Decommissioning of offshore operations

28 January 2019

Decommissioning of offshore oilfields is still a fledging industry, but one that will become increasingly important in the coming years.

Around the world there is a raft of offshore oil and gas facilities that are approaching the end of their useful design life or economic operation.

In particular, the huge expansion of oil and gas extraction in the North Sea in the last quarter of the twentieth century is now moving into reverse as the fields slowly near exhaustion.

This is bringing new challenges in terms of what to do with platform facilities – specifically how to decommission and remove them - as international law does not permit the option of just abandoning them (see box).

John Cooper, Senior Partner and Managing Director – Technical, Energy Division at JLT Specialty, says: “We have reached the point in the exploration and extraction cycle where end of life is now becoming a major issue. When an oilfield comes to the end of its life, you can’t just leave everything there.

“The North Sea is where the most end-of-life fields are coming up in the next few years. It is the first large area coming into this phase.”

The Oil and Gas Authority (OGA) estimates that 12 per cent of the fields in the UK Continental Shelf are being decommissioned. 

The Gulf of Mexico will be next to follow but platforms there are not as large and they are in relatively shallow water and closer to the shore, which significantly reduces the challenges of decommissioning.

Financial implications

The OGA published estimates in 2017 for the cost of decommissioning the 250 fixed installations, 3,000 pipelines and 5,000 wells that make up the UK’s North Sea oil and gas infrastructure.

The total cost was estimated at £59.7 billion, although it cautiously trimmed £4 billion off that at the start of 2018. Other experts have suggested this might turn out to be a significant underestimate.

The OGA says it is committed to achieving the maximum economic extension of field life and ensuring that decommissioning is executed in a safe, environmentally sound and cost-effective manner, with a drive to reduce the costs of decommissioning by 35 per cent.

As fields enter the late phase of extraction, fresh investment might be needed and that is when the financial and insurance issues start to emerge, says Cooper.

“They very often change hands as the major oil companies are looking to get out of them as soon as they can. They look to sell them on to a second- or third- tier extraction firm, who are willing to make the investment to extract the remaining oil and gas.”

Regulators take a close interest in funding for decommissioning, especially when oilfields change hands, and insist on understanding where the money is going to come from.

This often results in strain on operators’ balance sheets as letters of credit and surety bonds are demanded by regulators.

“The insurance market has tried to develop policies that will satisfy the regulators that the funds will be available, but has struggled to find a traditional insurance-backed solution,” says Cooper. 
This is largely because decommissioning is a certain event and not a fortuity.

Where insurance kicks in is when decommissioning starts and a number of major risks need to be covered.

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Regulatory authorities in Europe and the US have made it clear that operators are responsible for all the liabilities surrounding decommissioning even though they will be using specialist contractors.

Some smaller platforms may be capable of being transported complete on heavy lift vessels to the ports where decommissioning takes place.

However, the larger fixed platforms pose challenges as they have to be dismantled in situ, requiring specialist ships with cranes capable of lifting huge loads.

The platforms have to be dismantled piece by piece with everything taken to shore-based facilities, which requires dozens of trips.

Cooper adds: “We like to think this is where we can offer cutting-edge solutions covering removal of wreck and liability to third parties, especially the risk of dropping some of the structure onto other pipelines.”

A complex operation

The risk of dropping parts of the structure is one of the major hazards.

At best, it could mean an expensive operation to recover it from the sea bed thousands of feet below; at worst, it could damage or sever another operational pipeline, potentially giving rise to major third-party liabilities, including business interruption.

Some rigs may have very deep footings and, in exceptional cases, the regulators will allow them to be left in place but usually they have to be removed too.

Once removed, the structures are taken to specialist onshore facilities, usually in the UK or Norway.

It is there that any residual hydrocarbons are flushed out and any parts that can be recycled are separated out, although, typically, there is very little salvage value from a decommissioned platform.

The insurance market has been keen to write decommissioning cover, which it sees as a growing area.

The market is fairly soft, especially as it has yet to see any major claims: “It is heavily focused in London. It is not just the UK underwriters taking it on but also the London teams of the major overseas insurers,” says Cooper.

There are also small markets in New York, Houston, Singapore and Norway. Cooper says JLT Specialty is well placed to service the growth: “We have one of the largest upstream [from well to pipeline to storage] energy teams in the market.

“There are around 100 insurance and technical staff in the team and around two-thirds of them are specialists in upstream risks.”

International laws

There are several international conventions addressing the decommissioning of offshore installations.

This has led to a high degree of consistency in the approach of most jurisdictions, although, once some issues get tested in local courts, variations in interpretation could emerge. Conventions include:

  • 4th Geneva Convention of 1958 on the Continental Shelf

  • UN Convention on Law of the Sea 1982 (UNCLOS)

  • OSPAR Convention for the Protection of the Marine Environment of the North-East

  • Atlantic 1992 (a regional convention)

  • London Convention on Marine Pollution and the Dumping of Wastes and Other Matter.

UNCLOS states: “Any installations or structures which are abandoned or disused shall be removed to ensure safety of navigation, taking into account any generally accepted international standards established in this regard by the competent international organisation.

“Such removal shall also have due regard to fishing, the protection of the marine environment and the rights and duties of other States.

“Appropriate publicity shall be given to the depth, position and dimensions of any installations or structures not entirely removed.”

For further information, please contact William Helander, Executive Vice President, on 713-325-7608.

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