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Without cost reduction Asia Pacific decommissioning bill could hit US$100Bn

Fri 09 Feb 2018

Without cost reduction Asia Pacific decommissioning bill could hit US$100Bn
The potential cost of decommissioning in the Asia Pacific region means new solutions will be required

Decommissioning the Asia Pacific’s offshore assets – nearly 2,600 platforms and 35,000 wells – could cost over US$100Bn, and cost reduction is urgently needed

 

Decommissioning in Asia Pacific appears to be a mammoth task for which stakeholders are largely unprepared, according to Wood Mackenzie. Unclear government regulations coupled with a general lack of experience in the region could mean a steep learning curve with high initial costs and potential for mistakes.

Wood Mackenzie’s Asia upstream analyst Jean-Baptiste Berchoteau said “With over 380 fields expecting to cease production in the next decade, the magnitude and cost of work can no longer be ignored. Through learning from global decommissioning projects, the industry can adopt and adapt practices best suited for Asia Pacific’s own set of challenges.”

Wood Mackenzie has identified four levers to cut costs and decommission Asia Pacific on a budget. The first is transferring knowledge between regulators, operators and service sector firms. To establish a functional regulatory framework, it would be more efficient to adopt guidelines and processes already in place elsewhere in the UK or the Gulf of Mexico, rather than reinventing the wheel.

Operators, particularly those with extensive experience in offshore asset retirement, also have a key part to play in helping draft regulations. For instance, Chevron and Shell are already collaborating with Thai and Bruneian regulators respectively through knowledge transfer and pilot project initiatives.

“While the primary focus should be on cutting costs and maintaining health and safety standards, this is a great opportunity for countries in the region to develop service sector expertise through knowledge transfer,” said senior analyst Prasanth Kakaraparthi.

The second is choosing an optimal commercial and contracting strategy. Sound project management and pragmatic contracting strategies are critical to avoid cost blowouts. While the majors have the necessary skills inhouse, other players are expected to use project management companies to help execute the project on a strict timeline and within budget. The three most common contracting strategies – lump sum, unit cost and day rate – are suited to different levels of risk. The well plugging and abandonment (P&A) phase is usually the riskiest, as live hydrocarbons are involved and there is poor availability of data on well conditions. As such, unit cost contracts, where the contractor performs well P&A or facility removal at a fixed cost per unit that includes a margin, appear better suited for projects in Asia Pacific.

Adapting innovative technology is a third way to reduce costs. More recently, the industry has seen innovative approaches to conventional decommissioning with the potential for significant cost savings. For instance, Petronas implemented the rig-to-reef solution on two platforms at the Dana and D-30 fields in Block SK-305 offshore Malaysia in 2017.

Rig-to-reef consists of using the decontaminated platform structures to create an artificial reef at a designated location. In addition to being significantly cheaper, rig-to-reef provides an eco-friendly solution for sustaining habitats for marine life. The technique is particularly attractive at water depths of 10 to 30 m, where reef structures and associated marine life are the most prolific.

Economics of scale could provide a fourth cost-reduction lever. On average, well P&A accounts for half of the decommissioning costs, so any cost reduction in this category will have a significant impact – about 30–50% cost reductions have already been observed in the Gulf of Mexico and the UK on rig daily rate or unit rate contracts. For areas with a large number of ageing wells and platforms, batch decommissioning offers huge cost-saving opportunities. This approach could be extended further across blocks with different operators, with participants jointly contracting for a larger piece of work, thus reducing per-unit costs.

“While the decommissioning situation in Asia Pacific might look grim at the moment, we note that Chevron is taking a proactive approach in the Gulf of Thailand, and we expect the major to set a benchmark for large-scale decommissioning costs in the region,” concluded Mr Berchoteau.

 

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