When Shutting-In Production is Not an Option

When Shutting-In Production is Not an Option

February 26, 2015
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I have read several glib remarks about current low prices signalling the final demise of the North Sea. I can quite easily see a dip in production as start-ups are put back and maintenance work overs are deferred, but the cost of abandonment will always act as a brake on actually shutting down assets. Even with tax breaks these still substantial abandonment costs skew the economics towards extending the life of assets. This is particularly the case for transportation infrastructure.

By and large the North Sea uses the contract carriage transportation model for the use of pipelines and terminals that are owned by individual companies or groups of companies that own the infrastructure jointly. New fields seeking access to such infrastructure face the prospect of shouldering a disproportionate share of costs as the transportation assets continue to offer throughput tariffs long after throughput economics would ordinarily dictate closure.

Perhaps it is time for a review of the ownership of North Sea transportation infrastructure. Rational economic decisions taken by companies will always be different from those taken by host country governments seeking to extend oil production and their own tax revenue.