UK decom cost estimate has fallen 23%

Source: press release, 8 July 2021

illustration: OGA
illustration: OGA

The UK Oil and Gas Authority’s (OGA) 2021 Decommissioning Cost Estimate report reveals a fall of over GBP 13 billion from the baseline GBP 59.7 billion to GBP 46 billion, marking steady progress towards the GBP 39 billion by end-2022 target called for in the 2017 report.

This year’s GBP 2 billion (4%) reduction contributes to a total cut of 23% thus far, an average of almost 6% a year, and industry needs to maintain this level to cut the total cost by 35%.

Importantly, the reduction seen in the forecast estimate has been broadly matched by a 20% cut in the costs of completed decommissioning projects. Actual decommissioning expenditure in 2020 was GBP 420 million lower than estimated the previous year, in comparison to a GBP 170 million reduction in 2019 and GBP 432 million in 2018. The 2020 reductions were largely due to deferral of activity as a consequence of COVID-19 and the low commodity price.

The decommissioning industry is demonstrating a growing culture of continuous improvement, allied to knowledge-sharing and learning from experience which is helping it to reduce costs despite the fragmented nature of the market which has historically made collaboration difficult.

The report makes it clear that industry must maintain the pace of cost-cutting because the opportunity is immediate; the next 20 years is when most decommissioning will take place and when the reductions must be made.

The OGA’s recently-published Decommissioning Strategy warns that the industry must change its commercial practices to prevent higher costs and focuses on four main strands to achieve savings – planning for decommissioning, commercial transformation – encouraging the supply chain to be more proactive in soliciting work, supporting energy transition from late life into decommissioning, and technology, processes and guidance.

Since 2017 reductions of 25-35% have been achieved across three of the largest cost categories – well decommissioning, removals and subsea infrastructure. Well decommissioning alone represents 45% of the total cost estimate and removals a further 25%; and these two categories account for more than GBP 10 billion of the overall savings to date.

However, despite the overall positive performance, reductions have begun to slow, and if it continues at the same pace as the past 2 years, the ambitious target will be missed. Therefore, there is a clear need to build on what has already been achieved by capturing remaining opportunities from collaboration and aligned, incentivised contracting.

The OGA has recently relaunched the Energy Pathfinder website which details a large and growing number of opportunities for contracts and which encourages collaboration in all projects, including decommissioning work.

The 2021 Estimate notes that there are a number of opportunities to bring about further cost reductions, including:

  • Industry mainstream adopting campaign and proven collaborative models.
  • Creation of an environment and culture of stability and certainty.
  • Increased sharing of lessons-learned and good practices through improved communication, engagement and stewardship.
  • Updated late-life operating models.

But it also notes the primary risks to continuing to bring down costs, which include:

  • Operator commercial misalignment or lack of collaboration.
  • Poor performance.
  • Delayed activity planning.
  • Lack of real-time visibility of decommissioning during execution.
  • Oil sector cost inflation.

Stuart Payne, OGA Director of Supply Chain, Decommissioning and HR, says, “The industry is responding to the challenge to cut costs well, but it must maintain focus and increase the pace to hit the 35% target. The prize is significant for industry and the exchequer. So far around GBP 13 billion has been potentially saved and there are billions more up for grabs.”

“We will continue to help; benchmarking costs and promoting best practice; robustly holding operators to their regulatory commitments and providing tools like the improved Energy Pathfinder site which has multiple opportunities for collaboration and innovation. We will also work to bring companies together – because collaboration and knowledge-sharing is key, companies must continue to step up and collaborate in this area,” Payne continues.