Decommissioning Insight 2019

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DECOMMISSIONING INSIGHT 2019

A decade of Decommissioning Insights

DECOMMISSIONING INSIGHT 2019

Cover courtesy of Repsol Sinopec Resources UK

Contents 1 Foreword 2 Key Findings

The UK Oil and Gas Industry Association Limited (trading as OGUK) 2019 OGUK uses reasonable efforts to ensure that the materials and information contained in the report are current and accurate. OGUK offers the materials and information in good faith and believes that the information is correct at the date of publication. The materials and information are supplied to you on the condition that you or any other person receiving them will make their own determination as to their suitability and appropriateness for any proposed purpose prior to their use. Neither OGUK nor any of its members assume liability for any use made thereof.

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3 Decommissioning in 2019

3.1 3.2 3.3 3.4 3.5 3.6 4.1 4.2

2019 — A Busy Year for Decommissioning 9

UK Decommissioning in Context

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Expenditure and Activity Overview 14

Ten-Year Expenditure Breakdown Ten-Year Regional Overview Ten-Year Regional Breakdown

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4 The UK's Role in a Global Market

Developing a Strategic Framework

The UK — A Global Hub for Decommissioning Background and History Insight and Cost Trends in Decommissioning The Future — Challenges and Opportunities

5 A Decade of Decommissioning Insight

5.1 5.2

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5.3

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6 North Sea Activity

6.1 6.2

North Sea Well Decommissioning Activity 36

North Sea Topsides Decommissioning Activity

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6.3

North Sea Substructures Decommissioning Activity Forecast UKCS Activity — A Detailed Snapshot Well Decommissioning

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7 The UK in Detail

7.1

OGUK's vision is to ensure the UK Continental Shelf becomes the most attractive mature oil and gas province in the world with which to do business. Read all our industry reports at www.oilandgasuk.co.uk/publications

7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9

Well Decommissioning Cost Performance 51

Topsides Removal

Substructure Removal

Topsides and Substructure Decommissioning Cost Performance

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Subsea Infrastructure Decommissioning 60 Survey Development and Methodology 63

Maturity of Estimates

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8 Glossary

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DECOMMISSIONING INSIGHT 2019

1 Foreword W elcome to the 2019 Decommissioning Insight . Now in its tenth year of publication, it has tracked the emergence of a new phase in the life of the North Sea and reflects the accelerating pace of change across the sector. Ten years ago, only a handful of fields had been decommissioned. Since then we have seen an increasing flow of decommissioning projects in the North Sea, offering operators and supply chain alike the opportunity to develop fresh capabilities at a rapid pace. As the report shows, decommissioning has come-of-age and now is increasingly seen as a normal part of doing business, sitting alongside exploration, new field development and infield investment, presenting its own challenges, whilst creating its own opportunities. Decommissioning expenditure in the UK is currently running at £1.5 billion per annum and to-date, we have decommissioned around 9 per cent of the platforms that have been installed in the UKCS. Yet the total opportunity is much greater; whilst £15.2 billion will be spent on decommissioning assets on the UK continental Shelf over the next decade, the emerging global market is worth a massive $85 billion (£67 billion), over four times larger. The skills this industry has acquired to meet the decommissioning challenge at home positions it well to tackle the emerging global market opportunities. Performance standards in the UK are leading the way, and OGUK’s recently updated Decommissioning Work Breakdown Structure (WBS) guidelines set a global performance framework that many other countries are following. The Decommissioning Insight was first launched a decade ago to improve general knowledge of this activity and to enhance the overall market knowledge; that still remains its purpose today. Ensuring industry’s intellectual capital in decommissioning is shared is key to maintaining the competitiveness of the sector and helping us to become as efficient as possible. We have established a reputation for decommissioning professionally, systematically and to the highest environmental and safety standards, a reputation we must maintain at all costs. Year on year, the industry is delivering a steady improvement in cost performance as demonstrated in June when the OGA published its latest Decommissioning Cost Estimation report. This showed a 17 percent reduction in the overall cost of decommissioning over the last two years, persuasive evidence of the close collaboration between industry and government to deliver the overall 35 percent cost reduction target. These significant cost reductions are a result of operators working closely with their supply chain, openly and constructively challenging each step in the process and learning from the best and sharing with others. The OGA has also assisted by sharing performance benchmarks to help set new norms and it is industry’s intention to continue to build on this approach in years to come.

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It is also exciting to see new companies are emerging specialising in decommissioning, either offering full scope solutions or more specialised activities such as offshore decommissioning of wells and removal of structures or onshore dismantling and disposal. These companies will offer the industry real choices as to whether operators indeed do-it-themselves or pass on the scope to others who may offer an increasingly competitive solution. Business innovation goes hand in hand with technological innovation. The sector is making the most of the facilities offered by the OGTC and the recently opened National Decommissioning Centre, both of which, will play a key part in transferring technology from other sectors and developing innovative solutions. Technology will help the domestic market reach the next level of performance and provide inroads for the industry to support decommissioning in other mature basins round the world. Decommissioning is not the end of our industry; it offers a new beginning. Four years ago, industry stepped up to the challenge to cut decommissioning costs by 35 percent and we are well on the way to achieving that. We must apply the same collective determination and pioneering capabilities to deliver the net zero carbon challenge. Re-use of old facilities for carbon capture and storage presents new opportunities, not just to create new value from old assets but also to help deliver that net zero future that we as an industry have committed to deliver as part of Roadmap 2035. Decommissioning with the net zero agenda at the forefront of our minds will be the next big step; where we lead, others will follow.

