Well Abandonment and Decommissioing - Current Issues

7/29/2019 Well Abandonment and Decommissioing - Current Issues

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T O U C H B R I E F I N G S 2 0 0 9

Current issues surrounding well abandonment and decommissioning

of the associated infrastructure are challenging to operators and

service providers alike. This discussion of current issues focuses on

the financial, environmental and regulatory issues affecting the cost

of decommissioning operations in the US Gulf of Mexico (GOM)

region; however, it is believed that many of these issues may come

to affect decommissioning costs worldwide.

The costs of developing, operating and maintaining upstream assets

associated with the exploration, production and transmission of oil andgas have nearly doubled from 2004 to 2008, as indicated by the upstream

capital cost index curve shown in Figure 1. The rate of increase during the

three-year period from July 2005 to September 2008 exceeded 180%

and, assuming there are no effects from the global economic recession,

could be extrapolated to exceed 230% growth by the end of 2009. This

most recent five-year trend in cost escalation is significant compared with

the previous five-year period (20002004), which posted a modest 10%

(2% per year) escalation of costs in the upstream segment.1 A similar

growth trend in decommissioning costs is projected for the UK

Continental Shelf (UKCS) region, where costs are expected to increase

20-fold over the next 30-year period ending in 2038.2

Financial Outlook

The cost of plugging wells and decommissioning offshore infrastructure,

which includes wells, caissons, well protectors, fixed platforms and

pipelines associated with end-of-life assets,3 has tracked industry trends,

with escalating costs caused primarily by bottlenecks and shortages of

people, equipment, inputs such as steel, and engineering skills.1

Consequently, the cost of doing business has increased for lease

operators, material suppliers and service providers, with all of the

increases ultimately being borne by the lease operator, who is challenged

with developing new assets to increase production while absorbing the

increased costs charged by suppliers and service providers.

Figure 2 depicts the upstream capital cost index curve shown in Figure 1

superimposed with the average annual cost of crude oil plotted in US$

per barrel. By comparing the years 2000 and 2008, it is apparent that the

cost index, or the cost of doing business, in the upstream segment of the

oil and gas industry increased at a similar rate to that of crude oil prices.

The question for the future is: are crude oil prices the primary driver of

industry costs? Figure 2 shows the predicted price of crude oil for 2009,

which is expected to decline to an average near US$51 per barrel. If

crude oil price is the primary driver of changes in cost, one should expect

a flattening (green dotted curve) or even a decline in upstream costs (pinkdotted curve) during 2009, with the amount of change likely being

proportional to the duration and severity of the economic recession

currently stifling world economies, reducing their demand for fossil fuels

and causing oil prices to decline from the high levels attained in 2008.

Even though operator earnings were bolstered by record high oil prices

exceeding US$147 per barrel in July 2008, which allowed greater

spending on both infrastructure build and decommissioning projects,

operators have now been encumbered by the rapid decline in oil prices

experienced over the subsequent five-month period ending in

December 2008, when prices dropped below US$40 per barrel. The

earnings decline associated with the drop in oil prices and the tighteningof credit markets as a result of the current global economic recession

have caused a near-term reduction in operating budgets for many oil

and gas producers, especially for non-income-producing expenditures,

including asset decommissioning. Although there are a few major

producers, including BP PLC, Royal Dutch Shell PLC, Chevron

Corporation and TOTAL, that plan to keep capital expenditures flat or

slightly up in 2009, many others, such as ConocoPhillips, Occidental

Petroleum, Talisman Energy, Inc., Petro-Canada, Lukoil and Gazprom,

have all announced reductions as high as 45% compared with capital

expenditure in 2008.4 In the US GOM region, independent producers

such as Apache Corporation and Stone Energy have reduced their 2009

decommissioning budgets by 3050% below 2008 levels in response toboth declining revenues and the economic slowdown.

