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North Sea oil platform
Image: Stig Nygaard

Decommissioning – the next disaster in the North Sea?

A combination of low oil prices and rapidly depleting oil fields resulted in the North Sea losing money for the first time in 2015/6.  Last year, 10 oil and gas fields ceased production.  This year industry insiders predict that a further 50 will be abandoned – a collapse on a scale that nobody predicted.

This raises two important environmental and economic questions: who is going to clear up the mess; and at what cost?

According to Kiran Stacey and Alan Livsey in the Financial Times:

“Between now and the mid-2050s, around 470 platforms, 5,000 wells, 10,000km of pipelines and 40,000 concrete blocks will have to be removed from the North Sea.”

Much of this work has been brought forward by rising costs of extraction coupled to low oil prices:

“The industry has always known that it would have to decommission ageing platforms, but the process has been accelerated by an oil price that has crashed from $115 in the summer of 2014 to around $50. This has left half of the operators in the North Sea — the most expensive place in the world to drill for oil — running at a loss.”

The estimated cost of decommissioning is between £30bn and £60bn.  This figure will rise considerably if a large part of the decommissioning is brought forward because of the rising operating costs:

“These companies face a difficult decision: should they continue to produce oil and gas at a loss, hoping to make the money back if and when the price rebounds or do they pack up altogether, incurring millions of pounds of decommissioning costs in the process? It is prohibitively expensive to come back and start drilling once a well has been left, so any decision to leave is final.”

Nor has anyone seriously considered how to go about decommissioning on this scale.  Back in the days when the industry started, it was simply assumed that someone else would figure it out at a later date:

“Part of the problem is that few companies have attempted it, especially in conditions like those in the North Sea, where waves can swell to 40m high…  Another brake on the process is the fact that companies make no financial return from taking apart a platform and so many are hesitant to make the decision. Operators are legally obliged to take down platforms at some stage but with the oil price fall putting pressure on balance sheets, many are delaying for as long as possible.”

Under UK law, the government is pledged to pick up half of the cost of the cost of decommissioning (and unlike Norway, the UK government did not set aside earnings in a sovereign wealth fund; so this cost will fall on an already beleaguered economy).  Given that North Sea oil and gas was the main source of income that successive governments have relied upon to pay for such things; this may well lead to serious political objections.

The wider worry is that the energy companies may simply renege on their part of the deal.  While the big energy giants are unlikely to do so, more than 100 smaller North Sea operators – whose value is now less than Marks and Spencer may take advantage of limited liability and declare themselves insolvent.  Were this to happen, the British taxpayer may see the decommissioning bill rise well above the £1,000 or so each that is currently predicted.

The alternative would be to leave the infrastructure and equipment where it is (something that is illegal under international treaties)… with horrendous consequences for the North Sea environment.

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