Bill McDonald: Challenges facing oil industry over decommissioning

The North Sea decommissioning industry is in its infancy yet there is no doubt about its potential. Valued at between £24 billion and £30bn, this new industry could secure important jobs for Scotland. Over the next 30 years, decommissioning could rival oil exploration in terms of its size and impact.

But drag our heels in providing decommissioning services and the cost to the oil and gas companies could rise significantly. Any early advantage Scotland could gain in knowledge and expertise, capable of exporting around the world, would diminish.

There are 600 offshore platforms in the UK, 54 per cent of which are more than 15 years old. Approximately 50 will cease production in 2016, with more than 250 offshore installations to be decommissioned in total, along with subsea production systems and thousands of pipelines.

The main challenge is forging working commercial agreements between rig operators and contractors that make financial sense for both. Collaboration is needed to address multiple risks. North Sea decommissioning offers little room for error, has few examples to follow and is fraught with uncertainty.

Oil rigs were not designed to be decommissioned, their condition varies and historic documentation is often missing due to changing ownership throughout their lifetime. Location and water depth, environmental challenges and the size and age of platforms could affect project costs by tens of millions of pounds. Changes in the oil price could disrupt decommissioning timelines, undermining revenue certainty at short notice.

Skills are also in short supply, especially with competing industries like offshore wind, and it will require huge resources from engineering expertise, onshore facilities, specialist services and suppliers, safety and environment specialists. Where there has been a focus on "green jobs" in recent years, training new entrants and transferring the skills of existing oil industry workers must now also focus on this significant "brown jobs" market.

The priority is to get the right business models in place that allow for investment in knowledge and capabilities. Achieve this, and Scotland and the UK could secure a large portion of the market and look to export its skills abroad.

However, given the risks, operators and contractors are far from agreeing how they should work together. Operators like fixed-cost deals; contractors prefer cost plus deals. Fixed-cost deals put all the risk on to the contractor and forces margins down. Cost plus shares risk more evenly, but is potentially open ended and reduces the pressure on costs. Both operators and contractors need to buy in to a contracting model which they feel is commercially viable.

Accenture has carried out a research project in conjunction with students of the Oil & Gas MBA programme at Aberdeen's Robert Gordon University (RGU).Supported by Decom North Sea, it provides the industry's first objective analysis on the challenges that need to be overcome if the UK is take advantage of this potentially multi-billion pound opportunity.

The research found that while the operators and contractors were working to their own agendas on an ad-hoc project basis, they were now far more willing to look at alternatives and adopt greater collaboration to see progress. The findings have offered a platform for discussion for the entire industry.

Several options and levels of outsourcing are now being considered to manage risks and maximise margins. For example, in place of forming teams platform by platform, a new "alliance model" could eliminate much risk, allowing consortia to take on a number of moving decommissioning projects over several years. This would guarantee long term revenue streams and allow the alliance to absorb the financial disruption of a single postponed project.

Alternative contractual options are also under consideration which would allow vital investment in innovation. Both parties are also open to the idea of using different contracting models along the decommissioning project lifecycle, based on the level of risk and knowledge of each phase. The consensus is a move towards a balance of risk and reward and incentivised models across a phased project.

This is a very important stage in the successful development of the decommissioning industry. There is a strong sense of innovation and pragmatism within the sector and a desire to work collaboratively, which is likely to see a surge in activity over the next two years. So whilst challenges remain, those driving it forward seem ready for them.

• Bill McDonald is managing director for Accenture Scotland.