The most recent Decommissioning Cost and Performance Report published by the North Sea Transition Authority (“NSTA”) on 9 August 2023 showed that the total cost estimate for decommissioning remaining oil and gas infrastructure on the UK Continental Shelf (“UKCS”) is over £40 billion.
Since these reports started being published in 2017 they have shown a trend in the estimated total costs of decommissioning declining and heading in the right direction for reaching the NSTA’s target to reduce the estimated total cost of decommissioning to £33.3 billion by the end of 2028. Although the ambitious 2022 interim target to reduce decommissioning cost estimates by 35% of the base line estimate of £59.7 billion was missed, £40 billion still represents a 25% reduction since 2017.
Another key metric reported by the NSTA is the actual spend on decommissioning – £1.6 billion in 2022 – is the highest annual total to date. Whilst increased spend is indicative of increased activity in the sector, there are other factors contributing to this total including, for example, pricing in the market and inflation.
The NSTA have noted that, as a result of such market conditions, the 2028 target will be challenging and have said: “Industry must maintain its focus on performance, collaborate effectively and urgently commit to decommissioning plans to achieve further cost-efficiencies.”
There are a huge number of challenges and opportunities which will impact progress towards this target in the coming period; a few to mention are as follows:
1. The relief for decommissioning spend seen in respect to other taxes has not been replicated in respect of the Energy Profit Levy. It therefore remains to be seen whether this will lead to decommissioning spend being deferred (possibly in favour of other spending) with the possibility of losing out on cost efficiencies and incurring additional costs meantime.
2. Industry has raised concerns that there may be a shortage of rigs and other critical infrastructure in the UKCS as a result of the financial impact of market conditions. This would impact on both decommissioning activity and also renewables projects.
3. The NSTA have referenced the need for industry to continue collaborating effectively to meet the 2028 targets; as assets mature and the decommissioning market becomes more active, there may be an increased appetite for more innovative structures and models to perform that decommissioning.
4. The shift in market factors such as pricing and inflation coupled with the maturity of the UKCS assets presents an interesting challenge in the context of security for decommissioning provided by the industry. It might be expected that the decommissioning plans used to calculate the amount of security on an annual basis will face closer scrutiny. This may lead to increased engagement in joint ventures considering the most cost-effective means of carrying out decommissioning.
5. Generally speaking, due to the impact of increased rates of inflation, the industry has seen significant increases in the amount of decommissioning security that requires to be posted across the basin. As a result, in April 2023, Offshore Energies UK (“OEUK”) released guidance on inflation and discounting, suggesting some amendments to DSAs to align the basis of revenue and cost inflation and discounting. As stated in the guidance note, the revisions are advisory in nature and it is left for each group of joint venture and related parties to consider the merits and risks of adopting the suggested changes. Again, this focus at joint venture level may have a knock-on impact to the question of the cost of decommissioning across the industry.
The upcoming OEUK Offshore Decommissioning Conference scheduled to take place in November 2023 will provide an opportunity for the factors impacting the industry to be explored. The theme for the event this year is “delivering decommissioning – sharing opportunities, ideas, successes, challenges and lessons to explore how operators, regulators and the supply chain can collaborate to support safe, efficient and effective decommissioning.” There will certainly be plenty to discuss.