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Michael Tholen, Upstream Policy Director, OGUK

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DECOMMISSIONING INSIGHT 2019

2 Key Findings INSIGHT

UK ACTIVITY 12 topsides to be decommissioned per year in the UKCS up to 2025 1,630 wells are expected to be decommissioned over the next decade, a 10% increase from last year Steady workload of This is the tenth annual Decommissioning Insight report Over time the insight reports have established OGUK as the go-to place for decommissioning insights, leading the way in how we understand activity and expenditure in the UKCS Decommissioning now represents just under 10 per cent of the overall expenditure in the UK oil and gas industry

Forecast Expenditure on decommissioning in the UKCS is remains constant at £15.2 billion over the next decade

Pace of expenditure remains steady at around £1.5 billion

per year

Asset stewardship process is aiding accuracy of estimates as the industry matures

While expenditure remains consistent,

activity has increased . Demonstrating that the UK market is becoming more efficient

£1.3 billion is forecast to be spent on subsea decommissioning up to 2028 Over 6,000km of pipelines are to be decommissioned in UKCS over the next ten years

Well Decommissioning makes up 45% of the forecast expenditure

£6.8 billion is forecast

where

to be spent over the next decade

£2.7 billion is expected to be spent on topsides and substructure removal activity a 35% increase compared to last year

~150 wells per year forecast to be decommissioned in the UKCS

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REGIONAL ACTIVITY CNS remains the region withmost expenditure , there is a reduction in the overall activity in this region. Up to 2028: While the

M&A activity is deferring some expenditure in the CNS while other regions see increased expenditure

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Industrialising the process, the SNS sees around

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42% 32% 22% 4%

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of the decommissioning expenditure will be in the central North Sea of the decommissioning expenditure will be in the northern North Sea of the decommissioning expenditure will be in the southern North Sea

platforms to be removed each year up to 2024

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of the decommissioning expenditure will be in the west of Shetland

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GLOBAL HUB

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Expenditure in the UK is expected to make up 28% of global decommissioning expenditure over next decade 43% of the global decommissioning expenditure will be in the North Sea basin As a result: opportunities exist for UK based companies, within the UK, regionally and internationally Just over 660,000 tonnes of substructures to be decommissioned in the North sea, over 340,000 in the UK

$85 billion (£67 billion) to be spent on decommissioning globally over the next decade [Wood Mackenzie] 2,624 wells are to be decommissioned across the North Sea Just over 1.2million tonnes of topsides to be removed from North Sea, almost 880,000 in the UK

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– Facts and Figures – Facts and Figures

DECOMMISSIONING INSIGHT 2019

3. Decommissioning in 2019

In Summary This report is the tenth annual Decommissioning Insight report published by OGUK since 2010. It provides a fresh overview of the emerging and rapidly maturing decommissioning market on the UK Continental Shelf (UKCS) and highlights progress in this growing market. Decommissioning needs to be seen in context; it is part of the natural lifecycle of an oil and gas asset and now represents just under 10 per cent of the overall expenditure in the UK oil and gas industry. The overall proportion of spend committed to decommissioning has risen steadily since 2004, but investment in new infrastructure still far outweighs decommissioning, showing there is still a lot of potential in the UKCS. Cumulative decommissioning expenditure on the UKCS is anticipated to reach £15.2 billion over the next decade— consistent with 2018’s Decommissioning Insight forecast of £15.3 billion. However, despite similar findings, forecast activity across each of the regions in the North Sea has fluctuated this year. Increased merger and acquisition (M&A) activity in the central North Sea has led to a reduction in the expected workload over the ten-year period; in contrast, workloads in the northern and southern North Sea are predicted to increase. Moreover, the 2019 report reveals more work is being carried out for similar rates of expenditure, suggesting efficiency improvements are the source of some of the gains of the past few years. This progress will be instrumental as the industry, supported by regulators and government, strives to reduce future decommissioning expenditure by 35 per cent over the next few years – a fundamental element supporting the policy of Maximising Economic Recovery (MER UK). Decommissioning is an ever-growing market for the UK, and with around £1.5 billion to be spent each year, this represents a significant and enduring opportunity for the UK supply chain. 2,379 wells are expected to be decommissioned in the North Sea over the next ten years 6,234k of pipeline to be decommissioned in UKCS over next decade 2,624 w lls to be decommission d in the North Sea Basin 1,630 of which are in the UKCS nit well costs con�nue to fall across all areas of the North Sea M&A deferring ac�vity in the CNS while NNS and SNS regi ns see an increase in expenditure The UK is the largest global market for decommissioning spend over the next decade 2,379 wells are expected to be decommissioned in the North Sea over the next ten years 6,234km of pipeline to be decommissioned in UKCS over next decade 2,624 wells to be decommissioned in the North Sea Basin 1,630 of which are in the UKCS Unit well costs con�nue to fall across all areas of the North Sea M&A deferring ac�vity in the CNS while NNS and SNS regions see an increase in expenditure The UK is the largest global market for decom issioning spend over the next decade The UK is the largest global market for decommissioning spend over the next decade

