Asia’s Decommissioning Tsunami

By Thomas Timlen

Decommissioning of oil rigs in Southeast Asian fields presents a challenge of scale, with many but small platforms calling for innovative thinking on removal operations.

“With more than 380 fields expecting to cease production in the next decade, the magnitude and cost of work can no longer be ignored,” Wood Mackenzie’s Asia upstream analyst Jean-Baptiste Berchoteau told Breakbulk. “Through learning from global decommissioning projects, the industry can adopt and adapt practices best suited for Asia-Pacific’s own set of challenges.”

Berchoteau’s advice comes at a time when decommissioning in the Asia-Pacific region appears to be a mammoth task for which the various stakeholders are largely unprepared. Unclear government regulations coupled with a general lack of experience in the region could mean a steep learning curve with high initial costs and potential for mistakes.

The magnitude of the challenge is better understood with the knowledge that those 380 fields involve 35,000 offshore wells, serviced by 2,600 platforms representing 7.5 million tonnes of steel and more than 55,000 kilometers of pipelines.

And there’s the cost. According to Wood Mackenzie’s latest analysis, the cost of decommissioning Asia-Pacific’s offshore assets could exceed US$100 billion.

Decommissioning works in the region are being executed by contractors such as Sapura Kencana, Boskalis and COOEC, with many more looking at Southeast Asia’s future decommissioning opportunities.

Sapura Kencana recently secured a contract from Petronas’ 40 percent-owned associate PCPP Operating Co. Sdn Bhd for decommissioning of the facilities at the Dana and D30 fields off Sarawak. That contract is for a duration of about nine months.

Gulf of Thailand Opportunities

One specific area where major decommissioning work is required is the Gulf of Thailand. PTT Exploration and Production, or PTTEP, a subsidiary of the Thai state-owned oil company, is in discussion with Thailand’s Department of Mineral Fuels, or DMF, the government body regulating offshore oil and gas operations, which will sanction the decommissioning work. Standards for the work have been drafted, but these are still subject to some anticipated modifications.

Longitude Engineering, a specialist engineering consultancy dedicated to providing naval architecture and structural design and analysis services to the marine, offshore, renewable energy and small craft markets, anticipates the work will commence once PTTEP has finalized the production license with the DMF. Standards and procedures for the decommissioning work in the Gulf of Thailand need to be clearly defined to ensure that the solution is not only the most innovative and cost-efficient, but also environmentally friendly.

Sector stakeholders and others stand to benefit from forthcoming decommissioning; analysts note that rig companies’ earnings on leasing out drilling rigs will not improve unless a significantly higher number of rigs are scrapped.

In Longitude Engineering’s view, the work in the Gulf of Thailand alone will be a boon to many project cargo stakeholders, including contractors, scrapping yards and recycling companies as well as the oil companies that will finance the operations. If the jackets are disposed offshore to generate new reefs, as has been done in other parts of the world, there will be gains for other sectors.

Cutting Decommissioning Costs

Longitude is not the only party that has identified advantages. Multiple benefits of reef expansion were also addressed in Wood Mackenzie’s report, Decommissioning Asia-Pacific on a Budget, in which innovative approaches to conventional decommissioning were seen to have potential beyond significant cost savings alone. One example cited was the Petronas rig-to-reef solution on two platforms at the Dana and D-30 fields in Block SK-305 offshore Malaysia last year. Rig-to-reef consists of using the decontaminated platform structures to create an artificial reef at a designated location.

Adopting innovative technologies was one of four levers that Wood Mackenzie identified to cut costs. A second looked at the transfer of knowledge between regulators, operators and service sector firms. Prasanth Kakaraparthi, Wood Mackenzie’s senior analyst, felt that while the primary focus should be on cutting costs and maintaining health and safety standards, “this is a great opportunity for countries in the region to develop service sector expertise through knowledge transfer.”

In Kakaraparthi’s view, to establish a functional regulatory framework in the region, it would be more efficient to adopt guidelines and processes already in place elsewhere, such as in the UK or the Gulf of Mexico, rather than “reinventing the wheel.”

Cargo movers, particularly those with extensive experience in offshore asset retirement, also have a key part to play in helping draft regulations. Energy majors Chevron and Shell are already collaborating with Thai and Bruneian regulators, respectively, through knowledge transfer and pilot project initiatives.

Finding Economies of Scale

The third lever looks at choosing optimal commercial and contracting strategies. While the majors have the necessary skills in-house, other players are expected to use project management companies to help execute the project on a strict timeline and within budget.

The three most common contracting strategies, lump sum, unit cost and day rate, are suited to different levels of risk. The well plug and abandon, or P&A, phase is usually the riskiest, as live hydrocarbons are involved and there is often poor availability of data on well conditions. As such, unit cost contracts, where the contractor performs well P&A or facility removal at a fixed cost per unit that includes a margin, appear better suited for projects in Asia-Pacific.

The fourth and final lever identified in Wood Mackenzie’s report focused on achieving economies of scale.

On average, well P&A accounts for half of the decommissioning costs, so any cost reduction in this category will have a significant impact. About 30 percent to 50 percent cost reductions have already been observed in the Gulf of Mexico and the UK on rig daily rate or unit rate contracts. For areas with a large number of aging wells and platforms, batch decommissioning offers huge cost-saving opportunities.

This approach could be extended further across blocks with different operators, with participants jointly contracting for a larger piece of work, thus reducing per-unit costs.

Regarding decommissioning prospects for Southeast Asia, Wood Mackenzie analyst Berchoteau is optimistic. “While the decommissioning situation in Asia-Pacific might look grim at the moment,” he said, “we note that Chevron is taking a proactive approach in the Gulf of Thailand, and we expect Chevron to set a benchmark for large-scale decommissioning costs in the region.”

Meanwhile, with decommissioning creating new opportunities, gas field development has also blossomed, opening further opportunities for project cargo movers.

In April, Sapura Energy Berhad’s wholly owned subsidiary, Sapura Exploration and Production (Sarawak) Inc., and its partners, Petronas Carigali Sdn Bhd and Sarawak Shell Berhad, took the Final Investment Decision to develop the Gorek, Larak and Bakong fields as the first phase in the SK408 Production Sharing Contract.

According to Sapura Energy Berhad President and Group CEO Tan Sri Dato’ Seri Shahril Shamsuddin, “the development of the SK408 gas fields further strengthens Sapura Energy’s position in Malaysia as a significant partner and supplier of natural gas to one of the world’s largest LNG production facilities, the Petronas MLNG complex in Bintulu.”

Such examples indicate that well decommissioning and field expansion in tandem will keep many project cargo parties busy in Southeast Asia, where innovation and knowledge transfer can optimize gains for all involved.

Thomas Timlen is a Singapore-based freelance researcher, writer and spokesperson with 28 years of experience addressing the regulatory and operational issues that impact all sectors of the maritime industry.

Image Credit: Shell

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