Decommissioning update - April 2017

Shell has presented its plan for decommissioning the Brent oil and gas field to the UK Government. The Brent field is a 50/50 joint venture between Shell and Esso, and it is one of the largest fields in the North Sea, having produced about 10% of total North Sea production during the past four decades.

Decommissioning the field will be a major infrastructure project, expected to take ten years. Shell's plan is being closely watched by the industry because it is the biggest North Sea field to be dismantled so far, with hundreds more to follow.

The Decommissioning Plan

Shell's draft Decommissioning Plan proposes to plug and make safe the wells, remove the upper parts of the four Brent platforms and remove 'attic oil'. However, it would leave behind the supporting concrete legs (made of thick concrete reinforced with steel bars), and 64 subsea storage tanks, known as cells, and drill cuttings contaminated with oil. There are considerable technical challenges associated with removing these major installations. That said, the decision to leave much of the infrastructure in place has already proved controversial, with WWF Scotland registering objections.

OSPAR derogation

Decommissioning is a heavily regulated process. The Department for Business, Energy and Industrial Strategy (BEIS) regulates decommissioning of offshore installations and pipelines, with the Oil and Gas Authority (OGA) fulfilling this function on behalf of the Secretary of State.

The UK has legal obligations under the Convention for the Protection of the Marine Environment of the North-East Atlantic (OSPAR). Under OSPAR, the general presumption is that operators must completely remove and dismantle oil and gas installations at the end of their operational life. Any decommissioning plan which proposes to leave equipment in place requires a specific derogation. OSPAR makes provision for derogations for particularly challenging infrastructure, such as steel installations weighing more than ten thousand tonnes in air, or gravity based concrete installations (as is used in the Brent field).

Owners wishing to seek a derogation must deliver a fully evaluated and reasoned Comparative Assessment (CA), showing there are significant reasons why leaving in place is preferable to re-use, recycling or final disposal on land.

All the Brent installations are derogation candidates under OSPAR, and Shell has prepared a CA for each one. Considerations for the CA include balancing the safety risks, technical feasibility, societal impacts, environmental impacts and cost of each viable option. The assessment has to start from a baseline of complete removal. There is no outright hierarchy between the different considerations, although options where the safety risks are intolerable or involve major unacceptable impacts may be ruled out without further consideration.

Shell have concluded that the legacy effects offshore of leaving the installations in place would either be transient or confined to areas within 2 km of the platforms, and in both cases would not be likely to result in noticeable negative impacts at a regional level.

What happens next?

At the request of stakeholders, Shell has extended the public consultation period from the statutory 30 days to 60 days. The consultation closes on 10 April 2017.

During this period, the UK Government will also start its consultation with the other OSPAR Contracting Parties - Belgium, Denmark, Finland, France, Germany, Iceland, Ireland, Luxembourg, The Netherlands, Norway, Portugal, Spain, Sweden and Switzerland, together with the European Union. BEIS will then take the decision on whether to grant the derogation, in light of the OSPAR consultation.

It is expected that BEIS will grant the derogation.

Rig to reef debate

The environmental debate relating to decommissioning has not yet reached consensus. There are many who argue that a 'rig to reef' concept is appropriate for all offshore infrastructure (not just the heavy / difficult parts which can currently benefit from derogations).

Sir Ed Davey, former UK energy minister, and Jonathon Porritt, the environmentalist, wrote in The Times last month that abandoned oil and gas infrastructure could serve as artificial reefs if left in place. They cite evidence that the foundations of oil and gas platforms and wind turbines, rather like shipwrecks, can provide important habitats for valuable marine species, and suggest that the (vast sums of) money saved should instead be spent on environmental measures.

Other regions have taken a much more permissive attitude to rig to reef particularly in the Gulf of Mexico.

The OSPAR Commission is expected to review its current rules and decisions in 2018, and the offshore industry may take this opportunity to challenge the current rules on decommissioning. However, the OSPAR Commission and its five main committees have not yet publicly expressed any support for rig to reef. At the OSPAR Offshore Industry Committee (OIC) meeting last month, the OIC did not consider the rig to reef argument or discuss any proposals to relax current decommissioning rules. The OIC resolved to form an expert panel to examine the current decommissioning rules in more detail, but it is not yet clear what this panel's scope of work will be. On this basis, the rig to reef argument does not appear to be a current priority for the OSPAR Contracting Parties, and it seems unlikely that OSPAR will depart from the current rules in 2018.

Lessons learned on stakeholder engagement

Shell has learned from difficult past experience. In 1991 Shell tried to decommission its Brent Spar platform by deep sea disposal, and indeed the UK government approved this method. However, the plan prompted major protests NGOs and the media, including boycotts of Shell petrol stations, and objections from foreign governments. Shell was forced to abandon the plan, eventually towing the Brent Spar to Norway, where she remained until 1998. Brent Spar was broken into five sections in an operation costing £43m, compared to £4.5m cost of at-sea disposal. Shell's own dossier on the Brent Spar notes that although its evidence base strongly supported the concept of deep sea disposal being the 'best practicable environmental option', Shell recognised that it had to do business differently in terms of how it communicated and engaged with other stakeholders. This approach to consultation can be seen in the plans for Brent Field, which have involved wide consultation and peer review.

What does this mean for the industry?

The Brent field decommissioning process is being closely followed. Decommissioning activity has been delayed in the UKCS, partly because the high oil price between 2011-2014 allowed mature fields to keep producing economically. This is no longer the case, given the prolonged period of low oil prices and significant cost pressure on the North Sea industry. There are more than 250 fixed installations, in excess of 250 subsea production systems, 3,000 pipelines and approximately 3,650 wells, all of which must be decommissioned.

Five other decommissioning programs are currently under consultation, with many more expected to follow. If a derogation is granted in the Brent case, allowing the infrastructure to remain in place, it would provide great comfort to other North Sea asset owners. It could also affect the financial provision being made for decommissioning across the industry.

Shell's North Sea sell off

Decommissioning liability is also sharply relevant in M&A activity in the North Sea. Oil majors are selling out of North Sea assets as they approach the end of their working life.

In February 2017, Shell sold a large part of its North Sea oil fields for USD3.8 billion (£3 billion) to private equity-backed oil group Chrysaor. The assets sold accounted for more than half of the company’s North Sea oil production last year.

The decommissioning costs associated with the package are currently expected to be USD3.9 billion, of which Shell will retain a fixed liability of USD1 billion, and Chrysaor will assume the remaining liability. The decommissioning may not take place for more than two decades.