billion is forecast to be spent on decommissioning in the UKCS by 2028 billion is forecast to be spent on decommissioning in the UKCS by 2028

10% 10% Decommissioning Insig – Facts and Figures

Decommissioning now represents just under 10 per cent of the overall expenditure in the UK oil and gas industry Decommissioning now represents just under 10 per cent of the overall expenditure in the UK oil and gas industry

Decommissioning will open new markets for the UK supply chain, a key component of Decommissioning will open new markets for the UK supply chain, a key component of M&A deferring ac�vity in the CNS while NNS and SNS regions

ac ac

unit unit

cost cost

see an increase in expenditure

Mee�ng, then bea�ng, 6,234km of pipelin to be

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During 2017, the number

Decommissioning on

3.1 2019 — A Busy Year for decommissioning 2019 has been a notable year from a regulatory and policy perspective in the UK’s decommissioning industry. Whilst the industry has been building capability and expertise at a practical level, there also continues to be a high degree of dialogue with government and regulators alike, which will shape the outlook for the industry at home and abroad. The pace of consultations and industry engagement clearly demonstrates that policymakers are determined to do things diligently and with an appropriate evidence-based approach. National Audit Office Report 1 — At the turn of the year, the National Audit Office (NAO) issued a report on the state of the UK’s decommissioning industry after a period of evidence gathering in 2018. This report affirmed the role of the oil and gas industry as a positive contributor to the UK economy. It highlighted that this value generation is a combined commitment between government, regulators and industry and showed cost reductions benefit all parties, reducing the financial exposure to both government and industry alike. The NAO report highlighted that the total costs of decommissioning on the UKCS could range from £45 billion to £77 billion, with government cost exposure of £24 billion through tax relief, based on a central decommissioning cost estimate of £58 billion. In contrast, it highlighted that the oil and gas industry has contributed £334 billion in direct production tax payments since the early 1970s, a multiplier of at least 14 to 1. The report noted that tax relief is provided on a proportionate basis, based on decommissioning expenditure, and the total exposure to government will diminish as the industry continues to make inroads into efficiency improvement and cost reduction. The report also examined the current system of securitisation and financial oversight and observed that it provided considerable protection of the state’s liabilities. Decommissioning Call for Evidence — The Department for Business, Energy and Industrial Strategy (BEIS) launched a ‘call for evidence’ to understand how the UK could strengthen the domestic offshore oil and gas decommissioning industry, supported by HM Treasury. 2 1. How the UK decommissioning industry could further improve its ability to serve the UK market, support MER UK and reduce the overall costs of decommissioning 2. What could be done to encourage the domestic industry to export its decommissioning expertise abroad and position Scotland, together with the rest of the UK, as a world-leading hub for decommissioning OGUK responded to this consultation on behalf of the industry, which has helped to provide a fresh perspective of the wider contribution to the UK economy. Details of the response are discussed in Section 4. This consultation had two central themes:

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1 www.nao.org.uk/wp-content/uploads/2019/01/Oil-and-gas-in-the-UK-offshore-decommissioning.pdf 2 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/ 785544/strengthening-uk-offshore-oil-gas-decommissioning-industry-cfe.pdf

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DECOMMISSIONING INSIGHT 2019

Financial Capability Guidelines — An influx of new players to the basin as a result of recent M&A activity has led BEIS to consult on its Financial Capability Guidelines. These guidelines form part of the overarching Guidance Notes for Decommissioning of Offshore Oil and Gas Installations and Pipelines . 3 A key priority for the Offshore Petroleum Regulator for the Environment and Decommissioning (OPRED), a unit of BEIS, is to ensure there is no undue risk from companies defaulting, and these guidelines provide transparency regarding the assessments which will be made by the regulator when considering a merger or acquisition. UKCS Decommissioning 2019 Cost Estimate Report 4 — This shows steady progress. The forecast total cost for decommissioning on the UKCS has fallen to £51 billion (P 50 estimate) when including new fields given FID or installed over the past two years. On a like-for-like basis — comparing against fields installed or in operation prior to 2017 — the cost is around £49 billion (P 50 estimate) and reflects a reduction of 17 per cent from the £59.7 billion baseline figure first published by the Oil and Gas Authority (OGA) in 2017. This shows what the industry has achieved thus far and the benefits of close collaboration with the OGA through the asset stewardship process to make decommissioning more cost-effective. Industry pays for the full cost of decommissioning in the first instance and, since decommissioning is a normal cost of doing business in the UK, tax relief is provided on this expenditure. The OGA’s latest reduction in estimated forecast expenditure now infers that £16.8 billion could be recovered by industry as tax relief over time — a reduction of £7.2 billion from the 2018 forecast and that stated in the NAO report. This is made up of £8.3 billion from tax repayments and a reduction in offshore corporation tax of £8.5 billion. Certainty regarding the tax treatment of decommissioning is important at this stage in the basin’s life and increases the potential for investment in the UK in a competitive global environment. Recognising this, government has made a commitment to provide assurance that relief will be paid on decommissioning expenditure, putting in place Decommissioning Relief Deeds (DRDs) in 2013. As a result of the DRDs signed to date, it is estimated that more than £6 billion of cash has been unlocked for reinvestment which would not have otherwise been available.

