Weekly Overview: Decommissioning; New Hubs; and Nord Stream 2

There was relief from the run of bad news offshore UK this week when the cutting of the first steel for AP Maersk’s Culzean project got underway – admittedly on the other side of the world, in a Singapore yard that has specialised in modular engineering.

Despite the favourable tax regime the field development is entitled to, owing to the technically challenging properties of the reservoir, not much of the equipment for it will be built in the UK. Nevertheless AP Maersk says it will contribute billions to the economy when it comes onstream in 2019.

The field’s gas will help ease the UK decline and bring in money for the operators of the offshore pipeline – a French infrastructure fund Antin, for whom the producers’ ship-or-pay fees have underpinned the purchase – and the processing plant at Teesside. At home, AP Maersk is operator of the Danish producer group, DUC and it is thinking of winding up its production at the Tyra field by 2018 if it cannot find an alternative that is economic.

Together with the UK, Denmark is facing the dilemma of whether to intervene to support assets that are key for revenues for the state and which would might still be assured a longer future if oil prices were higher. Once shut down, decommissioning is their fate, rather than mothballing, meaning the remaining reserves will be locked away. On the other hand, nobody knows how long oil prices will take to rise to the point where intervention is no longer necessary.

A study by Douglas-Westwood in February looked at decommissioning in the North Sea between now and 2040 and estimated Denmark’s decommissioning costs will range between $4.8bn and $3.9bn depending on the technology that is used.

In the UK over the 2019-2026 period, the consultants see the removal of 144 platforms – 51% of all platform removals in the UK over the forecast period. The UK will retain a high level of spend to 2040, accounting for well over 50% of the market, the report says. Spend will range between $51bn and $44bn. Meanwhile in Norway, with a bright future in the short to medium term, decommissioning spending is expected to peak after 2030. 

Protecting key infrastructure is a high priority for the UK Oil & Gas Authority, which continues to actively engage with licensees across the UKCS on early stage planning to achieve maximum extension of field life. Some two thirds of the UK oil and gas reserves have gone; now the question is how much of the last third can be squeezed out.

Oil prices are a key factor in that discussion; the signs are not encouraging for producers in the near term as US production is very responsive to price rises and necessity is the mother of invention, where oil production technology is concerned. There is to be a meeting for a large array of Opec and non-Opec members on April 17 to discuss output, with no reason to see agreement leading to an actual reduction. Iran is still making up for lost time and other countries are unlikely to rest on their oars while their own budgets are suffering.

New hubs

Moving downstream, Ukraine and Turkey won plaudits from the European Federation of Energy Traders this week, for their moves towards developing hub trading. As an energy corridor, gas from all kinds of mutually unfriendly nations could be commingled and sold at local prices at a Turkish hub, once it earned traders’ confidence.

Ukraine’s gas monopoly for its part is moving fast with plans to unbundle, taking the initiative from an otherwise preoccupied government, and even groping its way towards a network code for balancing, a key function of a hub if it is to attract liquidity.

Is it too fanciful to imagine that with a grid owned not by the government in Kiev but by pension funds and infrastructure operators, keen to install modern compressors and meters that separate domestic from transit pipes, Russia’s aversion to using the Ukrainian grid might melt away?

Or conversely, should one ask who would buy a grid that could be four or five times bigger than it needs to be if Nord Stream 2 goes ahead, and that stretches for thousands of kilometres across featureless or  – worse, war-torn – terrain?

The operation of the grid is also moving towards a European ideal, with reverse flow possible since the start of April from Slovakia (just Budince, not Velke Kapusany), Poland and Hungary, increasing the country’s possible earnings from north-south transit as well as west-east, allowing it to bring other people’s gas into its grid and out again, from Slovakia to Romania and ultimately Turkey, for example, or bring regasified LNG from Poland down into Hungary.

Its storage assets could be a beneficiary: with reverse flow shippers finally have certainty that they can bring gas in and out of the country. In the past few years, Ukraine has begun the winter season with the facilities barely half full. That could be part of the answer to security of supply fears in the Balkans.

Nord Stream 2

However, the struggle surrounding Nord Stream 2 continues to rage and generate the pithiest quotes from eastern European opponents: a “killer project,” a “hybrid weapon,” or a “Trojan horse” – it is anything but a highly pressurised steel tube intended to bring a low-carbon source of energy to a region that is using up the last of its own.

A conference in Brussels was the scene for third parties to comment on this private-capital project, although the commercial arguments against it in this era of cheap gas might in the end prove fatal for a sanctions-hit country that could use the money for other things. And for those utilities who do not like the idea of buying gas from Russia, other options do exist in this competitive environment, even if they turn out to have a "liberty premium" attached to them.

Ukraine has the most to lose from Nord Stream 2. Like many other countries in the region it wants to retain some elements, such as cheap gas and transit fees, from the past. But it gained independence from Russia decades ago, so on the principle of reciprocity Gazprom and partners ought to be free to send gas to customers through a new pipeline using a different route, and to sell it at whatever price they can agree on.

If Gazprom and partners do go ahead with Nord Stream 2, those newly-enabled reverse flows across Ukraine’s three western borders will have to ramp up quickly to compensate Ukrtransgaz for the loss of Gazprom’s business, estimated at $2bn/yr. But given the low fees that shippers pay for capacity under those ultra-sophisticated network codes which are now being hammered out between regulators, transporters and shippers, the transporter may need a very good Plan B.

William Powell