream in the same time.

“Some 17 fields are expected to be commercially-approved over the next five years but at current crude oil prices, there is a risk projects may be cancelled or delayed. We could start to see a shift away from work in new developments to decommissioning projects.”

And with a shift in activity, so too would be a corresponding shift in spend. Legate added: “We expect around £54 billion (in nominal terms) will be spent on decommissioning on the UKCS and anticipate it to be completed in the early 2060s.

“Decommissioning spend is expected to increase by over 50% by 2019 and will overtake development spend in the same year.”

There have been announcements of five fields to be retired early this year, none of which have come as a surprise. The fields most likely to be decommissioned are uneconomic without high oil prices to justify escalating maintenance costs and declining production which are unable to support the high operating costs.

A total of 30 North Sea oil fields have been abandoned to date and companies have gone through a steep learning curve. The costs assumptions for decommissioning projects are higher than estimates from 10 years ago and more strict plugging and abandonment rules have also driven up well abandonment costs.

In fact with decommissioning costs top of mind for mature assets, it’s become more common for sellers to retain decommissioning liabilities as is the case with fields such as Beatrice, Heather and Kittiwake. “Buyers want to protect themselves from the burden of decommissioning liabilities, especially on mature assets.” said Legate. 

oil 50 barrelMeanwhile oil traders are waiting to see if US raises interest rates on Thursday for the first time since the financial crisis. If rates rise, analysts expect oil prices to fall as a stronger dollar would undermine demand from importing countries.

But although Brent crude oil is trading below $50 a barrel – less than half its level of June 2014 – the Arab-dominated OPEC cartel has refused to cut output, seeking to recover market share by slowing higher-cost production in the United States.

“We think we are near the floor, but nothing precludes that we temporarily move lower,” BNP Paribas global head of commodity strategy Harry Tchilinguirian told the Reuters Global Oil Forum.

The Paris-based IEA has forecast that production outside OPEC members will fall by 500,000 barrels a day to 57.7 million in 2016. Shale oil production in the US will drop by 385,000 barrels a day next year as a crude price below $50 a barrel “slams brakes” on years of growth, the agency said in its monthly market report.

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