While the full impact of the current economic recession, which may

produce a levelling or even a decline in operating costs, has not yet been

fully recognised throughout the oil and gas industry, the impact on

operator spending due to reduced earnings and restricted capital inflows

has reduced the number and scale of decommissioning projects. The

number of these projects could decline even further beyond 2009,

depending on the depth of the recession, the speed of global economic

recovery and, subsequently, the rebound of oil and gas commodity prices.

Environmental Effects

The effect of the environment, such as weather, is another major issue

in offshore abandonment and decommissioning costs. In studies, the

effects of global warming have been linked to an increase in both the

Gary Siems is Technology Director of the Offshore

Division at TETRA Technologies, Inc. He has over 32

years of sales, marketing and operations management

experience in the oil and gas services industry. Mr

Siems holds a BSc in electrical engineering from the

University of Florida and an MBA from the University of

Louisiana at Lafayette.

Richard Ward is Vice President of Global Sales and

Marketing in the Offshore Division at TETRA

Technologies, Inc. He has over 40 years of engineering,

project management and offshore construction

experience, including international assignments in the

North Sea, South-East Asia, West Africa and the formerSoviet Union. Mr Ward has a BSc in mechanical

engineering from Texas Tech University.

E: [email protected]

Well Abandonment and Decommissioning Current Issues

a report by

Gary Siems 1 and Richard Ward 2

1. Technology Director; 2. Vice President, Global Sales and Marketing, Offshore Division, TETRA Technologies, Inc.

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number and strength of tropical cyclones (hurricanes) occurring in the

tropical regions of the Atlantic Ocean. The number of hurricanes that

develop each year has more than doubled over the past century, from

an average of 3.5 hurricanes per year in the 25-year period from 1905to 1930 to an average of 8.4 per year in the 11-year period from 1995

to 2005. Greg Holland of the National Center for Atmospheric

Research in Colorado states, Were seeing a quite substantial increase

in hurricanes over the last century, very closely related to increase in

sea-surface temperatures in the tropical Atlantic Ocean.5

The increase in the quantity and strength of tropical storms passing

through the GOM combined with the ageing oil and gas production

infrastructure in the region some of the earliest of which were

installed over 60 years ago has significantly and permanently changed

the way in which abandonment and decommissioning plans and

schedules are viewed by lease operators. Wind and storm surge fromHurricanes Katrina and Rita in 2005 destroyed 113 of the nearly 3,800

production platforms in the GOM,6 with Hurricanes Gustav and Ike

destroying an additional 60 platform structures during the 2008

hurricane season.7

The collateral damage to platforms and associated infrastructure by

wind and storm surge, commonly referred to as downers, causes an

increase in operating costs in at least two ways. The first is a direct


Figure 1: Upstream Capital Cost Index

02000 2001 2002 2003 2004 2005 2006 2007 2008 2009

50

100

150

200

250

300

Costin

dex Upstream

cost index

2008 extrapolatedcost index

Source: Cambridge Energy Research Associates (CERA).1

Figure 2: Upstream Capital Cost Index and Crude Oil Prices

Upstream cost index Oil prices inflation-adjusted

02000 2001 2002 2003 2004 2005 2006 2007 2008 2009

50

100

150

200

250

300

0

50

100

150

200

250

300

Costindex

Price

perba

rrel(US$)

2009 cost index likely range

2009average

Inflation-indexed to 2007. Source: Cambridge Energy Research Associates (CERA) 1 and InflationData.com13

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E X P L O R A T I O N & P R O D U C T I O N V O L U M E 7 I S S U E 1

increase to the cost of plugging and decommissioning wells, pipelines

and platform structures that have been knocked to the ocean floor. Thecost of abandoning and decommissioning a downer platform is

estimated to range between five and 50 times the cost of a

conventional abandonment.3 The second cost increase that affects all

operators is the cost of insurance. It was estimated by Dr Robert

Hartwig of the Insurance Information Institute that Hurricanes Katrina

and Rita caused over US$11.6 billion in total losses to the offshore

energy industry, and cost energy insurers at least US$5 billion in claim

payments.8 The cost of damage caused by Hurricanes Gustav and Ike

has yet to be fully determined. As a consequence of the high cost of

hurricane damage claims, insurance companies underwriting well and

platform assets have either significantly raised underwriting premiums

or have abandoned underwriting oil and gas assets altogether. Leaseoperators are now faced with paying much higher insurance premiums,

assuming greater risk by paying higher insurance deductibles

sometimes in the US$100 million range or assuming all risk by self-

insuring at least a portion of their producing and non-producing assets.

