Decommissioning: Beyond the Challenges of Oversupply, Pandemic and Recession

Decommissioning: Beyond the Challenges of Oversupply, Pandemic and Recession
2020-05-04

After weathering the storm that was the price collapse of 2014, the oil industry has again been hit in recent months by two new blows almost simultaneously: oversupply (caused by the failure of negotiations between Saudi Arabia and Russia to agree on production cuts and the aggressive response of the former); and a demand shock (reflecting the economic impact of the Covid-19 lockdown).

Whilst the emergent OPEC+ deal initially stabilised the price to some extent, the lack of storage forced West Texas Intermediate (WTI) into negative territory for the first time in history and ongoing concern over the economic outlook has forced all benchmarks lower.  (OPEC is the Organization of Petroleum Exporting Countries).

Optimists will point to the fact that the WTI event was a localised phenomenon and that a negative price actually indicates market expectations of a future positive value (otherwise producers would simply shut up shop rather than paying buyers).

Pessimists will contend that even if demand returns, it is bound to be at lower levels – perhaps even for years – as a consequence of a global recession (even depression) meaning that some production capacity will be lost.

The immediate effects on the UK Continental Shelf (UKCS) are already apparent: some fields shutdown for maintenance will not reopen; new projects are delayed; drilling rigs are laid up; there have been numerous announcements of reductions in capital and operating expenditure.

All of this could easily be read as evidence of the hastened demise of what is a mature basin and, as such, as the precursor of a significant uptick in decommissioning activity.

But whilst the simple operation of the market will be important in the months and years ahead, it will not be determinative.

Even in the context of the UK’s ambitious push towards net zero carbon emissions, there will be a continuing, albeit tapering, requirement for oil and gas. There are a number of reasons why it would make sense to source as much of that requirement from domestic reserves, including energy security, balance of payments, and employment.

Equally, there are good reasons to encourage oil and gas companies to play a key role in energy transition, especially if, for example, the future energy mix requires natural gas for blue hydrogen production, to say nothing of the future role of carbon sequestration to support the continuation of a variety of energy and heavy industrial purposes.

There will undoubtedly, therefore, be an increase in decommissioning activity, but this will be in the context of the UK’s Maximising Economic Recovery Strategy, as well as of increased interest in reusing infrastructure for hydrogen, geothermal and other purposes.

Published by School of Law, University of Aberdeen

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