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Wood Mackenzie casts a pall over UKCS

Analysis from the energy consultancy suggests decommissioning rates on the UKCS are due to accelerate rapidly
February 4, 2016

Reduced assumptions on long-term crude prices, coupled with improved clarity on likely decommissioning costs, could result in as many as 140 fields on the UK Continental Shelf (UKCS) ceasing operations in the next five years, according to analysis from Wood Mackenzie.

That rate of attrition could apply even if oil prices return to $85 a barrel; around 50 fields are thought to be at risk well within that timeframe if Brent crude was to settle at $70 a barrel. This implies little leeway for operators even at relatively sound rates - Brent has averaged $96 a barrel over the past five years.

Fiona Legate, UK upstream research analyst for the global energy consultancy, told the IC that operators are starting to abandon the "wait and see" attitude made possible by high oil prices.

The decommissioning process is complex and the potential costs need to be weighed against existing production rates and the amount of tax from any given project that has made its way to the Crown coffers; the last point partly dictates the level of rebates on decommissioning expenses.

The UK government signed off a bill in 2013 designed to provide further certainty on decommissioning relief on the UKCS, thereby unlocking billions of pounds of additional investment - that was the theory, at any rate. By contrast, the Wood Mackenzie analysis predicts that expenditure linked to decommissioning could increase by more than 50 per cent by 2019, overtaking development spending in the same year.

Ms Legate said operators need to weigh up the timing of cessation, while decommissioning liabilities will vary widely across the industry. Research suggests cost estimates for decommissioning projects have been revised upwards, but Wood Mackenzie believes 'batch decommissioning', where a group of fields with shared characteristics are abandoned in concert, could generate savings of 20 per cent on average. A collective take up on this basis would invariably accelerate the attrition rate in the North Sea; little wonder that specialist oilfield service companies such as Gulf Marine Services (GMS) are now turning their hands to decommissioning work in anticipation of an offshore cull.

With billions earmarked for decommissioning expenditure over the next three decades, it's unsurprising that remits for sub-sea specialists within the oil services sector have held up reasonably well, even though exploration/appraisal expenditure on the UKCS has virtually dried up. Prior to the oil price slump, analysts at Rystad Energy had been predicting an annualised growth rate of 15 per cent in sub-sea expenditure through to 2020. Presumably that rate of expansion has been quelled by the oil price slump, but it's an area within oil services that could still warrant exposure over the long run.