All of these options serve to increase the operators liabilities on their

balance sheet. This increased liability requires prudent managers to

plan and execute well abandonment and decommissioning

programmes on a continuous basis in order to mitigate the potential

for catastrophic loss to their company and to continue the process

independently of other influencing factors.

Regulatory ImpactAlthough wells that have been severely damaged by natural disasters

have not yet caused any major environmental damage in the hard-

hit GOM region, the potential for significant damage to the

environment from any oil and/or gas well and its associated

infrastructure does exist. Under US law, regulators could classify all

non-producing wells as an environmental hazard and force lease

operators to immediately plug them if the potential for commercial

production cannot be demonstrated. The United States Code of

Federal Regulations (250.1710) requires that all wells on a lease be

permanently plugged within one year after the lease terminates, and

another code (250.1711) requires the Minerals Management

Services (MMS) to order the permanent plugging of a well if that

well poses a hazard to safety or the environment, or i s not useful for

lease operations and is not capable of oil, gas or sulphur production

in paying quantities.9

Regulatory compliance has been a driving force in encouraging major

and independent operators in the US to pursue decommissioning

projects on a continual basis; however, regulatory pressure in itself is

not always sufficient to ensure that decommissioning plans are

executed within the prescribed time period. It is anticipated that

regulatory pressures in the US could increase further to help achieve

one of the goals of the Obama administrations American Recovery and

Reinvestment Plan, which is to save or create over three million jobs

while investing in priorities like healthcare, energy, and education that

will jumpstart economic growth.10 This goal could be accomplished in

part by the US Government directing its regulatory agencies such as the

MMS, the agency that is responsible for decommissioning activities in

the US Outer Continental Shelf (OCS), to apply pressure on operators

to adhere to abandonment and decommissioning schedules prescribed

by law. This action would act to sustain, if not create, jobs in the

industrys service sector. However, it should be recognised that any

regulatory pressure applied by the US Government would have little

effect outside of that country, especially on the worlds national oil

companies (NOCs), which may have fewer restrictions and may even beencouraged by their governments to reduce spending on non-

production activities if oil and gas commodity prices decline to a point

at which government income is significantly reduced.

Well plugging and infrastructure decommissioning have been moving to

the forefront of concern in many oil- and gas-producing countries, despite

rising costs. Some countries such as the US, Norway, The Netherlands and

the UK have been decommissioning ageing infrastructure for years under

rigid environmental and legal guidelines. Other countries with fewer years

of oil and gas production, such as Thailand, have begun drafting

decommissioning regulations in this decade.11 All operators seem to

recognise the potential environmental impact and rising costs associatedwith delaying decommissioning obligations, but they must also balance

these liabilities against expected earnings and profit objectives.

Mitigating Decommissioning Costs

Knowledge of current decommissioning issues is important to understand

the willingness of oil and gas producers to increase, decrease or sustain

abandonment and decommissioning programmes, as all of the key issues

drive up the cost to the lease operators responsible for decommissioning

end-of-life assets. Therefore, decommissioning service providers would be

remiss if they failed to offer cost-saving options to lease operators (their

customers) that would reduce, instead of increase, the cost of

decommissioning. TETRA Technologies, Inc., for example, offers amultitude of options to help reduce the cost of well abandonments, one

of which includes providing a rigless well abandonment solution that not

only eliminates the cost of a rig or hydraulic workover unit, but usually also

reduces the time required to complete the well plugging process. Project

engineering and project management are other available service options

that serve to relieve operators personnel resources of the detailed work

required for researching well histories, developing current and proposed

well schematics, engineering and developing detailed plugging

procedures, preparing pre-work and post-work regulatory documents and

assisting with or performing the management and oversight of the entire

decommissioning process. Once the wells are plugged, the next stages

of decommissioning including casing sectioning, diving services for

pipeline flushing and terminating, structural engineering for safe platform

structure removal, heavy lift vessels to complete the removal (see Figure 3)

and the arranging of trawl services to ensure full site clearance can all

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Figure 3: Platform Decommissioning


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be provided or arranged by a single-source company. When multiple

services are provided by one company, lower project costs can result.

