Decommissioning liability: the number buyers and sellers get wrong

Every producing oil and gas field carries a bill that falls due after the last barrel is sold. Too often, that bill shows up in the data room as a single line, carried forward from the operator's last budget, and both sides treat it as settled. It rarely is. The decommissioning liability is a pure cost with no revenue left to pay for it, it is estimated years before the work happens, and the assumptions underneath it are seldom opened up. When the number is wrong, value moves quietly from one side of the table to the other.

Why is decommissioning liability so often underestimated?

Underestimation is rarely dishonesty. It comes from how and when the estimate is made. Most figures are produced early in a field's life, or rolled forward from last year's version, while the field itself keeps ageing. Several things tend to push the real cost above the paper one:

• The wells are older than the estimate assumes. Permanently sealing wells is widely recognised as one of the largest and least predictable parts of an offshore decommissioning bill. Wells drilled decades ago often come with incomplete records, and an average cost per well cannot tell you which ones will cause trouble.
• The market moves. The estimate prices a rig or vessel at a rate, and with an availability, that may not exist in the year the work is actually due, particularly when many fields in the same basin reach the end of their lives together.
• Scope is assumed at its most favourable. Whether pipelines and subsea structures can stay in place or must be removed is ultimately the regulator's decision, and a quiet assumption of the cheaper outcome can carry a large part of the figure.
• Work falls between two teams. Wells and subsea removal are often estimated by different people. The vessel time and equipment needed where the two scopes meet end up in neither budget.
• The owner has little incentive to make it bigger. The company carrying the liability on its balance sheet has little reason to challenge its own number.

How does the liability change the value of a transaction?

For a buyer in oil and gas M&A, the decommissioning liability (often called the abandonment liability) behaves like deferred debt that comes with the asset. Every cost the estimate misses is value handed to the seller at signing, and it only becomes visible years later, when production has stopped paying the bills. Discounting hides the problem: a cost far in the future looks small today, so a serious error in the estimate can pass for a rounding difference in the valuation model.

Sellers get it wrong too. A thin, poorly supported estimate invites the buyer to price in its own worst case, and a seller who cannot defend the number risks conceding more on price than a proper study would have cost. A credible estimate protects both sides, because it moves the negotiation from opinion to evidence.

The figure also shapes the structure of the deal. It helps set the size of any financial security the regulator asks for, it frames how retained liabilities and deferred payments are split between the parties, and in some regimes it stays relevant to the seller long after closing, because the authorities can turn to former owners if the current one cannot pay.

A decommissioning estimate nobody has opened up is not a number. It is an assumption with a currency attached.

What makes a decommissioning cost estimate credible?

You do not need to be a well engineer to judge an estimate. You need to know what to ask of it. A number you can rely on in a negotiation usually has these features:

• It is built well by well and structure by structure, from the actual records and condition of each, not from an average spread across the field.
• Gaps in the data are named and priced as risks, not filled with hopeful assumptions.
• The major choices are written down: what is removed and what stays, where the material goes, which kind of rig or vessel does the work, and in what order.
• It is a range rather than a single figure, with a central case, a pessimistic case and the handful of drivers that separate them.
• Rig and vessel costs reflect today's market and a realistic view of availability when the work falls due.
• The wells and subsea scopes are estimated together, so the work where they meet is costed once and owned by someone.
• It has been checked by someone independent of whoever benefits from the result, and it carries a date.

An estimate that fails several of these tests is not necessarily wrong. It is unproven, and an unproven number should be priced as one. Testing it belongs in any independent technical due diligence on an acquisition, alongside the reservoir, the wells and the subsea infrastructure. In one of our published cases, Mature-field acquisition, de-risked, quantifying the decommissioning liability was part of the independent review handed to the buyer's negotiation team.

Why does the removal contract decide the final cost?

Even a sound estimate can be lost in execution. Overruns in a decommissioning campaign show up offshore: vessel days nobody planned for, waiting on weather, a tool that does not fit, a gap between two contractors' work that turns into a claim. Many of them were locked in months earlier, when the work was contracted.

The strategic choices come before any bid arrives: one large campaign or several smaller ones, wells work bundled with subsea removal or tendered separately, fixed prices or day rates, and who holds the weather risk. Make those choices deliberately, write into each contract exactly where one contractor's work stops and the next one's starts, and bidders price the real job. Leave them vague, and the cheapest bid can become the most expensive outcome.

That was the core of another published case, Subsea decommissioning, contracted without surprises: an operator facing its first campaign, where we shaped the contracting strategy, ran the tender for vessels and services and supervised execution, so the boundaries between contractors were fixed before they could turn into claims. Both engagements are on our cases page. The same thinking runs through our tendering and contracting work and our decommissioning service, where the wells and subsea removal scopes are engineered as one plan.

When should you bring in an owner's engineer?

An owner's engineer sits on your side of the table, not the contractor's or the counterparty's. We have worked in that role since 2015, from offices in Brazil, Norway, Switzerland, Singapore and Australia. The cheapest moment to test a decommissioning number is before it is written into a price, and the call usually makes sense at one of these points:

• During due diligence on an acquisition, before the sale and purchase agreement fixes how the liability is shared.
• When a seller preparing a sale wants a figure that will survive the buyer's scrutiny.
• When joint venture partners question the operator's estimate, or the regulator asks for an updated plan or more security.
• When the end of production is in sight and the campaign has to be planned and contracted.

If one of these is on your desk, tell us about the asset and the deadline you are working to. The senior partner who scopes the estimate stays with it until the campaign is contracted.