Ultra-deep water port: feasibility study

Executive summary

Introduction

The Scottish Government's (SG) Programme for Government made a commitment to build the case for an ultra-deep water (UDW) port in Scotland, and made capital funding of £7.5m available to support this development for the decommissioning sector. The purpose of this feasibility study is to assist the SG to identify a potential preferred location and to establish whether there is an economic case for the development of a UK UDW port^[1].

Two locations, in Shetland and at Nigg Energy Park, have been shortlisted from 40 quays across the UK

Working with SG, key stakeholders and Arch Henderson as technical advisors, a long list of 40 potential locations for a UK UDW port was identified. A three stage down-selection process was followed to identify the optimal locations. The stages considered were:

• Stage 1: All quays were assessed against a set of hard criteria (minimum requirements) which would need to currently physically exist for a quay to be a potential UDW port. After this stage, 22 quays were removed from consideration.
• Stage 2: The remaining 18 quays underwent a practicality assessment to assess the technical feasibility of converting the current quay into an UDW port. This resulted in a further 10 quays being removed due to the cost to develop the approach depths and depth at quayside to the required UDW levels.
• Stage 3: The remaining 8 quays were assessed against a set of soft criteria. Two locations, Dales Voe and Nigg Energy Park, emerged as the preferred locations to develop an UDW port.

While a range of criteria were assessed as part of this review, the selection of the preferred locations was governed by technical feasibility of each quay being able to reach the required water depths at the quayside and on approach, as well as proximity to the key North Sea basins.

Of the £1.2bn estimated expenditure for onshore recycling and disposal activities, an UDW port could target £583m of that expenditure

The Oil & Gas Authority forecast overall expenditure on decommissioning c300 platforms in the UK Continental Shelf (UKCS) at £59.7bn. Of this, an UDW port would participate in onshore recycling and disposal activities and this is estimated to account for £1.2bn or 2%.

There is no standard industry approach to estimating the proportion of the £1.2bn onshore recycling and disposal market that an UDW port could attract. Consequently, we developed a bespoke methodology to estimate the potential market size.

There are three primary decommissioning removal methods for transporting topsides and substructures to ports for onshore recycling and disposal. Of these three methods only one, the reverse engineer using ultra heavy lift vessels (UHLV), requires UDW at the quayside. Without this, these decommissioning projects need to use a barge transfer which adds time, cost and risk to decommissioning programmes. As the UK does not have an UDW port, projects using UHLVs have been taken to Norwegian UDW ports.

We estimate 64 platforms in the UKCS, weighing a combined 2m tonnes, are potential candidates for reverse engineer removal using UHLVs, and hence more likely to utilise an UDW port. Based on tonnage data available from OSPAR and a cost estimate of £300 per tonne, the market size for onshore disposal and recycling activities for decommissioning projects which may need an UDW port equates to £583m.

In performing this analysis, it is important to note that we have had to make a number of broad assumptions due to lack of available detail, inherent market related uncertainties and much of the financial information being commercially sensitive and confidential. These assumptions are detailed in Appendix B.

The ability to estimate direct income for an UDW port owner is restricted by commercial confidentiality, but could be in the region of £68m-£97m

The UDW port itself could generate income from activities such as charges levied on the vessel operator, the onshore recycling contractor and various other support vessels. The level of charges is held commercially confidential by port authorities. Applying a range of £35-£50 per tonne as a proxy would give a total market in the region of £68m-£97m for port income. This estimate reflects the total income potential. However, factors such as competition from other removal methods or non UK ports would be expected to limit the market share that a UK UDW port could secure.

Section 3 (Decommissioning market), Section 4 (Market assessment) and Section 5 (Sensitivity analysis) provide further detail on the market.

Currently, there is limited evidence to suggest non-decommissioning markets require an UDW port

We examined two potential non-decommissioning markets where an UDW port could attract additional revenues. Firstly, supporting future capital and operational expenditure within the oil and gas sector. Secondly, the renewable energy sector, especially floating offshore wind as Scotland looks to expand from its position as a leading destination of fixed bottom wind farms. This is described in more detail in Section 6 (Multi-use opportunities).

An UDW port could support 6^th and 7^th generation drilling rigs coming straight to shore for maintenance and capex without having to withdraw thrusters. No organisations from the oil and gas sector were able to identify any other specific activities which require an UDW port.

While an UDW port was required for the Hywind floating offshore wind project, floating wind industry reports and stakeholder feedback suggests there is no current need for an UDW port in the UK as its future requirements can be accommodated by existing facilities. We also asked industry contacts whether an UDW port could support other renewable energy activities such as wave or tidal energy; our findings suggested that these industries do not currently require an UDW port.