3 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/ file/760560/Decom_Guidance_Notes_November_2018.pdf 4 www.ogauthority.co.uk/news-publications/publications/2019/ukcs-decommissioning-cost-estimate-2019-report/

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UK CCUS Consultations — OGUK responded to two government consultations related to Carbon Capture Usage and Storage (CCUS). These consultations separately covered business models, and the potential for reuse of oil and gas infrastructure for CCUS. OGUK’s responses to the consultations recognise that the oil and gas industry is fully supportive of CCUS and that it offers further significant opportunities for the UK’s energy supply chain. It is understood that the UK is well placed to be at the forefront of a global capability, and that there are financial opportunities. The potential to reuse infrastructure, for example, could enable reductions in transport and storage costs, as well as increasing flexibility in terms of when decommissioning costs are incurred. 1. The limited remaining design life of older infrastructure and/or its reconfiguration to suit a new service 2. Scheduling issues such as the alignment of projects, and the potential dormant periods experienced by oil and gas infrastructure as it awaits CCUS projects 3. Legislative, fiscal and policy considerations affecting existing assets which will need to be considered if they are re-used or are otherwise transferred into a new legal jurisdiction Scottish Affairs Committee 5 — The Scottish Affairs Committee gathered evidence through a witness session in February 2019 and published a report in March. The report recommends that the government should continue with its objective to work with the OGA and industry to improve the certainty of decommissioning costs and produce an annual report on the OGA’s direct impact on the reduction of those costs. Decommissioning presents a significant opportunity for the UK supply chain. Accordingly, the report also called for the government to set out a strategy for maximising the economic benefit of the development and export of decommissioning skills and resources. Similarly, with regards to the CCUS industry — which has clear parallels with the decommissioning sector — the report called for the government to set out an expected timetable for its deployment and how it aligns with the timeline for the decommissioning of UKCS assets. It should also be recognised that there are challenges to overcome in developing this technology. These include:

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5 https://publications.parliament.uk/pa/cm201719/cmselect/cmpubacc/1742/1742.pdf

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DECOMMISSIONING INSIGHT 2019

3.2 UK Decommissioning in Context Decommissioning is part of the natural lifecycle of an oil and gas asset and should always be viewed in context with the wider oil and gas industry. Industry expenditure across the lifecycle, investment in new developments, activity levels, cessation of production (CoP) dates and decommissioning plans are all influenced by prevailing market conditions and overall uncertainty levels. Although oil and gas markets have shown some increased stability in recent years compared with late 2014–16, they have still been characterised by uncertainty. During the first three quarters of 2019, Brent crude averaged just under $65 per barrel (bbl), with a 40 per cent swing in prices. Alongside this, day-ahead NBP gas prices averaged just under 35 pence per therm (p/th) and have declined frommore than 60 p/th at the start of the year to less than 20 p/th in September — the lowest price since 2004.

Figure 1: Total UKCS Expenditure 1970, to 2019

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Operating Expenditure

Development Expenditure

E&A Expenditure

Decommissioning Expenditure

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20

15

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Total Expenditure (£Billion - 2018 Money)

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1998

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2012

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2016

2018

Source: OGUK, OGA

Decommissioning remains a small part of overall expenditure — Overall UK oil and gas industry expenditure in 2019 is expected to be around £15 billion, which means that decommissioning represents just under 10 per cent of overall expenditure in the basin. This shows that investment in the basin and expenditure on the continued operation of current assets still significantly exceeds what is being spent on decommissioning, despite the view a few years ago that decommissioning would by now dominate spending on the UKCS. Forward projections assume less volatile market conditions — Operators' planning assumptions have stabilised in recent years, reflecting more stable oil and gas prices in comparison to 2014–16, an improved cost base, and the increasing maturity of the decommissioning market. It is therefore no surprise that this year’s outlook is similar to those presented in Decommissioning Insight 2018 . The relative stability is beneficial for operators and the supply chain, while greater transparency is also beneficial for regulators and HM Treasury as it tracks expenditure.

