Industry view: The budget game-changer
Published: 27 Mar 2015
By Richard Heard, managing director of Strategic Decom, a specialist consultancy which advises companies on the safe, efficient and cost-effective decommissioning of assets.
To say that these are challenging times for the North Sea oil and gas industry is already a cliche.
According to the latest Oil and Gas UK (OGUK) report, falling oil prices have meant that revenues fell to just over £24billion last year – the lowest since 1998.
Together with rising operating costs, this has resulted in negative cash flows of £5.3billion for the basin, the worst since the 1970s.
Last week’s budget was a game-changer, with all the industry experts involved in the current campaign for ‘Maximising Economic Recovery’ (MER) agreeing that the chancellor’s efforts will make a difference.
But what about decommissioning? The scope of decommissioning oil and gas infrastructure remains and will be executed over many years to come. According to the latest estimates, the financial liability of decommissioning all wells, facilities and pipelines amounts to £46billion.
A cost that will be shouldered by oilfield owners and taxpayers alike.
One interesting aspect of the tax reforms announced is that they will benefit operators who are producing oil and gas, are covering their operational costs and therefore actually earning taxable revenues.
So the question hasn’t changed operationally: in an era of low oil prices, are our assets economic or not? And if they are not, what do we do with them?
So the challenge for the operator remains: can they produce economically from an ageing asset which was designed for tens of thousands of barrels more than current oil production rates? If not, how does the prospect of decommissioning fit into economic thinking?
In particular, owners now need to re-analyse the tax relief equation in a lower tax environment, and determine how it affects the case for cessation of production and decommissioning.
For the supply chain, is there any more certainty on the scope and timing for decommissioning? The supply chain needs visibility on prospects and scope to make its own investment decisions. The operators on the other hand really do not want to decommission until the time is right and the budget has just added another term to the economic formula that needs to be crunched to allow them to make such decisions. The budget has not provided any more clarity on the ‘what and when?’ questions which are constantly being asked by the supply chain.
As for the regulators, the new Oil and Gas Authority (OGA) and the Department of Energy and Climate Change (DECC), their challenge in terms of what they can do to assist in maximising economic recovery lives on. Part of this will be to ensure we have the necessary infrastructure in place so the new fields we hope will follow from the budget reforms remain economically attractive to investors.
In an era when external factors such as oil price can change so quickly and radically, the need for a robust decommissioning strategy becomes all the more important. The industry needs a basin-wide understanding of the decommissioning scope and how it will be delivered to respond quickly and effectively to change and, ultimately, deliver on MER.