After the oil rush ... the breakers yard

It was the job of the Shetland Decommissioning Company (SDC) – a three-way joint venture between the Lerwick Port Authority, Dutch logistics group Peterson SBS and French environmental services group Veolia Environment – to take in two platforms for dismantling from the Total Frigg gas field, far to the east of the islands. There were five platforms in total, but the other three went to Norway in line with the shared sovereignty over the

field and the fact that the £500 million project was too big for Lerwick.

The first platform to come to the islands, MCP-01, was relatively straightforward for the harbour, since it was carved up at sea and shipped in container loads. But the second, TCP2, a North Sea behemoth that stood 104 metres above the seabed, had to be towed there in one piece before being rolled on to the quayside by linking up 358 trailer vehicles to create a giant set of rollers.

James Johnson, decommissioning manager at Peterson, explains that the harbour needed so many of these trailers for the job that there weren’t enough spares in Europe to cope.

“We needed to arrange to bring additional units from Australia and the US,” he laughs. “We used up the entire European supply of spare trailers.”

There was little time for frivolity once the rolling job had been completed, however. For both TCP2 and MCP-01, everything had to be decontaminated, separated into different parts and either sent off for hazardous waste disposal or recycling. Everything should have been finished by the end of 2008, but the price of steel had collapsed in the wake of the economic crisis so the SDC had no choice but to wait until it had

recovered. With the price now back to about triple the lows of that period, the last few containers only left the harbour a couple of weeks ago.

The platforms might have been producing gas as recently as 2004, but now they had all but disappeared.

The project represents the start of what will one day become commonplace, given the need to eventually remove nearly 500 installations, 5000 wells and 10,000 kilometres of pipelines. No oil producer is exactly fond of

the 1992 OSPAR (Oslo-Paris) Convention that will force them to do so, but there is no denying that there is a boom coming for port authorities and oil services contractors.

According to estimates from industry association Oil and Gas UK, decommissioning might be worth as much as £25billion, and some observers say that this is almost bound to be an understatement.

The figure is coincidentally exactly the same as the estimates for what will be spent setting up the Scottish offshore wind industry, as reported in last week’s section.

And although the decommissioning figure also includes sites off English waters, the deeper and therefore larger structures to the north will inevitably demand most of the expenditure. For this reason, Lerwick Harbour

has been expanding. Last year, the port authority spent £12m on dredging certain areas to deepen access channels for the huge ships that do this work, while there are plans to spend more millions creating two more deep berths at the neighbouring Dales Voe base either next year or in 2011, to make it possible to cope with two or even three platforms simultaneously.

Down at Peterhead, £30m is being spent on equivalent harbour improvements by a local consortium which hasattracted £6m of government money.

They, too, want to become players in this sector, while other sites such as Nigg and Ardersier on the Moray Firth are also seen as prime locations. Meanwhile, countless services companies, from minnows all the way up to giants such as Wood Group and Aker, are developing as much experience in the area as they can. Just last month they announced plans to set up a new industry association called North Sea Decom to help push their interests,

and they are in the process of recruiting a chief executive.

There is also a conference dedicated to the subject taking place in Aberdeen on November 11 and 12, where hot topics will include carbon-neutral decommissioning, new platformcutting techniques and projects to turn

rigs into artificial reefs in Mexico. This might not sound like a great draw for the average punter, but the industry is clearly getting into gear. Yet ask an oil man about decommissioning and you can expect a knowing

look. It has been touted as the next big thing to hit the industry for many years,

but it has always seemed to stay just over the horizon as improved production techniques and new discoveries have steadily extended the lifespan of the North Sea. Add to this the fact that nobody actually wants to spend the

money to decommission sites until it’s absolutely necessary, and you start to see why things have been slow to take off. The only other major platform to be decommissioned this year has been North West Hutton, which belongs to BP, sits to the north of Frigg and is being handled at the yards in Teeside, the only serious UK competitor to Lerwick.

