New late-life models called upon to avert early North Sea shutdown

North Sea operators must abandon outdated late-life models if a wave of premature decommissioning is to be averted, industry analysts have told Upstream Intelligence.

Current late-life models are outdated, experts say (Image credit: Wikimedia Commons)

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With an estimated 22 billion barrels of oil and gas resources yet to be extracted from the UK Continental Shelf, a fresh attitude and commitment to streamlining are seen as keys to maximizing economic recovery in an era of $40-per-barrel oil prices.

“Anything which in theory can be done to extend the life of production is a worthwhile pursuit,” said Will Rowley, Group Analyst at Acteon, a specialist in subsea services.

“Operators can reduce costs by tweaking procedures to knock off 10-15% here and there, but that can’t reduce it enough. Cost cuts might buy time but not the step change that is required,” Rowley added.

Christopher Young, Director of KPMG’s Energy and Natural Resources Group UK, agreed that cost-cutting on its own would not provide the solution. He said: “The right operational model is where operators have managed to simultaneously cut costs and improve productivity – that’s the gold standard, that’s the key.”

Leaner, faster, stronger

Current models typically emphasize measurable actions such as cutting maintenance and engineering costs or reducing headcount. But Rowley and Young warned this approach would no longer prevent a surge in early shutdowns that in the past year has shifted “from a theoretical to a live concern”, in Young’s words.

A better approach would be to create an internal mechanism that encourages smoother operations and cost-effective execution, argued Rowley.

“It’s the internal processes, attitude and approach which are increasing costs,” he said. “There are a lot of options which can positively impact late-life operations but current internal procedures mean that applying them are just too expensive.”

Strained operator-contractor relationships and poor supply-chain management are also leaving value on the table, Young said.

Both men pointed out that to pump out every remaining barrel most effectively, operators must commit to a leaner and simplified management structure. Shorter decision-making lines and faster responses to environmental changes will serve to both improve operational efficiency and economic recovery, they argued.

Total opex has fallen in the North Sea, with reductions from existing fields outweighing additions from new fields (Source: Oil & Gas UK)

Oil & Gas UK identified behavioral change – alongside business process and standardization – as one of three avenues to industry-wide efficiency improvements in its 2015 Economic Report. And Ian Shaw, BG Group’s head of production operations, highlighted culture, values, governance, organization and delivery as all-important in a recent presentation on optimal late-life operating models.

Rowley and Young both presented the Forties field – which BP sold to Apache in 2003 – as a prime example of successful late-life production management and extension in the North Sea. Rowley believes that in most cases the only truly effective operating model is through change of ownership.

“Late life operations require a different approach and unless that is their standard way of operating – they can’t do it effectively,” he said, adding that the internal makeup of operators makes re-education a difficult task.

“Apache are not doing anything that BP can’t do; their attitude and approach is the fundamental difference,” Rowley said.

Dodging the dominos

Ownership transfer is actually decreasing in popularity, with the number of North Sea transactions declining 33% in 2015, according to EY’s annual review of global oil and gas transactions.

Young explained that the increased risk and smaller margins associated with assets nearing cessation-of-production (COP) were dampening interest in recovering the remaining North Sea barrels. As a result, he said, players were under-investing in late-life assets and opting for COP and decommissioning sooner rather than later. When one player opts for early decommissioning it has profound implications for neighboring assets and increases the risk of a domino effect, Young said, echoing warnings made by the Oil and Gas Authority.

COP and decommissioning require operators to divert cash and human resources away from revenue-generating activities, and removes the option to use the asset in the future to access and develop oil and gas production, both for the operator and also for the holders of adjacent licenses who might use the infrastructure, McKinsey and Company noted in a 2015 paper. Ken Bruce, Senior VP Asset Integrity Services at Lloyd’s Register, has also noted the significant gains to be made from assets in the late stage of their life cycle.

Adoption of new operating models and abandonment of traditional approaches could present “the greatest level of change” for the industry over the next 25 years, Rowley predicted.

He concluded: “We could come out the other side in much better economic shape than we went in. But we could also miss the opportunity and end up accelerating North Sea decline.”

By Sayo Rotimi