E&P firms in mature regions will soon have to grapple with the challenges of decommissioning. As assets reach the end of their useful lives, company resources will become increasingly drawn into the expensive and at times technically complex activities required to cease production, safely remove subsea and surface infrastructure, and ensure that wells are permanently abandoned. In this industry-leading paper, KPMG sets out how treating decommissioning as a strategic question will improve company decision-making and create a new opportunity for the most agile and flexible players to gain competitive advantage.
Despite the recent uptick in M&A activity in the North Sea, decommissioning liabilities and limitations on tax relief for new entrants continue to constrain the market. Significant uncertainty remains with regards to the scale and timing of the expected decommissioning ‘bow wave’: unit cost performance varies significantly between assets, and the predicted ‘domino effect’ on shared infrastructure remains a constant threat in the new world of ‘lower for longer’ oil prices. Against this backdrop and in response to priorities set by the Wood Report and the OGA, E&P companies continue to seek new models of collaboration, in order to maximise economic recovery, reduce decommissioning costs and resuscitate the market for late life operations. But capacity constraints in the supply chain and a history of ineffective collaboration between operators and service providers represent significant challenges for the industry, with many companies adopting a conservative, engineering-led approach that could leave value on the table. KPMG sees these questions and challenges as primarily strategic in nature, with material advantages to those that address them in advance, and who explore very different models for decommissioning delivery and collaboration across operators and suppliers.
KPMG advises clients on the strategic options, operational performance challenges, tax and supply chain implications associated with their decommissioning activities. KPMG authored the industry-leading paper: ‘Decommissioning Strategy – A new imperative for E&P firms’ in which we set out a set of strategic decisions and options that both Operators and Service Providers can pursue, in order to chart a path forwards in response to these challenges.
Since the oil price downturn, E&P companies have followed in the footsteps of their downstream counterparts by taking aggressive cost cutting actions, such as supplier rate reductions and significant headcount reductions. Yet in the world of ‘lower for longer’ oil prices, there remains both the necessity and the opportunity for more transformative unit cost improvements that go beyond short-term cost cutting to tackle the underlying performance challenges. E&P firms continue to struggle with the reliability of ageing North Sea assets, and the challenges associated with contracting strategies, supplier performance management, planning and offshore execution efficiency.
KPMG has an excellent track record in helping clients think through and deliver on these challenges, leveraging best practices in oil and gas as well as experience from other relevant sectors.
The UK tax structure has recently acted as a major hindrance to the late-life North Sea M&A market, with new entrants discouraged from acquisitions due to lack of tax history to offset against decommissioning liabilities. This means that small, specialised late-life operators cannot acquire assets for which they should be the natural operators.
KPMG advises a wide variety of clients, using our specialist skills across taxes, our deep industry knowledge and our insights, to help them assess their business needs and help them to stay competitive, compliant and responsible.