Technical alternatives are under consideration, but are at an early stage of development

Developments in platform removal technology and the contractual arrangements across the supply chain have the potential to impact the market for an UDW port. Alternative approaches to the removal and transfer of platforms to the shore are being considered, such as barge transfer or float and tow method. However, the commercial case remains to be established and the alternatives are at the early stage of development with no fixed date for introduction to the market. Section 7 (Technical alternatives) provides our commentary on technical alternatives.

Market consultation assessed views from a range of 25 organisations

In order to gauge market sentiment on the development of an UDW port a series of 25 interviews were conducted. The key messages from the market were:

• There is a lack of clarity on the future market, with no commonly recognised programme and timescale for decommissioning platforms. Currently, the market for ports is considered highly competitive, with a large number of locations and few projects coming to the market. However, it remains unclear what impact an increase in decommissioning activity, especially for large scale projects, would have on market dynamics.
• The ability of a port to offer a comprehensive onshore disposal and recycling capability, and to effectively manage the associated risks, such as fulfilling the safety and regulatory requirements, was considered a key advantage during the selection process. For the physical location, the east coast of the UK was considered preferable primarily due to the shorter transit times from the Northern North Sea and Central North Sea basins.
• No organisations viewed an UDW port as an attractive investment opportunity for them given that this would not align with their existing business model. Neither did they believe that guaranteeing a number of projects to a specific port would be possible.
• The number of direct jobs created by a project was considered to be up to 50, with the market investing in mechanical approaches to reduce labour costs. The UK market was viewed as a lower cost base for onshore activity compared to Norwegian competitors.
• Regarding specific multi-use opportunities, an UDW port could allow 6^th and 7^th generation drilling rigs to come straight to shore for maintenance and capex. However, there was no particular need identified for an UDW port from the offshore renewable industry.

The overall findings from the market consultation are provided in Section 8 (Market consultation). It is important to recognise that views will be based on the experience and commercial priorities of each organisation and accordingly should not be considered a definitive description of the market, but rather as a range of opinions.

A UK UDW Port could deliver a net economic benefit to the UK if it is able to attract a sufficient number of decommissioning projects

In all scenarios considered, which vary between a UK UDW port being able to attract 7 and 20 projects over a 20 year period, a UK UDW port is able to deliver a net economic benefit. This does not consider the impact of private financing potentially required for the development. Considering the need for private funding and assuming £10m of public funding to support the project, more than 10 projects would be required to be won by the UDW port to deliver a net economic benefit.

The primary benefits derive from the onshore decommissioning activity which considers work for the onshore contractor and the supporting supply chain.

A UK UDW port also has the potential to support lower overall decommissioning costs through reduced steaming time, lower onshore costs and a simplified waste management process. The level of saving available is largely dependent on a number of broad assumptions. However, analysis indicates that savings from lower onshore costs could be between £8m and £68m which has the potential to equate to a saving of between £3m and £27m for the UK exchequer through reduced future tax liabilities^[2]. Potential savings derived from simplified regulatory process and reduced transit times should be further explored as part of the business planning phase.

A range of scenarios were run which considered varying levels of success an UDW port might have in attracting decommissioning projects. Under the scenarios considered, the forecasted economic impacts amount to:

• £184m to £522m of total output impact (i.e. accounting for direct, indirect and induced economic impacts.)
• Between 58 and 165 average FTE positions per year, which considers the wider supply chain impact and beyond direct employment at the UDW port.
• Between £81m and £229m of gross value added.

A 'transfer hub' has the potential to increase the volume of decommissioning projects delivered to the UK

If the UK UDW port was able to operate as a transfer hub whereby it can receive modules from UHLVs then transport them to other ports for onshore decommissioning work, it would have the potential to increase the volume of projects brought to the UK by freeing up capacity at the UDW port and opening up opportunities for other ports. However, this may create economic leakage from the UK if the UDW port was used as a transfer hub by non-UK based disposal contractors.

To understand the potential of this opportunity, further analysis is required to determine how such a facility could operate in the most efficient manner, whether such an option would be attractive for operators and if the facility could operate in a cost effective manner to attract decommissioning projects.

Next steps

SG should consider the findings of this feasibility study and assess whether it wishes to proceed to the Business Planning phase. If taken forward, the following key areas must be addressed:

• Establish a robust plan on how the UDW port could be funded - in particular, ascertain the quantum of public sector support which may be available for the development.
• Engage with the appropriate port authority in order to outline a clear commercial model for the UDW port. Agree clear roles and responsibilities for all key stakeholders.
• Further develop and refine the following key areas of this feasibility study:
  • Clarify how a transfer hub could technically operate and assess the commercial implications.
  • Perform a technical assessment on future candidate projects to highlight those which should be targeted by an UDW port and complete a more detailed assessment of revenues which can be derived from the associated onshore activities.
  • Complete a more detailed assessment in order to fully understand the expected benefits which could not be quantified through this initial review e.g. additional UHLV activity, transit time savings and simplifying the waste treatment process.