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Production efficiency at its highest level for a decade — The OGA’s Production Efficiency Dashboard 6 shows that the UK’s production efficiency is at its highest level since 2008. Coupled with low unit operating costs —which are expected to remain at around $15-16/boe in 2019 7 — this means that assets are remaining economically viable for longer. This resilience of the UK’s oil and gas industry means that there continues to be no rush to decommission. Decommissioning presents a significant supply chain opportunity at home and abroad — The average spend rate for the UK decommissioning industry is around £1.5 billion per year. This is a significant annual expenditure as UK operators continue to fulfil their decommissioning obligations and presents significant opportunities for the broader supply chain tasked with executing the scope of work. Decommissioning broadens the services the industry offers and emphasises the role of the UK as a global E&P hub covering exploration and production operations through to decommissioning. The latest data show that the oil and gas sector supported circa 277,400 jobs across the UK in 2018, through direct, and indirect employment, and employment induced as a result of the sector’s wider economic contribution. 8 As a mature basin, and an early mover in the global decommissioning market, the capabilities and expertise our supply chain can develop conducting work in the UKCS may unlock the door to the global market. Well decommissioning activity is a major feature — While 2018 saw a slight increase on the number of development wells in comparison to 2017 — 85 wells developed compared with 71, respectively — the number of wells decommissioned remained relatively consistent, at 163 wells in 2017 and 151 wells in 2018. It should be noted that on a cost basis, it is typically much more expensive to develop a new well than to decommission one. In 2018, on a well-count basis, decommissioning represented 63 per cent of the physical wells activity in the UKCS; this is expected to be similar in 2019.

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Figure 2: Well Activity in the UKCS 2010, to 2019

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Exploration

Appraisal

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Development

Decommissioned

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Number of Wells

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2011

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2014

2015

2016

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2018

2019 Forecast

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Source: OGA, OGUK

6 www.ogauthority.co.uk/data-centre/benchmarking/ukcs-production-efficiency-2018/ 7 oilandgasuk.co.uk/product/economic-report/ 8 oilandgasuk.co.uk/product/workforce-report/

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DECOMMISSIONING INSIGHT 2019

3.3 Expenditure and Activity Overview The UK expects to spend £15.2 billion on decommissioning activity over the next decade. This is consistent with the £15.3 billion as reported in the 2018 Decommissioning Insight report. Figure 3 shows the annual expenditure forecast for each Work Breakdown Structure (WBS) element, with the blue line below the chart indicating the number of fields with decommissioning activity each year. For a second consecutive year average expenditure is expected to run at around £1.5 billion per year, providing further evidence of a maturing market. However, this year’s data show a wider fluctuation, with expenditure falling to below £1 billion in five years then rising above £2.1 billion towards the end of the decade. It should also be noted that this ten-year snapshot is only a portion of the OGA’s total cost estimate which anticipates a spend of £51 billion for all UK decommissioning liabilities. 9

Figure 3: UKCS Decommissioning Expenditure 2019, to 2028

2,500

2018 Actuals

Post-decommissioning Monitoring

Site Remedia�on

Subsea Infrastructure

Topsides & Substructure Onshore Recycling Substructure Removal

Topsides Removal

Topsides Prepara�on

Facili�es / Pipeline De-energising

2,000

Well Decommissioning

Post-CoP Facility Running / Owner Costs

Operator Project Management

1,500

1,000

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Annual Expenditure (£ Million – 2018 Money)

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2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Source: OGUK, OGA

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Number of fields

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with decommisioning ac�vity

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Source: OGUK, OGA

Actual expenditure on decommissioning in 2018 was £1.3 billion, slightly less than the £1.68 billion forecast in Decommissioning Insight 2018 . While it appears that a limited amount of work has been re-phased, industry is also conducting activities more efficiently, further contributing to lower actual expenditure. Previous reports

Source: OGUK, OGA

9 www.ogauthority.co.uk/news-publications/publications/2019/ukcs-decommissioning-cost-estimate-2019-report/

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have shown a much wider gap between actual expenditure in a given year, versus forecasts made in the previous year. This narrowing gap shows less work is being 'pushed to the right' and that operators are sticking to stated schedules, undertaking more of their expected work and benefiting from efficiencies in a more capable and experienced decommissioning market. Figure 4 shows the UK’s forecast cumulative expenditure on decommissioning and illustrates the consistency in the expenditure profile between the 2018 and 2019 Decommissioning Insight reports. While in the past we have seen estimates trending towards a burn rate of around £1.8 billion per year, the past two years have shown a 17 per cent reduction, inferring that around £1.5 billion of spend per year is now the new norm.

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Figure 4: Forecast Comparisons for Cumulative Decommissioning Expenditure

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2015 Forecast

2016 Forecast

2017 Forecast

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2019 Forecast

Actual Expenditure

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(£ Billion - 2018 Money)

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Cumulative Decommissioning Expenditure

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2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Source: OGUK, OGA

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This step-change reduction in cumulative expenditure since 2017 may be attributable to:

MER UK in action — The action taken by industry, the government and regulators, to create a more attractive investment proposition in the UKCS in support of the aim of Maximising Economic Recovery (MER UK) is working and is shaping how the decommissioning industry operates. Late life intelligence — Current owners are becoming more knowledgeable in how they operate their late life assets and decommission at the right time. New investment — The continued wave of new companies attracted to the basin which is extending the life of individual producing assets on the UKCS.

