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Oil crisis creating ideal conditions for decommissioning in APAC region

Fri 17 Jun 2016

Oil crisis creating ideal conditions for decommissioning in APAC region
Discussion of decommissioning opportunities has tended to focus on the North Sea, but opportunities are growing in Asia and Australasia

An interesting blog by Mark Casey, director/principal subsea consultant at Odyssey Consulting Services, recently appeared on the Subsea Energy Australia website. In his blog, Mr Casey noted that, because of the low oil price and the crisis in which the offshore oil and gas industry currently finds itself, with engineering companies offering breakeven rates in an attempt to survive, marine construction/diving companies offering vessel day rates none of us thought we would see again and ageing assets becoming non-economic due to low output, the low oil price and high maintenance costs, it might be that decommissioning’s time really has come. “Never let a serious crisis go to waste,” said Mr Casey, suggesting that the time might be ripe for ageing producing assets that are not currently viable to be decommissioned.

“What is clear is that the timing looks right to take advantage of the current crisis and at the same time keep our offshore contractors afloat, because one day soon, we will want them to still be around when we need competitive rates to execute that next project,” said Mr Casey, noting that, as of 2000, it was estimated that there were 950 offshore platforms in Asia and 17 in Australia and that, in the last decade, every year, approximately 86 new offshore platforms have been installed in Asia Pacific (APAC), resulting in the total number of offshore structures almost doubling to 1,732 by 2014. A study on the age of the platforms shows that about 48 per cent are older than 20 years and 12 per cent have already reached 30 years of age.

New rules are being introduced to accelerate decommissioning activity in Asia, national regulators revealed at the Decommissioning and Mature Wells Management Conference in Kuala Lumpur in December 2015. Malaysia wants to see 50 wells decommissioned in 2016, with 20–25 firm candidates already slated for either partial decommissioning or suspension, Shahril Mokhtar, a team leader at Malaysia Petroleum Management (MPM), the regulatory body for the country’s oil and gas industry, told the conference.

With 65 per cent of Malaysia’s 300-plus platforms aged 25 years or more, it is no surprise that Petronas and MPM will be pushing operators to begin the end-of-lifecycle process. Asia is home to more than 1,750 oil and gas assets, according to Amila Zawawi, senior lecturer at the Universiti Teknologi Petronas, a private university and a subsidiary of the state oil company. Decommissioning these assets will cost anywhere from US$30 billion to US$60 billion, she said. Some 85 per cent of these assets are in Indonesian or Malaysian waters, and more than half of them are at least 20 years old.

Northwest Java, for example, is home to 223 offshore platforms, 46 per cent of which were built before 1985. Thailand, which is notorious for mercury contamination throughout its oil and gas production process, will soon be facing even greater challenges on its 619 platforms, 321 of which are aged 20 or more. In Australia, there are estimated to be about 60 decommissionable structures out of about 7,000 worldwide, but as always, there is no firm deadline by which a platform has to be dealt with. A structure that is producing at a low level often slides in and out of profit as the price of oil changes on world markets.

“In the next 25 years, it is estimated that 100 offshore oil production installations will need to be decommissioned in Australia, with an anticipated cost in excess of A$1.2 billion,” Mr Casey said. “Australia has limited experience in these types of operations and, to date, no mega installation has reached the end of its useful life and been decommissioned. It is evident that decommissioning operations will become more prevalent and have a higher profile in the coming years.

“Obviously, the main concern operators have with decommissioning and abandonment (D&A) programmes is clearly apparent and felt by every operator – the lack of return on investment (ROI). It is obvious that operators produce revenue during the operational phase and that D&A presents a significant cost that produces no revenue. As these costs have seen a significant increase over previous decades, operators are faced with an important challenge of accurately estimating the final price tag for D&A projects,” Mr Casey said. “Operator experience with D&A in the APAC region is generally limited, adding to this cost uncertainty, even in the current environment where vessel and engineering rates are low.

“As seen in the Gulf of Mexico, regulation is the predominant factor for kick-starting D&A projects. This trend is no truer than in Asia Pacific, where regulators are either beginning to enforce regulations or are in the process of developing them for future release. The process of decommissioning continues to be hampered by the lack of clear and specific regulations from national authorities, and in some cases, the added complication of excessive red tape. In essence, there is no legal onus on operators to decommission facilities, even if market forces are favourable.”

As he noted, in 2014, a survey was undertaken interviewing experts in the APAC offshore decommissioning business, principally to gauge their views on the issues going forward. In the survey, 87 per cent of experts said that decommissioning will be a huge challenge for the oil and gas industry in APAC. The challenges that respondents identified when moving forward with decommissioning in APAC included unclear regulations and no interactions with regulatory bodies, untrained and inexperienced staff, inaccurate estimations and evaluations (costs and risks), a lack of suitable and experienced offshore companies for decommissioning in Asia Pacific and funding issues for decommissioning projects.

As Mr Casey also noted, the latest Douglas-Westwood (DW) North Sea Decommissioning Market Forecast 2016–2040 predicts that the UK will dominate decommissioning expenditure. Costs could exceed US$50 billion using current removal methods. DW anticipates that 146 platforms will be removed from the UK during 2019–2026 – 51 per cent of all UK platform removals over the forecast. This is due to the high number of ageing platforms in the UK, which have an average age of over 20 years and are uneconomic at current commodity prices as a result of high maintenance costs and the expensive production techniques required for mature fields. However, many of the largest platforms will remain in place until the 2030s, mainly due to tie-backs that have increased production late in life.

In contrast, Mr Casey said that the Asia Pacific region has been a “bystander” amid a flurry of global decommissioning activity, but the slow pace of global economic recovery and ageing infrastructure has some operators reconsidering their options.

“Experts have been predicting a regional spike in decommissioning for several years. It was noted as long ago as 2010 that a significant percentage of the more than 1,700 offshore installations in Asian and Australian waters had exceeded or were close to exceeding their intended lifespans. There are signs of growth in the Asian decommissioning sector, led by Malaysia, where two possible subsea and early production systems have been earmarked for decommissioning, and in India, where thousands of onshore and offshore wells will need to be abandoned.”

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