Multi-operator decommissioning contracts could play an increasingly important role in the decommissioning of oil and gas assets. But the challenges and issues raised can be significant.
In the UK, the OGA recently launched a search for operators to voluntarily participate in a ‘pilot’ multi-operator, well plug and abandonment (P&A) optimisation programme. The objective of the pilot is to demonstrate the cost savings which can be achieved through collaborative working, stimulate work-sharing campaigns and adopt improved execution and contracting models, taking advantage of the current low cost environment. Those companies selected to take part will have the opportunity to participate in a collaborative well P&A programme to be executed in 2018/19.
Those interested in applying to be involved in the pilot programme should contact firstname.lastname@example.org by 10 March 2017. Applicants must be willing to work collaboratively with OGA to help reduce costs not only through economies of scale and repeatability but also by testing factors such as technology application, different contracting and business model adoption, regulatory simplification and long term liability management. Data and lessons learnt from the project will be shared with the wider decommissioning community. A key objective of the OGA in this area is to grow a UK-based expertise in decommissioning services capable of export.
The pilot programme was envisaged in the OGA’s Decommissioning Delivery Programme (available here) and forms a part of the OGA’s general drive towards more collaborative forms of working (collaboration was a key issue in the OGA’s “Lessons Learned” report (available here: Lessons Learned)).
Collaboration in the industry:
Collaboration forms one of the core policy themes under MER: its importance was emphasised in the Wood Review and section 9A of the Petroleum Act 1998 (as amended) defines the “principal objective” as being the objective of maximising the economic recovery of UK petroleum, partly through “collaboration among [relevant] persons”. Consequently, in its paper “Competition and Collaboration” published in November 2016, OGA argues that collaboration has been “elevated from being a matter of general practice to a statutory obligation”. (Please see our Law-Now on this publication here.)
The oil and gas industry is no stranger to collaborative working. Whether through industry initiatives like the Subsea Well Response Project, rig sharing, ‘strategic alliances’ or through other forms of collaboration with the wider supply chain, business models based upon collaboration are becoming increasingly popular.
Indeed, Oil and Gas UK analysis suggests that the sector is becoming more collaborative, with an increase in the “Operator Collaboration Index” score from 5.9 to 6.7 out of 10 between the summer of 2015 and March 2016. Collaboration is becoming increasingly prevalent during the continuing downturn in the oil price. In the context of decommissioning, there is now a statutory requirement for operators to consult with the OGA on their decommissioning plans before submitting them to BEIS for approval and for the OGA to consider and advise the Secretary of State on whether collaboration with other persons could contribute to keeping the costs of the programme to the minimum reasonably practicable in the circumstances.
Multi-operator decommissioning contracts, as the name suggests, are contracts in which two or more operators agree to use decommissioning services for a specific period of time. They have been shown to enable operators to share project costs and reach a more cost-effective means of decommissioning assets. However, they are not without their complications.
Cost savings and remuneration:
Multi-operator decommissioning campaigns provide significant cost savings for individual operators through the sharing of mobilisation/demobilisation costs (for example, rigs, barges and heavy lift vessels). It also allows operators to pool their resources to reduce project management costs, and can allow smaller operators to access rigs or vessels at a time of high demand.
However, particularly for well P&A campaigns, one of the key potential benefits is in the learning curve of the team on the rig – by engaging in a long campaign of repeated work using the same or similar methods, significant efficiencies in operation can be obtained.
One of the hardest things to address in a multi-operator campaign is how to share the benefits of this learning between all the operators. Under a simple day rate mechanism each operator would want its wells to be the last in the queue so the team on the rig is operating with the benefit of the maximum experience with the result that the last wells are likely to be the shortest.
One of the operators will have to go first, but must then be given some of the benefit of the learning curve. However, as all wells are different the parties cannot simply average the total costs across all wells. Furthermore, one would have to take account of particular problems which are specific to a well, rather than resulting from a lack of co-ordination in the team or teething problems with the rig or other equipment. As such, parties may require a fairly sophisticated formula for the remuneration which takes account of all of those matters.
Although multi-operator arrangements can reduce costs, the nature of the arrangements can raise a number of issues for consideration.
(i) Multiple parties: the increase in the number of parties to the contract will itself carry with it increased complexities and time required for negotiations.
(ii) Operator interfacing: the project documents must provide for the interfacing between operators in areas such as financial approval, the timing of infrastructure shutdown and broader issues of logistical planning. One key question is that of scheduling: the parties will have to address what will happen in the event that one operator cannot take its place in the schedule: i.e. whether that operator’s slot will be ‘skipped’, placed at the end of the queue, or whether the entire schedule will be delayed. The scheduling regime should cater for such possibilities to help avoid parties ‘gaming’ the contract.
(iii) Risk allocation: the goal should be to establish a reasonable allocation of cost and risk. It is likely that the services contract will require special provisions to cater for the co-location of multiple party property and personnel, especially during the transition period from one field to the next (e.g. the potential need for indemnities from operator to operator in respect of people/property on board the contractor’s vessel). The service contract should clearly establish responsibility for liability for third party claims (e.g. damage to nearby infrastructure such as platforms and pipelines), especially during transit phases.
(iv) Documentation: each company may have its own policy documents it would normally – in a bilateral contract – expect the contractor to follow. The approach to policy adherence may have to be more collaborative with other operators.
(v) HSE: the infrastructure safety case should already be in place, although it may need updating for the decommissioning phase. In the context of P&A work, the rig will have its own safety case but there will then need to be a bridging document to the operator’s safety case.
(vi) Large, complex infrastructure / platforms: cost savings may be reduced in larger and more complex decommissioning projects, which may require different vessels with enhanced capabilities over those conducting potentially simpler P&A work. Certain work scopes may need significant hardware and/or complex equipment on-board the vessels, reducing deck space and so reducing the efficiency of the campaign.
(vii) Contractor skill set: the nature of multi-operator projects can place considerable responsibility for campaign coordination on the contractor, requiring it to exercise a wider project management role in addition to its technical and operational role.
In many scenarios, the benefits of multi-operator decommissioning contracts are reasonably plain. However, is some cases, in consideration of all the circumstances, it may sometimes simply not be practicable to progress down a multi-operator route.
Although there is an expectation that multi-operator decommissioning campaigns could become increasingly common over the coming years, there remains much for the industry to learn. From that perspective, the OGA’s stated goal of sharing of data and lessons learnt from its pilot scheme with the wider decommissioning community is to be welcomed.