As the UK weathered Arctic conditions last month, the key players in the decommissioning sector gathered in snowy Bergen at the ninth annual conference organised by the Norwegian Petroleum Society. Was the chill at home reflected in the atmosphere inside the conference?
One possible reaction to the steep falls in the oil price over recent months might have been an acceleration of plans for cessation of production from North Sea fields and therefore an upturn in decommissioning activity.
However, neither DECC nor the NPD reported any sign yet of such a shift – it seems that the industry is watching and waiting to see if the price rebounds. The early signs of deflation in costs will also be a factor in the economics of continued production.
Of course, programmes already under way continue to provide significant workflows for service companies in the sector, and the complexities of removing these large and venerable installations – Ekofisk (as part of a major overhaul of this still important asset), Frigg, NW Hutton, Miller – were described by the contractors and operators involved with great pride with regard to the high levels of health and safety performance achieved and the engineering ingenuity that they demonstrate.
What was apparent was that the plans for increasing the industry fleet of heavy-lift vessels – which play a large role in decommissioning and which have been in short supply at times – are being delayed or even stymied by difficulty in obtaining finance.
The five projects on last year’s agenda were down to three this year, and all three admitted that financing was an issue. Capacity constraints in this sector may, however, be reduced by the postponement of development projects.
The difficulty in predicting the precise timing of cessation of production has long been a significant obstacle for companies considering investment in decommissioning facilities, and some expressed the view that service companies could not survive on decommissioning activities alone and should always seek to have a diversified service offering.
This is achievable for some. For instance, Aker Solutions presented its buoyancy system which can be used to float old jackets up from the seabed prior to towing to shore without the need for a heavy-lift vessel but which could also be used to float and instal subsea assemblies.
It is harder perhaps for others, such as those providing the ultimate disposal of items removed from the seabed.
In conjunction with the meeting, a work group established by Scottish Enterprise agreed on the establishment of a new body to represent the North Sea decommissioning supply chain.
Perhaps this may provide a better means of communication between the operators and the service companies as to future decommissioning plans to encourage the service sector to invest with more confidence.
One of the most interesting comments at the conference was from Keith Mayo, of DECC, who queried whether, in future, there would be a shift by the authorities towards low-carbon decommissioning.
If he is right about this then this may counteract the pressure from the environmental lobby to work towards total removal of all vestiges of production.
Currently, under international legislation, all oil installations must be removed, with exceptions only for the older and larger steel jackets and concrete structures, but there are no international rules yet in place for pipelines or cuttings piles.
We have previously suggested that, as technology advances, it may become practical to remove even the concrete gravity-based structures and that the current derogation may come under threat.
However, even where the technology exists, if it involves a massive use of energy, it may, on balance, be found not to be in the best interests of the planet to use it.
Similar arguments might apply in the case of cuttings piles and the large amounts of concrete mattressing used to protect pipelines.
One aspect of decommissioning not on the agenda at the conference, but which is being affected by the financial crisis, is the provision of security by those primarily responsible for decommissioning – the field owners – to others who are potentially liable if they become insolvent, including partners, past owners and the Government.
Evidence of the concern around this area is that DECC accelerated the entry into force of the Energy Act 2008 to January 26, 2008, in order to have access to the additional powers granted by the act to demand security at an early stage.
Also, it is clear that letters of credit, which are the principal form of security in use, are harder to obtain – costs are up and demands by issuing banks for cash collateral are increasing – and every pound tied up as security is one pound less which the owners are able to invest in exploration and production.
At the same time as banks are becoming more cautious about lending, their own credit ratings are falling. Since decommissioning security agreements specify the rating of the bank which provides the letter of credit, this may require LOCs to be replaced.
Meanwhile, the volatility of the oil price and changes in costs may mean that earlier estimates of the amount of security to be provided (based, in most cases, on the difference between the likely cost of decommissioning and the remaining value of the field) may be inaccurate. These estimates are redone each year, but some agreements provide for mid-year recalculation in the event of significant changes.
Let’s hope that the industry does not need to test too many decommissioning security agreements over coming months and that the financial crisis eases without claiming many more victims in this sector.
Judith Aldersey-Williams is a partner at CMS Cameron McKenna