Decommissioning will be the North Sea’s biggest business by 2030
LONDON (Bloomberg) --Graeme Fergusson sees life in the death of an oil field.
Five years ago, the blonde-haired native of Aberdeen, Scotland had a fairly conventional role in the industry, focusing on squeezing every drop of crude from reservoirs in the North Sea. But a brush with the worst oil slump in a generation sent his career on a detour and he’s now more inclined to perform last rites on a field than to keep it alive.
Fergusson is the managing director of Fairfield Decom Ltd., which specializes in dismantling offshore oil and gas platforms. It may not be as glamorous as frontier exploration, but it’s potentially a huge business.
“Over $26 billion is to be spent on UK decommissioning by 2030,” said Paul Main, a Wood Mackenzie Ltd. analyst focused on the upstream supply chain. By the middle of the next decade, companies will be spending more on removing redundant oil and gas facilities than developing new fields in the area, he said.
Historic Slump. When Fergusson became chief financial officer of Fairfield Energy in 2015, the company managed the Greater Dunlin Area of the North Sea. Dunlin was an old field, first discovered by Royal Dutch Shell Plc in 1973, but was still pumping. Then came a historic slump in oil prices, from above $100 a barrel in 2014 to below $30 two years later.
Cheap crude and looming maintenance costs meant the business was no longer viable, Fergusson said in an interview. In June 2015, Fairfield turned off the taps at Dunlin after 37 years of production.
“We had to convert and become something else, which was the beginning of the Fairfield Decom story,” Fergusson said. There was lots to learn because the Greater Dunlin Area, which includes the Osprey and Merlin field, plus associated infrastructure is “as complicated as it can get from a decommissioning perspective.”
Cleaning Up. Dunlin is a concrete gravity-based structure, not dissimilar to Shell’s Brent platforms. On the huge submerged base sits a 20,000-ton structure made up of 30 modules, a drilling derrick, a flare boom and a helipad. Beneath the water are dozens of wells, some of which were drilled as far back as the 1970s.
Fairfield Decom is structured as a joint venture between Fairfield Energy’s parent Decom Energy, Heerema Marine Contractors and AF Offshore Decom. Dunlin’s decommissioning process is about two-thirds complete. All 16 subsea wells have been plugged and abandoned, plus a quarter of the 45 platform wells in the area. The company has removed subsea infrastructure and is now preparing to get rid of the topsides -- the most visible part of an oilfield.
Shell actually built the Dunlin platform, but in recent years oil majors have been selling aging North Sea fields to smaller companies, in some cases also transferring the decommissioning liabilities.
In 2016, the largest companies in the North Sea were not willing to hand over their decommissioning activities to smaller operators, said Fergusson. “The dial has moved massively” since then as companies realize decommissioning isn’t their core business, he said.
The process can be controversial, especially for well-known companies like Shell. The Anglo-Dutch company is seeking to leave the legs of its Brent platform in place, saying that removing them would pose a greater environmental risk. Greenpeace opposes the plan and recently boarded two of the field’s platforms, calling on the company to “clean up your mess!”
Fairfield has yet to submit a final decommissioning program to the government for the field’s concrete legs, each of which weigh as much as the Eiffel Tower.
Business Opportunity. So far, Greater Dunlin is Fairfield’s only decommissioning project, but Fergusson said the company has drawn interest from a number of North Sea players, from which it has “a number of propositions.”
The UK Department for Business, Energy & Industrial Strategy has required operators to set aside 844 million pounds so far to cover decommissioning costs. Fairfield Energy, with its partner Mitsubishi Corp. as a backstop, put in place the funds for the Greater Dunlin Area before the fields ceased production.
The UK Oil & Gas Authority estimates that the total cost of decommissioning in the country currently stands at 49 billion pounds. The government body reduced its estimate this year by 10% from 2018 as improved planning and execution practices resulted in lower costs. The OGA says that there is still “considerable opportunity” for improvements, which would help meet its 39 billion-pound decommissioning cost target.
Decommissioning has typically been done by a number of service providers focusing on different elements of the process, from plugging wells to operating vessels that remove platforms. Fairfield Decom aims to capture this business by offering an integrated approach that will cut costs, Fergusson said. Because companies can offset some of the expense of shutting down platforms against their tax bill, doing it cheaper could also benefit government coffers, he said.
“It’s to everyone’s benefit that we do decommissioning at the lowest possible cost,” said Fergusson. “The taxpayer is clearly on the hook for a substantial portion of this.”
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