The costs associated with the decommissioning of oil and gas infrastructure in the UK continue to rise, reaching unprecedented levels, according to a recent report by Offshore Energies UK (OEUK). Expenditures, estimated at £1.7 billion in 2023, are expected to surpass £2.3 billion in 2024. Over the next decade, these costs could exceed capital investments, marking a turning point for this transforming sector.
Despite the increase in spending, the amount of work carried out has declined. In 2023, only 126 wells were decommissioned, 10% fewer than in 2022. This figure falls significantly short of forecasts, as the industry needs to decommission over 200 wells annually to meet its targets. According to OEUK, a significant acceleration of activities is now required.
A Fiscal and Logistical Challenge
Already strained relations between the UK oil industry and authorities are further tested by criticisms of the tax regime. With a tax rate reaching 78%, some companies face an effective rate exceeding 100% due to limitations on deductions for decommissioning expenses. This situation hinders the investments needed to maintain production, which is crucial for financing both transition and decommissioning activities.
The lack of specialized equipment and vessels poses another challenge. The UK faces fierce competition from other active decommissioning regions, such as the Gulf of Mexico and Australia, where large-scale projects are booming. Building a local decommissioning sector could not only lower costs but also meet the growing needs of offshore wind farm decommissioning.
The Role of the Regulator
Stuart Payne, CEO of the North Sea Transition Authority, recently warned that the sector might have to invest £20 billion by 2030 to meet decommissioning deadlines. He noted that 500 wells have already missed their initial deadlines, putting the industry’s credibility to the test.
However, Payne highlighted that some players are fulfilling their duties, with an average of 120 wells decommissioned annually over the last five years. The urgency of the situation may nonetheless require closer collaboration between companies and regulators to avoid defaults that could undermine the nation’s energy transition.
Energy Transition and Uncertainties
As the UK pursues its goals of reducing fossil fuel reliance, uncertainty looms over the future of production. OEUK emphasizes the need to maintain a certain level of extraction to ensure the financial viability of companies engaged in decommissioning. “A balanced energy mix is essential to ensure companies can support these expenses,” said Richard Thomson, OEUK Decommissioning Manager.
North Sea oil production is already in decline, registering an 11% drop in the first half of 2024. This decrease heightens the pressure on an industry balancing emissions reduction with meeting its transition commitments.
