Where are we now?

It all sounds simple enough.  The dual objectives of the UK government today in relation to petroleum production from the North Sea are to maximise the economic recovery from domestic reserves and, once the continued recovery of petroleum has become uneconomic, to promote the safe decommissioning of the relevant assets at no cost to the UK taxpayer.

At the heart of these objectives is the inescapable realisation that the North Sea is, to put it politely, a mature production basin with a lot more history behind it than it has life left ahead of it.  This year, in the fiftieth anniversary of the first landing ashore of North Sea gas production, the official estimate is that in excess of 43 billion barrels of oil equivalent have been extracted. 

The challenge facing the industry in decommissioning the North Sea's ageing infrastructure is three-fold:  the technical issues are significant and much progressive learning from experience will be inevitable; the sheer volume of the required decommissioning activity is astounding (figures published by the Oil and Gas Authority (OGA) indicate over 250 fixed installations, over 250 subsea production systems, over 3000  pipelines and more than 3,500 wells); and the current and continuing low oil price environment means producers must balance the need to reserve sufficient funds to cover their future decommissioning liabilities against the ongoing need for cash to support new exploration and production activities.

Over the years the UK government and the industry have together developed a relatively clear yet complex legal, regulatory and financial regime to address the impending business of North Sea decommissioning, building on the raft of various international treaty obligations to which the UK is subject.  In particular, much effort has gone into designing effective mechanisms for providing security for decommissioning costs, ring-fencing that security from the risk of insolvency and providing a reliable basis for the tax offset for decommissioning costs so that they can be carried back and offset against the profits made in previous years. 

And what lies ahead?

In addition to the trilemma outlined above, a number of other specific challenges with North Sea decommissioning are becoming apparent:

(1) Disposal at sea

Some readers might remember the debacle of the Brent Spar from the mid-1990s.  This was a facility which first came into service in 1976, for use on the Brent field as an oil storage and tanker loading buoy.  By 1991 Shell, the operator, believed the Brent Spar to be of limited future value and proposed to dispose of the facility at sea (which was regarded as the safest option from the HSE perspective and also the cheapest solution). Despite the relevant decommissioning plan having received government approval by 1994 Shell had to abandon the proposed disposal at sea in the face of huge public and political opposition (led principally by Greenpeace, which argued (wrongly) that the facility still contained over 5,500 tonnes of crude oil).  Only in January 1998 was a replacement plan announced for the decommissioning of the Brent Spar onshore in Norway.

Shell’s recent announcement regarding the prospective decommissioning of the Brent field and the remainder of the relevant infrastructure could see a return to the rhetoric of the Brent Spar. Shell’s website suggests the best method for decommissioning the Brent Alpha, Bravo and Delta platforms is to leave the gravity base structures in situ and only to remove the topsides. It remains to be seen how achievable this will be, and whether this will generate more protest.

(2) Clean breaks on sale

As petroleum basins mature a producer could want to rationalise its portfolio and sell its interests.  Indeed, a producer responsible for the initial development and early operation of an asset is likely to have long since sold its interests in that asset before the need for decommissioning arises. Not unreasonably, that producer would want to sell the asset with the benefit of a “clean break” and not to have the uncertainty of future decommissioning obligations hanging over it.

Yet under the UK decommissioning regime there is a real risk for the owner of an asset that it will never really be able to rid itself of future decommissioning obligations by selling its interests in that asset, because the UK government reserves the right to come calling years later for a contribution to decommissioning costs if the need arises. This is a real concern to potential sellers even today and in some cases has impacted the prospective sale of mature assets.

It could be however that a recent transaction has signalled a change of emphasis.  In January 2017 Chrysaor paid US$3 billion to Shell for a portfolio of North Sea assets.  As a departure from the obsession with an absolute clean break Shell agreed to retain up to US$1 billion of an estimated US$2.9 billion of liabilities associated with decommissioning the relevant assets.  Some sellers, it seems, have become attuned to the notion of retaining at least some of the liability to future decommissioning costs in order to get an asset disposal over the line.

(3) Delayed decommissioning and increased safety risks

The current prolonged downturn in oil prices continues to impact producers. This reduces the funds available for producers to pay for the costs of decommissioning assets, which in turn also gives them an incentive to apply the most conservative estimates for those costs that they possibly can.  Lower oil prices also mean lower profits and so reduced tax relief pools to offset future decommissioning costs. 

All of this could compel producers to continue to delay decommissioning and to extend an asset's productive life.  There is a danger that extended asset life, coupled with a general drive to make costs savings to boost revenues in a low oil price environment, could compromise the safety of offshore operations. The backlog of maintenance to “safety critical equipment” in the North Sea quadrupled between 2009 and 2015, according to some estimates. The UK government should be anxious to minimise the risk of compromised safety as a consequence of continued petroleum production.

(4) The domino effect of decommissioning

The decommissioning of certain assets in the North Sea could produce an unwanted domino effect because of the high degree of asset integration and interdependence which has become a hallmark of North Sea operations over the years.  The first North Sea fields were developed by installing bespoke assets and as production from those fields declined then ullage in those assets became available and encouraged the development of new satellite fields.   This process has repeated itself, such that today the production, processing and transportation of petroleum is often effected through a complex series of asset interrelationships

It stands to reason therefore that if the assets belonging to a particular field are decommissioned then any satellite fields depending on those assets would face a difficult choice – to develop new assets themselves, to access spare capacity in any other available assets or to decommission themselves.

(5) Decommissioning through federal contracts

A 'federal contract' is one whereby a contractor provides certain defined services to multiple but unconnected parties through a single contract.  This could happen in the context of decommissioning, where a single contractor would be retained by several producers to perform a number of different decommissioning activities.  Such collaboration would enable the contractor to achieve better economies of scale and so costs savings which could be passed back to the producers, and there should also be some improved efficiency of performance as the contractor's learning curve improves over time. 

The problem with this approach however (aside from the usual difficulties associated with the complexity of federal contracts and the risk allocation and multiple interfaces which they entail) is making sure that the benefits achieved as a whole are shared equitably between all the producers.  The contractor's day-rate costs cannot be allocated to the producers on an incurred time-basis, as the last of the producers to be serviced by the contractor should benefit the most from the improved learning curve which has manifested itself.  A formula for the rateable allocation of benefits between all the producers will need to be constructed.

Conclusion 

The UK government has, to date, done well in establishing a regime for the decommissioning of North Sea fields and infrastructure:  despite all of the complexities involved, the legislative regime is clear, comprehensive and predictable, with considerable effort having been made to address the key issues of decommissioning costs security and tax offsets. 

There are real challenges ahead, and the business of North Sea decommissioning has yet to start in earnest.  Only then will true worth of the legislative and financial regime be properly tested.

A lesson could also be learned from the UK experience by other petroleum producing countries – it is never too soon to commence the design and early implementation of a transparent, comprehensive, and reliable regulatory regime for petroleum infrastructure decommissioning, and doing so could be particularly helpful in attracting inward investment in project developments at the start of the life of a new petroleum basin.

This article is the summary of a workshop conducted by the authors in June 2017 as part of the Queen Mary University London Energy Law Summer School Sessions