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DECOMMISSIONING INSIGHT 2019

Greater oil price stability — The stable oil price seen over the last two years in comparison with 2014–16 provides more certainty for operators to continue to operate assets. Efficiencies in decommissioning — Experience in decommissioning is growing in every element of the scope. As a result, efficiencies are being seen within decommissioning projects. This growing capability is beginning to industrialise the decommissioning process particularly in the southern North Sea, where there has been a production line of projects and operators are noting significant savings on similar activities from one project to the next.

CASE STUDY — TAQA

In 2017, after producing around 125 million barrels during its life, the TAQA-operated Eider field in the northern North Sea (NNS) had become uneconomic. Taking the time to consider the big picture, TAQA developed a strategy to transform the economics of a network of assets, resulting in a multi-faceted programme of work being undertaken which secured several more years of production for TAQA’s wider NNS portfolio.

The programme included a number of technical and interdependent elements, including a well decommissioning campaign which culminated in CoP of Eider in January 2018; redirecting production from TAQA’s subsea Otter field from Eider directly to its North Cormorant platform; and installing a multi-phase pump (MPP) system at Otter to further boost production. Following the CoP of Eider, the asset was converted to late life ‘utility mode’ and continues to provide power and system support to the other hub fields. With the aim of minimising the amount of post-CoP OPEX, Eider utility mode has resulted in a smaller operating crew of six Personnel on Board (POB), because Eider is no longer producing hydrocarbons, significantly reducing the amount of maintenance, inspection and catering required on the platform. Furthermore, vessels are scheduled monthly and a weekly flight enables crew changes and the movement of any specialist vendors or equipment to and from the platform. This has resulted in a 57 per cent reduction in post-CoP OPEX when compared with the year prior.

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3.4 Expenditure Breakdown

Figure 5 shows the forecast expenditure expected in different areas of decommissioning projects over the next ten years.

Figure 5: UKCS Expenditure breakdown 2019, to 2028

Topsides and Substructure Onshore Disposal • Onshorewaste handling • Deconstruction • Decontamination

Subsea Infrastructure • Pipeline decommissioning • Mattress decommissioning • Subsea Structure decommissioning

Site Remediation andMonitoring • Debris clearance • Monitoring requirements

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Removals • Removal activities for the topsides • Removal activities for the substructure s

2%

9%

Well Decommissioning • Engineering Spread rate and services associated with phase 1, phase 2 and phase 3 well decommissioning Operator Costs • Projectmanagement services throughout preperation of decommissioning programme • (Post CoPOPEX) Operational expenditure after occurrence of Cessation of Production Facilities and Pipelines Permanent i solation and cl eaning , and Topsides Preparation • Engineering down and clean for topsides and pipelines • Preparation of platform for unattendedmode

2%

18%

7%

45%

17%

Source: OGUK, OGA

The 2019 dataset shows a similar breakdown of expenditure to that of previous Decommissioning Insight reports, however there are some subtle differences: 1. Well decommissioning (45 per cent): £6.8 billion is forecast to be spent on well decommissioning over the next decade, a reduction from the £7.5 billion reported in 2018. 1,630 wells are expected to be decommissioned, compared with 1,465 last year. This demonstrates that the market is becoming more efficient in well decommissioning, conducting more work for less. 2. Operator costs (17 per cent): This is a combination of decommissioning project management and the cost of operating platforms after production is ceased. £2.5 billion is anticipated to be spent on these elements over the next ten years, in line with last year’s data. 3. Removals (18 per cent): This is the combined costs of removing topsides and jacket structures on the UKCS. £2.7 billion is expected to be spent on removals over the next decade — a notable increase on the £2 billion forecast in last year’s report. 4. Subsea infrastructure (9 per cent): £1.3 billion is expected to be spent on subsea infrastructure decommissioning over the next decade, and includes activities related to pipelines, mattresses and subsea structures. This is a reduction from the £1.7 billion reported in last year’s dataset.

17

DECOMMISSIONING INSIGHT 2019

These four elements of a decommissioning project continue to be the main cost drivers for decommissioning in the UK. As the industry continues to grow and learn, understanding what drives success in decommissioning is essential. The development of key performance indicators (KPIs), particularly in these four main areas, will be vital in enabling the industry to track success and set improvement targets. While KPIs to measure technical success (e.g. days per well decommissioned or days per tonne of material removed) will be required to communicate to decommissioning practitioners, KPIs for commercial success (e.g. costs per well decommissioned or costs per tonne of material removed) will also be required to engage with government, including HM Treasury and other stakeholders. While the Decommissioning Insight data provide a forward look as to how UK operators expect to perform, backward-looking data (actuals) are required to measure true success. With limited historic data, assessing actual performance has proved difficult. However, as more decommissioning work has been completed, the development of KPIs and benchmarks is becoming possible in certain areas of the WBS, particularly relating to well decommissioning. The OGA is now gathering more granular data as part of the Asset Stewardship Survey and creating metrics to support individual conversations with UK operators. While this process is working well, increased sharing of learnings and insight across UK operators and their supply chain is to be encouraged and can only help in the development of a more efficient market. On a global scale, being able to demonstrate success in the UK industry could help to better advertise national capabilities and act as a catalyst for growing international exports.

