KPMG: New strategy needed for North Sea decommissioning activity

Oil and gas operators will have to approach the challenge of decommissioning in new ways if the goal of maximising economic recovery from the UKCS is to be achieved, according to a report from professional services firm KPMG.

In its Decommissioning Strategy: A New Imperative for E&P Firms report KPMG states that adopting a more strategic approach to decisions regarding late life assets could open up significant new opportunities for operators with key outcomes being breaking the log jam in mature asset sales and the creation of potentially new, end-to-end outsourced decommissioning services.

Challenging economics, deteriorating infrastructure, technical limits on further recovery and regulatory pressure mean that change in the offshore industry in mature provinces, like the North Sea, is inevitable with industry forecasts predicting that the pace and scale of decommissioning activity is set to accelerate, KPMG says.

To date, the industry has often treated decommissioning as a technical and cost challenge with much of the discussion revolving around supplier capacity, tax relief, safety and environmental issues. KPMG believes that the decommissioning decisions that operators will make are as important as choices about major development projects and exploration and must take account of factors including asset portfolios, value realisation, business models, and relationships with partners and suppliers.

Fergus Woodward, Energy Partner with KPMG, said: “The Wood Review and the new Oil & Gas Authority (OGA) recognise the real threat that a poorly coordinated and badly executed approach to decommissioning poses to maximising economic recovery in the UKCS if companies operating mutually dependent infrastructure decommission earlier than they might. Operating costs in the basin and low commodity price bring this threat closer.

“In reviewing the decommissioning landscape and options for E&P firms from a strategic perspective, two of our conclusions have important implications for the OGA’s basin-wide agenda.

“By becoming much more innovative about their approaches to selling assets, separating the question of decommissioning liability from the question of asset ownership, companies could help break through the current log jam in mature-asset sales, getting late-life assets into the hands of specialist owners who could operate them more effectively for longer, supporting the goal of maximising economic recovery.

“As assets enter decommissioning, we also see enormous potential for the creation of new, decommissioning service models. Developing these models will accelerate learning and efficiency and allow a much more integrated approach across multiple assets. There is enormous scope for increased collaboration among operators, going beyond information sharing, to develop new models for example in standards related to plugging and abandonment of Wells and other related questions, arrangements for joint campaigns on related assets, and potentially even the creation of new entities to allow common buying of services and execution of end-to-end programmes.

“Getting these things right will require a more focused approach by each company and a broader, more active level of cooperation among E&P firms, service companies, the OGA, and HM Treasury. The potential prize is there, but time is of the essence,” said Woodward.

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