Capturing The UK’s Decommissioning Opportunity · Capturing The UK’s Decommissioning Opportunity Wells to be decommissioned 2,447 Total tonnage decommissioned (tonnes) 1,421,641

Capturing The UK’s Decommissioning Opportunity

North Sea Decommissioning Conference

27 November 2018

Page 2

Context – North Sea decommissioning activity could exceed $100bn, with 90% of all platforms yet to be decommissioned


Wells to be decommissioned

2,447Total tonnage decommissioned

(tonnes)

1,421,641

Share of total projects in early

scoping phase

90%

Total expenditure GBP

17bn by 2025

UKCS decommissioning cost

reduction target-reduce by

35% during 2017-2035

Central North Sea will lead to

46% of the total

expenditure

Well P&A forms 49% of

the total cost

Platforms to be decommissioned

206

349 fields are expected to be decommissioned up to 2025

UKCS will account for 55%-60% of the total decommissioning cost in the North Sea during 2017-2025

About half of the total decommissioning expenditure of the UKCS region during 2017-2040 will be incurred by

2025, averaging ~ £2bn p.a.

Source: Oil and Gas UK

Page 3

Several factors make decommissioning a complex challenge


Reputational risks amplified by interests of multiple stakeholders

► O&G companies ‘enjoy’ heightened public interest and receive extensive media coverage

► Attention is amplified by environmental aspects of decommissioning and media reporting that taxpayers are footing the bill

► Asset-level decisions taken in isolation could be sub-optimal as fields are often parts of complex hub systems

Limited experience and lack of best practice

► There are significant technical challenges

combined with few past projects to provide

guidance on best practice

► Assets have diverse ownership, and operators

have diverse experience levels

Cost Uncertainty

► Average annual spend in 2021-40 is forecast to

be more than five times spend in 2015

► Cost and schedule overruns have been a feature

of historic decommissioning and there remains

uncertainty in future projections

Lack of returns for E&P investors

► Companies perceive negligible returns on

decommissioning expenditure, in contrast to

capital investment in E&P

Pressure on supply chain

► Financial stress has impacted ability to invest and

innovate around technical and commercial

solutions

► Lack of clear, predictable market demand has

made it difficult for companies to develop scale

Page 4

Mindset shift – decommissioning’s role in MER

► ‘Decommissioning means we cannot be

maximising recovery’ – is an over-simplification

► ‘E’ in MER is easy to say, but very hard to explain

as it means different things to different people

► ‘E’ addresses the need to achieve an acceptable

return from uncertainty

► Reducing uncertainty (positive or negative) can

drive a lower required ‘E’, which would increase

MER

► Reducing decommissioning cost is important, but

there is also real value potential in reducing

uncertainty in decommissioning cost


Disabling Cycle of

Decommissioning

Stagnation

Growing liability blocks

access to growth

Declining credit

ratings & M&A

stagnation

Inefficient supply chain

capacity

Inefficient execution

Cost escalation

6

5

1

3

2

4

Operatorprocrastination

Page 5

Aggregation offers the potential to reduce uncertainty


A single project may have the following profile: Aggregated activity could have the following profile:

0

20

40

60

80

2017 2018 2019 2020 2021 2022 2023

Revenue/Spend

Revenue/Spend

0

20

40

60

80

2017 2018 2019 2020 2021 2022 2023

Revenue/Spend

Series 1 Series 2

► A piecemeal procurement approach to decommissioning creates a fairly uncertain future cost profile (or revenue profile from a supply

chain perspective)

► A more certain cash flow profile, especially if from a creditworthy counterpart, is more valuable and attracts a much lower cost of capital:

► For operators, greater predictability could reduce the return requirement in E needed from continuing to produce (thereby increasing

MER)

► For suppliers, greater predictability could enable lower bids to capture the more valuable revenue profile (which would also increase

MER)

Page 6

Operators face a strategic choice at a corporate level, as well as a project level

Illustrative decommissioning strategic options


Sc

op

e

Asset Sale

Outsource

to decom

services

company

Develop

core internal

decom

capability

Decom

services

provider/

aggregator

Asset

purchaser/

decom

aggregator

Sell assets to third

party specialist

operator/decom

services company

Hybrid – Internally

directed, supply

chain contracted

Specialist late life/decom

services company

Decommissioning Options

Develop

full internal

decom

capability

Own assets

Own assets plus third party assets

Outsource to decom

services company

Range of commercial models relevant across these options

Page 7

The supply chain is evolving with new participants, propositions and commercial models from late life through to recycling


Operator

Heavy Lift Vessels

Topside

Wells

Subsea

Services

Decommissioning supply chain

Tier 1 Contractors

► Tier 1 contractors offer packaged services

and will oversee and deliver large parts of a

decommissioning contract

► Alliances are emerging to extend lifecycle of

solutions

► Duty holder concepts are being explored – but

not extending to financial liability transfer

Consortia and Special Purpose Vehicles

► Decommissioning consortia/aggregators

are emerging that are prepared to

assume operational responsibility for

late-life operations and decommissioning

► SPVs can help in aggregating scope and

managing financial risk

Specialised Operators

► A few operators have developed

in-house decommissioning

capabilities and are seeking to

act as decom service providers to

other operators

Service Providers (Tier 2/3 contractors)

