Revised requirements for disposal of disused offshore installations will ser-iously impact final decommissioning costs. Since the decision was taken at the Oslo-Paris (Ospar) Conference in Sintra, Portugal last year, there has been little debate on the magnitude of decommissioning liabilities and the primary cost drivers. There remain three important issues affecting final decommmissioning costs:
- Impact of the Ospar-Sintra agreement
- Strategic planning impact on decommissioning costs
- Industry capacity to execute decommissioning contracts.
Prior to 1998, the minimum requirement was to remove fixed steel jackets weighing less than 4,000 tons, while larger jackets could be toppled in-situ or partially removed, providing a minimum of 55 meters of clear water was left above any seabed remains.
There was an understanding in the 1995 version of the DTI guidance notes that topsides could be toppled with the larger jackets or emplaced alongside the toppled jacket, though in practice, the additional cost of cleaning the topside and preparing for toppling generally exceeded the cost of removal to shore.
Return to shore
Under the new regulations, there is a presumption that all topsides and steel jackets will be returned to shore, while allowing a case to be made for jacket structures weighing more than 10,000 tons to be removed while leaving the footings in place.
For Holland, Germany and Denmark there is no additional cost associated with implementation, while for Norway, the cost increase is 12% and for the UK 14%. There is a direct impact on jacket removal costs in complying with the new regulations - an increase of 14% for Norway and 22% for the UK.
In money terms this equates to an increase of US$ 219 million for Norway, and US$ 850 million for the UK, over 25 years. While these costs are significant, they will be increased or reduced, depending on the strategic approach to decommissioning and industry's capacity to execute decommissioning projects.
Strategic planning
There is a potential to reduce the overall decommissioning costs by adopting different contracting strategies that allow grouping of platform removal contracts. Implementing a removal campaign, thereby reducing mobilization costs, could produce savings in excess of US$870 million on the UKCS alone.
If a coordinated removal program of the UKCS platforms was extended to involve North Sea inter-country decommissioning planning and operations, the UK costs could be reduced by a further US$ 296 million. There are, therefore, clear financial incentives to encourage a North Sea regional approach to decommissioning planning.
Such collaborative cost savings can however be wiped out in the drafting of decommissioning contracts. A decommissioning contract is not a re-worded construction contract, and yet decommissioning contracts are still being written incorporating a "time is of the essence" approach and penalty clauses inappropriate to the work being undertaken. The result is that contractors factor in increased costs to reflect having to carry such risks.
Industry capacity
Decommissioning contracts will occur over the next 25 years, with peaks occurring in the period 2010 to 2014. The impact of the oil price volatility in 1998-1999 and the structural changes arising as the North Sea region, which develops into a mature producing province, have resulted in a major restructuring of the contracting industry. This a process that continues through today.
The current workload in UK fabrication yards is declining, and it is hard to imagine that all yards will survive. The shortage of fabrication work is matched by low order books for marine contractors.
The great unknown is how far contractor capacity will have declined by the peak de-commissioning periods and what impact this will have on costs. While the actual percentage breakdown will vary from facility to facility, in each case the marine operations and site reception will account for more than 50% of total costs. A generic breakdown of de-commissioning costs is as follows: Marine operations 43%; Reception site/demolition 12%; De-commissioning & shutdown 17%; Well abandonment 14%; Surveys 02%; Engin-eering 09%; Insurance 03%.
Mobilization costs
If marine contractors move construction equipment out of the North Sea to other frontier regions, there will be additional mobilization costs to execute North Sea decommissioning projects.
Again, the closure of construction yard facilities cannot easily be reversed.
The search is on therefore to develop a means of capping decommissioning costs, and to shift the risk of increased costs to counter-parties. To date, this has focused on a search for insurance cover, but this has not materialized and is unlikely to do so.
An alternative approach is that of forward contracts, which means signing a contract today for a decommissioning project in the future. This would allow contractors to build portfolios of future work, which, when combined with flexibility in contract schedules, would permit them to move equipment around the world, sharing mobilization costs across a series of individual contracts. This now becomes the challenge.
Editor's Note: The preceding is a condensation of an analysis appearing in the Quarterly Review of the North Sea Abandonment Market - Volume 3, Number 2. The article was authored by Mike Corcoran.
