Many North Sea operators are considering decommissioning fields earlier than planned

Low oil price speeding up field decommissioning

Low oil prices are forcing some well operators to consider ceasing production earlier than planned to save on operation costs.

Soaring oil prices in recent years have made it cheaper for North Sea firms to continue producing even at the most depleted oilfields despite the expense, rather than face a large decommissioning bill.

However, with oil prices having halved in the last 12 months, some companies are being pressured into limiting their losses by bringing decommissioning forwards, adding to fears of a domino effect in mature areas as more platforms and fields cease to operate, pushing terminal and pipeline costs up for neighbouring fields.

"It's a sign that many of the meetings I'm going to, the first issue on the agenda is decommissioning," Gunnar Olsen, business development director at Total E&P UK, said.

Trade body Oil & Gas UK has estimated that decommissioning expenditure could surpass £2bn in 2018, up from £1bn in 2014, adding that the full impact of the low oil price had yet to be felt and the numbers could rise "significantly" over the remainder of the decade.

Fairfield's Dunlin cluster in the Northern North Sea shut down just last month with chief executive David Peattie citing low oil prices and challenging operational conditions as contributing factors.

"Dunlin will shut five years before plan, which will mean all the other fields going into Sullom Voe (oil terminal) will have increased operating costs," said Olsen, speaking at a Society of Petroleum Engineers (SPE) conference in June.

"The domino effect is now a significant challenge. If some of these fields are shut in, it will affect the whole basin."

Fairfield said the Dunlin Alpha platform would continue to export oil from third parties into the Brent system pipeline until decommissioning gets underway, but the decision puts pressure on its neighbour EnQuest to find a work-around, as its Thistle and Don fields currently export oil via Dunlin.

"The maturity of the UK North Sea has really started to show and with the fall in the oil price, companies are placing a lot more scrutiny on projects and fields and taking a view on whether they can continue to produce economically," said Fiona Legate, a research analyst at Wood Mackenzie. "We expect to see more announcements like Fairfield's."

In the North Sea’s southern gas basin Centrica’s Audrey, Annabel, Ann and Alison oilfields are all in negative cashflow, according to director of UK operated assets Andy Bevington, with revenue of about £5m and operating expenditure of about £31m per annum in total.

The gas from these fields is currently exported via the Conoco-operated LOGGS pipeline system, but this is proving costly for Centrica.

"The A-fields are tied into an historic processing and operating services agreement with Conoco and in terms of the domino effect, that's just a cost share for all the operators, so as they fall away your costs go up and up," he said.

The cost of operating pipeline systems in the UK has shot up in recent years, partly because ageing infrastructure requires more maintenance, but also due to legislative changes.

"That has been quite costly and pipeline operators have passed that cost on to the users. For smaller producers, who have to pay this cost on top of their tariff to use the system, it has been damaging to their economics. So we are likely to see some fields cease production earlier than expected," said Wood Mackenzie's Legate.

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