Energy
Production Strategy

May 2016 ... The North Sea's Late-Life Conundrum

Burgess COMMENTARY

Peter Burgess

The North Sea's Late-Life Conundrum

The North Sea is on a knife-edge: the decisions operators face about the future of their late-life assets have never been so crucial – should they continue production, close production or perhaps even sell up?

The economics of the field have undergone a dramatic shift in light of the low oil price era, and in one of the most mature offshore basins in the world, this presents a major headache for industry leaders. But it’s much more than just field economics that impact late life decision-making – a whole host of factors come into play which are being compounded, creating disproportionate levels of uncertainty at a time of dwindling returns.

With signs of early field closures looming, there is a necessity to both protect the future of the North Sea’s production revenue through lowering unit cost, and pinpoint a strategy for cost-effectively tackling decommissioning & abandonment. At the same time, innovative approaches to decommissioning liability must be employed to reignite the stagnant M&A market, which has been stalled by the inability of independent operators to take on such large decommissioning obligations.

The operators that choose to continue production are being forced to develop novel “lean” approaches to production operations. The most forward-looking operators are already well on their way to securing a robust late life operating model. By implementing fundamental changes to their organization they are able to extract maximum value and ensure decisions are made for the life of the field. But just how are operators going about this and what can we learn from those who have already succeeded in initiating such model? And whilst some operators have made knee-jerk reactions to their mature field operations in light of the 60% drop in oil price, how will they unlock the secrets to sustaining this, balancing safety and cost as part of a longer-term view?

The decision to close production is largely driven by two key factors: the need to control reputational risk and the ability to prove that the decommissioning cost “today” is cheaper than the cost “tomorrow”. In an environment of squeezed cash reserves and lack of visibility on the real cost of decommissioning, defining the timeline for close of production (COP), well abandonment and structural decommissioning is pivotal. How can operators build clarity around these late-life landmarks to help reduce risk, optimize scheduling and begin quantifying the “unknowns” well in advance?

In conjunction with all of this, you have a dramatically shifting regulatory landscape: Oil & Gas Authority (OGA) have set their Maximizing Economic Recovery (MER) Strategy into motion, firmly cementing it within UK petroleum law. How this law applies in practice is yet to be seen, though. In particular, what does it mean for operators making the decision to abandon a field? And would the OGA have the power to stop an operator decommission should the infrastructure be interconnected with a producing field? The heavily integrated nature of the North Sea presents a huge challenge for the entire industry as it strives to avoid a decommissioning domino effect and retain the ability to exploit future marginal production.

How do you think the North Sea will handle the question of 'extend or end' late life production?