While Shell famously and controversially decommissioned Brent Spar in the early 1990s, the only other big jobs in this decade have been Maureen, Ekofisk and Hutton (all owned by ConocoPhillips), together with a few smaller

platforms from the southern North Sea.

Looking to the future, nobody seems sure which field will be decommissioned next.

“Every pound you spend on developing a new field is a productive pound because it produces revenue for the taxman and the company concerned,” says Paul Dymond, operations and supply chain director at Oil and Gas UK.

“But every pound spent on decommissioning is an unproductive pound.

“Our current view is that it might take off in five years, but we were saying much the same thing five years ago.”

Perhaps not surprisingly, one of the early tasks of the North Sea Decom chief executive will be to point out the dangers of being too vague about decommissioning. Although nobody wants to hasten the demise of the North Sea, producers have to realise that they could end up in a situation where there’s a sudden decommissioning stampede but not enough capacity in things like barges, cranes and skilled engineers.

The higher-than-necessary prices that this shortage would cause could be avoided if things were planned more clearly, the contractors argue. Their only consolation at present is that there is little temptation for producers to sit on sites that have stopped producing in the hope that future technology will make them useful once more. This is because the risks of bigger problems grow with each year that they spend standing beyond their planned lifespan, which entails larger costs.

Once the well runs dry, it is time to get on the phone. As Dymond explains, however, there are no quick solutions once that day arrives. It takes time to produce a detailed plan, particularly since few platforms are identical – especially the older ones. Maureen, for example, was the only platform to be held down by a steel gravity base structure as opposed to a concrete one, which meant that it could be chopped up and used to form a quay in a port in Norway. Hutton, meanwhile, was unique for the steel cables that held the floating subsurface structure in place.

“As you go further north, most of the platforms were independently designed for the particular circumstances of the field, such as the number of wells and the type of fluid that needed to be processed,” says Dymond.

Once you’ve come up with your plan, he adds, it needs to go through a public consultation to get approval from the Department of Energy and Climate Change. After that, the 14 other OSPAR signatories all get to put in their tuppenceworth. After that, the platform needs cleaned and either cut up or lifted by enormous cranes before you get anywhere near a port. It was for all these reasons that North West Hutton took seven years from stopping production to reach Teeside, and even now it is still being processed. For all these uncertain timescales, however, Judith Aldersey-Williams, an oil and gas specialist at Aberdeen law firm Cameron McKenna, stresses that decommissioning is not only an issue for the future. It already plays an extremely important role in deals by major oil producers to sell fields and wells to smaller operators who are prepared to accept the lower profit

margins that come from more complex late-stage extraction. These second and sometimes third production tiers have played a key role in extending the life of the North Sea, but they are being threatened by the OSPAR rule that anyone who has ever had an interest in the field can be liable for decommissioning it.

To avoid continued liability, the majors require buyers to show them a bank letter of credit as part of any deal to prove that they have the funds to pay for the decommissioning. But in many cases the bank expects the new operator to keep funds to that level in their account throughout all their production years, and tax rules exacerbate this by preventing them from claiming any relief on decommissioning until the process begins.

“This is the single biggest issue when a big company sells to a smaller company,” says Aldersey-Williams. “It has a huge impact on the ability of the small company to purchase the assets in the first place, and then it affects their level of investment. It means that you risk stopping production sooner than might be necessary.”

Another job for the North Sea Decom chief executive is therefore likely to be to persuade the government to allow tax relief on decommissioning begin sooner, but in the meantime the industry is coming up with its own ways

around the problem. The recent second-to-third tier deal for Ithaca Energy to take over the Beatrice field in the Moray Firth from Talisman Energy, for example, saw Ithaca leasing rather than buying it so that it wouldn’t take on decommissioning responsibilities.

Innovations such as these will have to become more common in future if the industry is not to be adversely affected, especially now that the banks have become more cautious. In the way that good strategists prepare for an end game long before it arrives, decommissioning therefore looks set to cast an increasingly long shadow on the industry in its final years. From Shetland to Teeside, from majors to minors, the slow grind and clank of

the death of North Sea oil and gas will surely be just as loud and expensive as the manner in which it arrived.