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3.5 Ten-Year Regional Overview The central North Sea (CNS) remains the area with the majority of decommissioning expenditure over the next decade. However, the proportion of expenditure in the CNS has reduced significantly since last year’s Decommissioning Insight , from 48 per cent to 42 per cent and reflects an increase in the northern North Sea (NNS), southern North Sea (SNS) and Irish Sea (IS). The NNS now expects to see 32 per cent of overall expenditure, up from 30 per cent in last year’s forecast, while the SNS and IS together expect to see 22 per cent, up from 15 per cent last year. The west of Shetland region has seen a slight reduction, down from 7 per cent of total spend in last year’s dataset, to 4 per cent this year, reflecting the future prospectivity of the region.

1

2

3

Figure 6: UKCS Regional Expenditure Breakdown 2019, to 2028

West of Shetland 4%

4

Southern North Sea and Irish Sea 22%

5

Central North Sea 42%

6

Northern North Sea 32%

Source: OGUK, OGA

7

Figure 7: UKCS Regional Expenditure Breakdown by Year 2019, to 2028

8

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Percentage of Total Expenditure WoS EIS SNS NNS CNS Source: OGUK, OGA

9

10

11

19

DECOMMISSIONING INSIGHT 2019

On a regional basis, decommissioning spend is split fairly evenly between the CNS, NNS and SNS/IS in the immediate future. However, by the end of the decade, decommissioning in the CNS is rising to make up more than 50 per cent of total activity as expenditure in the NNS begins to decline. Activity in the west of Shetland and east Irish Sea is also seen to grow towards the end of the decade. The step change in regional forecast expenditure in comparison with previous years may be in part due to the amount of M&A activity which has recently taken place. Figure 8 details the M&A activity in the past two years where operatorship of an asset has changed. This shows that the majority of the assets which have been acquired are situated in the CNS, inferring that new owners plan to inject a new lease of life into these assets and ensure that dates for CoP are pushed to the right.

Figure 8: UKCS M&A Activity 2018 and 2019

Merger & Acquisition Activity

Petrogas NEO picked up a number of assets from Total E&P for around $635 million. The deal secured many fields in the CNS region such as Dumbarton, Balloch, Lochranza, Drumtochy and Flyndrew. Chrysaor acquired the majority of ConocoPhilips’ UK portfolio in a deal reported to be worth almost $2.7 billion. The deal included assets in the CNS and Irish Sea such as Britannia, Brodgar, Calder, Callanish, Enochdhu, Jade, Jasmine, Joanne, Judy and Millom. Marathon Oil divested its UK portfolio to Rockrose Energy for $95 million. The deal included the Brae fields in the central North Sea. Delek Group (parent company of Ithaca Energy) purchased Chevron’s UK assets in a $2 billion deal. This deal included the Alba, Alder, Captain and Erskine assets in the Central North Sea. Enquest fully acquired the Magnus field in the northern North Sea by purchasing the remaining interest in the field from BP. Serica Energy acquired an increased stake in the northern North Sea assets, Keith and Rhum from Total, Marubeni and BHP Biliton and closed out the deal to buy BP’s share for the Rhum field. Tailwind Energy acquired the Triton cluster of assets from Shell and ExxonMobil. This included the Bittern, Guillemot, Clapham, Pict and Saxon fields in the central North Sea.

