Does Oil & Gas Risk a Wave of Idle Iron?
If low oil prices persist, deferred decommissioning spend and accelerated shutdowns could create a new wave of "idle iron"—resulting in increased costs, risks, and external scrutiny.
Oil and gas wells and installations—developed in the 1970s and later—are reaching the end of their useful lives, and an intense period of offshore decommissioning is ramping up worldwide. But the process is a costly challenge. In fact, the value at stake in handling these projects properly could be worth several billion dollars for many countries. In the North Sea alone, aggregate estimates for decommissioning costs start at close to $150 billion.
The Gulf of Mexico is well advanced in its decommissioning-process journey, and activity is picking up in the North Sea. Now other hotspots are emerging around the globe. And they must prepare for what is typically a massive task.
In many emerging hot spots, preparation is still at an early stage. Offshore decommissioning requires a high level of coordination among governments, operators, and contractors—players that are all driven by different incentives. Moreover, in many countries, taxpayers are on the hook for the lion’s share of decommissioning costs, heightening public scrutiny of stakeholders’ actions.
Although operators and contractors play essential roles in defining and executing an effective decommissioning agenda, national governments must lead the way by establishing a comprehensive governance framework and supporting it with strong institutions. This framework must ensure the optimal use of public funds, incentivize world-class project design and execution, and promote value-creating cooperation across the supply chain.
On the basis of our experience supporting decommissioning projects globally, we have identified five steps that governments must take to prepare:
Oil and gas operators worldwide need to dramatically slash the costs of decommissioning wells and installations. But cost reduction isn’t a concern solely for oil and gas industry players. Governments also have a vested interest in reducing costs: taxpayers can be on the hook for as much as 50% to 80% of the bill for offshore decommissioning. Recognizing the urgency, some governments have set a goal to reduce decommissioning costs by 30% or more. But the path to achieving reductions of this magnitude remains uncertain.
Although the goal of reducing decommissioning costs by 30% is ambitious, our experience supporting governments and operators suggests that it is achievable. BCG has worked with industry players to significantly cut decommissioning costs at the national, company, and project level. To get there, operators and governments need a detailed roadmap that directs the application of a variety of levers that are designed to make the most efficient use of decommissioning resources.
In developing cost reduction roadmaps for the decommissioning process, we have identified dozens of sources of value and risk. To capture the value and mitigate the risks, leading operators and governments have applied six cost-reduction levers.
No single lever is sufficient by itself. To realize cost reductions of as much as 30%, stakeholders must take an orchestrated approach that applies each of the levers relevant to a specific decommissioning project or campaign.
If low oil prices persist, deferred decommissioning spend and accelerated shutdowns could create a new wave of "idle iron"—resulting in increased costs, risks, and external scrutiny.
BCG’s global experts have partnered with governments, operators, and contractors to deliver more efficient, effective, and responsible decommissioning and reuse approaches.
Partner and Director, Oil & Gas
London
Managing Director & Partner
Paris
Principal
Houston
Associate Director, Upstream Oil & Gas
London
Principal
Amsterdam
