The prospect of huge costs to retire UK North Sea oil and gas installations is deterring bidders for older fields put up for sale by larger companies, threatening to slow development of the region's remaining resources.

Underlining the inevitable decline of North Sea output, a Royal Dutch Shell Plc official said this week the Brent field - in production since 1975 and one of the largest ever found in the UK North Sea - would be decommissioned in the near future.

The cost of decommissioning, and how liabilities may be slowing down deals, was among the topics addressed during London's IP Week, an annual conference and series of social events for oil executives and traders.

We don't really have much of a track record of decommissioning yet in the UK, said Andy Brogan of global accountancy firm Ernst & Young. When you speak to people about how much it's going to cost to do it, you get very wide ranges.

Decommissioning refers to plugging old wells and removing installations such as production platforms and pipelines once the oil and gas reserves have been pumped out. Companies factor in these costs when wells are initially appraised, and the government provides tax relief.

Andrew Moorfield, head of oil and gas at Lloyds Bank - among the biggest lenders to the North Sea oil and gas industry - said North Sea decommissioning costs could reach 30 billion pounds.

This number is difficult to nail down, Moorfield told Reuters. As the UK North Sea has about 470 oil and gas installations, all of which have their own unique lifespan and cost characteristics, the true cost will only be known in hindsight.

Trade group Oil and Gas UK says decommissioning spending may exceed 3.3 billion pounds from 2012-2016.


In recent years, larger oil companies such as BP Plc have been scaling back from the North Sea, selling fields to smaller companies to whom they are more valuable and who tap the remaining reserves.

That process, executives say, is being slowed down.

The prospect of future decommissioning costs deters small companies, said John Manzoni, chief executive of Talisman Energy Inc, a North Sea producer since 1994 when larger companies started to sell assets.

Hence, the transactions have stalled and the resources are not getting the investment that they otherwise might.

Moorfield of Lloyds said last year's UK budget - which upset the industry by increasing tax on UK oil and gas output - had given rise to uncertainty around the tax treatment of decommissioning costs.

This has led to a reduction in bid activity for older and technically challenging fields traditionally sold by the majors to the UK minnows, he said.

If the government provides clarity around decommissioning in the March 2012 budget - as the industry hopes - deal activity could increase in 2012, oil consultants Wood Mackenzie said in a report last month. Moorfield also said he expected more deals to be done should the issue be clarified.

Even so, decommissioning is not all bad news for the UK oil and gas industry.

A January report from Oil and Gas UK said the decommissioning market represented a growing business opportunity and a chance for companies to develop expertise that they can export to other regions.

And with oil prices well above $120 a barrel supported by rising tension with Iran, industry executives at IP Week were upbeat about the North Sea's future.

UK oil and gas investment is set to reach an all-time high in 2012, according to Wood Mackenzie, suggesting the government's tax increase last year has not jeopardised profitability.

For us, the North Sea is important, said Patrice de Vivies, senior vice president, northern Europe at Total. We are relatively optimistic for the future.

(Additional reporting by Dmitry Zhdannikov; Editing by William Hardy)