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1

UKCS M&A Activity 2018 and 2019

2

3

4

5

6

7

8

9

10

11

21

DECOMMISSIONING INSIGHT 2019

3.6 Ten-Year Regional Breakdown Looking more closely into the regional expenditures, we begin to see some common traits. For example, on a pro- rata basis, well decommissioning costs range from 50 per cent of the overall expenditure in the CNS to 42 per cent in the NNS and west of Shetland, and 41 per cent of spend in the SNS and IS. However, unit costs still tend to be higher in the NNS and CNS compared to the SNS, reflecting the increased complexity of the scope. The CNS also contains a greater quantity of subsea wells expected to be decommissioned over the next ten years; these are generally more expensive to decommission than platform wells. More generally, the SNS has seen some recent successes in well decommissioning activity and a greater industrialisation of the process, which may account for the apparent reduction in expected costs. The CNS and NNS will certainly glean knowledge from these experiences, driving further efficiencies. Forecasts for the CNS and NNS anticipate that 20 per cent and 17 per cent of decommissioning expenditure will be spend on project management and continued operational expenditure on platforms after production has ceased. Estimates for the SNS and IS region suggest a much smaller share of expenditure, around 9 per cent, for these activities. This is mostly due to the larger size of the installations and greater complexity in the NNS and CNS, compared to SNS assets. The proportion of expenditure forecast for removals costs also varies significantly across the UKCS, with 26 per cent allocated in the SNS, 23 per cent allocated in the NNS and only 10 per cent in the CNS. Forecast removals costs in the CNS in the near term are relatively low due to the aforementioned M&A activity in the region, which has pushed back some CoP dates. In the SNS, the proportion expected to be spent on removals has increased, likely as a result of the amount of well decommissioning activity liquidated over the past two years, which has reduced wells costs but led to greater removals (given these are concurrent activities). Expenditure on subsea infrastructure is relatively consistent around the North Sea, accounting for 9 per cent of expenditure in each of the CNS and NNS, and 8 per cent in the SNS. All regions have seen a reduction in forecast spend in comparison with the 2018 Decommissioning Insight , suggesting further efficiencies are expected in this area. The slightly higher level of expenditure in the former two regions is perhaps due to the deeper water adding complexity to subsea decommissioning activities. While the four main cost drivers are considered to be wells, removals, post-CoP OPEX and subsea infrastructure, it is important to consider all aspects of decommissioning when aiming to reduce costs. Facilities and pipeline permanent isolation and cleaning, coupled with topsides preparation, account for only 7 per cent of total UKCS decommissioning expenditure. However, this element contributes 11 per cent of forecast expenditure in the SNS, making it a larger cost component than subsea infrastructure, likely because the composition of SNS assets is different. It is therefore essential that incremental gains are sought throughout every element of the WBS.

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Figure 9: WBS Element Allocated Spend by Region 2019, to 2028

1

100%

100%

CNS

NNS & WoS

2%

1%

9%

9%

2%

90%

90%

2

2%

10%

80%

80%

7% 23%

5% 7%

70%

70%

3

6%

60%

60%

50%

50%

50%

40%

40%

42%

4

30%

30%

20% Breakdown Structure Component

20% Breakdown Structure Component

10%

10%

5

10% Proportion of Total Expenditure for Each Work 20%

10% Proportion of Total Expenditure for Each Work

£5.4 billion

£6.4 billion

17%

0%

0%

6

100%

100%

SNS & Irish Sea

1% SNS & Irish Sea

1%

8%

8%

7

90%

90%

Site Remediation & Post-decommissioning Monitoring 3%

Site Remediation & Post-decommissioning Monitoring

3%

80%

80%

7%

7%

26%

Subsea Infrastructure Decommissioning 26%

Sub ea I frastructure Decommissioning

70%

70%

8

Topsides & Substructure Onshore Disposal

T psides & Substructure Onshore Disposal

60%

60%

11%

11%

50%

50%

Removal Activities

Removal Activities

40%

40%

9

Facilities & Pipelines Permanent Isolation and Cleaning and Topside Preparation

Facilities & Pipelines Permanent Isolation and Cleaning and Topside Preparation

30%

30%

41%

41%

Well Decommissioning

Well Decommissioning

20% Breakdown Structure Component 20%

Breakdown Structure Component

10

10% Proportion of Total Expenditure for Each Work

Proportion of Total Expenditure for Each Work

£3.4 billion 0% 10% 9%

Project Management & Post-CoP Facility / Running Costs £3.4 billion

Project Management & Post-CoP Facility / Running Costs

9%

0%

Source: OGUK, OGA

Source: OGUK, OGA

11

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DECOMMISSIONING INSIGHT 2019

CASE STUDY — REPSOL SINOPEC RESOURCES UK

Repsol Sinopec Resources UK (RSRUK) has the largest decommissioning portfolio in the UKCS, which comes with a significant decommissioning liability to manage. In managing such a wide and varied portfolio, it often meant that planning and executing the optimum decommissioning programme was not always available and required a more strategic and tactical view on how such programmes delivered value within the business. One of RSRUK’s core decommissioning assets, Beatrice, was amongst those that required ‘different thinking’ in order tomaximise reduction in post-CoP running costs until such time it was better positioned tomove forward. The Beatrice Alpha complex was successfully de-manned in December 2018 after transitioning to not normally attended (NNA) status, although the wells are yet to be decommissioned. The integration and application of multiple new technologies and digitalisation elements enabled RSRUK to reduce post-CoP running costs significantly, whilst ensuring the safety of the asset in this mode. This gave RSRUK the time to monitor and learn from industry on how to further maximise economic recovery in decommissioning withminimum impact on total abandonment expenditure (ABEX). This mode of operation is well known in the SNS but has had very limited application in the CNS. By interaction with operators with expertise on this kind of operational mode in the SNS, RSRUK was able to apply it successfully in Beatrice, being the first platform operating in this mode within the RSRUK portfolio. This project was delivered safely, under budget and ahead of schedule and with the support of the supply chain, this project was truly a collaborative effort in delivering value in decommissioning.

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