► Service providers collectively offer a

wide spectrum of services from P&A to

the provision of heavy lift vessels

► Several service providers are developing

multi-disciplinary alliances to offer jointly

to the market

Page 8

Service companies are developing their late life commercial propositions


Potential Commercial Model OptionsR

isk

/Re

ward

Scope/ValueTransactional Supplier Integrated Project Partner

Price ListDay Rates

Performance

based

Lump sum

(capped

liabilities)

Modified

Lump sum

Lump sum

Turnkey

Gain share

Asset

Ownership/

Production

Sharing

Equity

Contract

Margin

While operators and service companies seem prepared to look at things differently, proper commercial collaboration will

be needed to achieve success

Page 9

Proposed fiscal change can help get the right assets into the right hands


A ‘tax value gap’ can be caused in UK asset transactions if the buyer’s unable to obtain corporate tax relief for negative

net future cashflow on the asset (while the seller would due to its tax history.)

Seller

Buyer

Tax history

Point of sale

Profits

Decom

Unrelieved

Seller

Buyer

Tax history

Profits

Decom

TTH

TTH

Without TTH With TTH

Page 10

The market has already evolved to separate activity (who does it) from liability (who pays)


Recent transactions in the North Sea demonstrate growing flexibility in decommissioning liability sharing, with

responsibility for decommissioning not necessarily being transferred to the buyer

No Liability

Seller

Decommissioning liability sharing models

Recent illustrative transactions

Total’s acquisition of Maersk Oil & Gas (August 2017)

BP’s divestment in three North Sea fields to Serica

(November 2017)

Shell’s asset sale to Chrysaor (January 2017)

BP’s 25% stake sale in the Magnus field to EnQuest

(January 2017)Limited Liability

Buyer

Model 1

Model 2

Model 3

Model 4

Financial Liabilitiy Decommissioning responsibility

Page 11

Decommissioning is likely to drive workforce transformation


► Decreasing personnel requirements in aggregate

► Detailed understanding needed of skill requirements

► Assess vs. internal and external availability

► Secure key/scarce resources

► Labour engagement/relations will be key

► Socially responsible redeployment/retraining

► Retaining key personnel

► Employee value proposition needs to be targeted to capabilities

Strategic planning across lifecycle (skills/capabilities identified at each stage, sourcing strategy agreed

and training developed and available when needed).

Clear view of employee value proposition across internal and contractor staff and by capability type. Long

term retention approach developed for key staff.

Implementation of appropriate culture across dynamic/changing workforce. Proactive labour engagement

and management across multiple groups. Effective HR processes

An employee transformation programme should encompass:

Workforce optimisation

Employee value proposition

Culture and transition

management

Page 12

In a global context:Europe has strongest near-term demand, but spend elsewhere accelerates in the medium term


► Global offshore decommissioning spend during 2020-2040 estimated at US$200bn (2016 estimates).

► Annual global spend estimated to reach US$13bn by 2040. More than 5x 2015 spend of US$2.4bn

► Between 2016 and 2021, Europe is expected to account for over half of the global offshore decommissioning spend

Key Offshore Decommissioning Markets

► South America – Brazil

► North America – Gulf of Mexico

► Europe – North Sea (UK and Norway)

► Asia Pacific – Thailand, Indonesia and Australia

► Africa – Angola and Nigeria

Page 13

► Mindset shift – decommissioning is not the enemy of MER; it can be a core part of MER

► Realising value in aggregation – right assets (or activities) in the right hands

► Commercial innovation to share value – collaboration and evolving relationships between suppliers and

operators

► Developing people and skills

► Infrastructure – managing what we have and building what we need

► Thinking in a global context

Capturing the decommissioning opportunity for the UK necessitates:


Page 14

Contact details


Jon Clark

EMEIA Leader Oil & Gas Transaction Advisory Services

Tel: + 44 20 7951 7352

Email: [email protected]

Disclaimer

The information in this pack is intended to provide only a general outline of the subjects covered. It should not be

regarded as comprehensive or sufficient for making decisions, nor should it be used in place of professional advice.

Accordingly, EY accepts no responsibility for loss arising from any action taken or not taken by anyone using this pack.

The information in this pack will have been supplemented by matters arising from any oral presentation by us, and should

be considered in the light of this additional information.

If you require any further information or explanations, or specific advice, please contact us and we will be happy to

discuss matters further.

Page 15

Thank you

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Ernst & Young LLP

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Documents

Capturing The UK’s Decommissioning Opportunity · Capturing The UK’s Decommissioning Opportunity Wells to be decommissioned 2,447 Total tonnage decommissioned (tonnes) 1,421,641