Edwin Goldman, Senior Vice President of the Offshore Division of TETRA

Technologies, Inc., remarks, As TETRA expands its range of

decommissioning services globally, we are mindful of increasing costs. We

feel that a way to mitigate costs is through the provision of integrated

services under one roof.

Another cost-reducing solution offered by some integrated

companies is to provide oil- and gas-producing property owners with

an avenue for asset divestment. The divesting of sunset properties

allows the selling company to free up its personnel in order to

strategically focus on the exploration and production activities of

more lucrative properties. A single-source provider such as TETRA

Technologies, Inc. offers this option through its wholly-owned

subsidiary Maritech Resources, Inc., which acquires and operates

mature oil and gas fields and manages the final decommissioning of

the wells and infrastructure after all remaining hydrocarbons have

been produced. This provides an attractive buyer with expertise in

the decommissioning process to whom exploration and production

companies can sell mature fields.12

Conclusion

The cost of plugging and decommissioning end-of-life oil and gas assets

has been continually increasing over time, and it is expected that this trend

will continue. Once the worlds economies begin to recover from the

current recession and return to growth, the price of oil and gas that is

needed to fuel that growth will rise, as any shift away from fossil fuels as

a primary energy source will be a lengthy process. Therefore, near-term

solutions for reducing well abandonment and infrastructure

decommissioning costs are required. These near-term solutions are

available through planning, innovation and the application of new

technologies by the companies providing decommissioning services,

single-source service providers offering multiple decommissioning services

and operators taking advantage of divestment opportunities to unburden

themselves of sunset oil and gas property liabilities.


1. Cambridge Energy Research Associates (CERA), Available

at: www.decc.gov.uk/pdfs/cera-report.pdf (accessed 31

January 2009).

2. Eustace J, Odling D, Rivara A, Tholen M, Available at:

www.oilandgas.org.uk/issues/economic/econ08/index.cfm

(accessed 5 February 2009).

3. Kaiser MJ, Dodson R, Foster M, Louisiana State University,

2008.

4. AFX News Limited, Available at: www.rigzone.com/

news/article.asp?a_id=72463 (accessed 6 February 2009).

5. Vergano D, Study Links more Hurricanes, Available at:

www.usatoday.com/weather/hurricane/2007-07-29-more-

hurricanes_N.htm (accessed 4 February 2009).

6. US Department of the Interior, Minerals Management

Service, Available at:

www.gomr.mms.gov/homepg/whatsnew/hurricane/2005/

katrina.html (accessed 4 February 2009).

7. US Department of the Interior, Minerals Management

Service, Available at: www.gomr.mms.gov/index.html

(accessed 4 February 2009).

8. Hartwig RP, Available at: www.iii.org/media/presentations/

energy/ (accessed 2 February 2009).

9. Federal Register, Available at: ecfr.gpoaccess.gov/cgi/t/text/

text-idx?c=ecfr&tpl=/ecfrbrowse/Title30/

30cfr250_main_02.tpl (accessed 3 February 2009).

10. Obama B, Available at: www.whitehouse.gov/agenda/

economy/ (accessed 4 February 2009).

11. www.thaidecom.com

12. Anderson E, Available at: www.epmag.com/archives/

managementReport/774.htm (accessed 6 February 2009).

13. Historical Crude Oil Prices, 2008. Available at:

www.inflationdata.com/inflation/Inflation_Rate/Historical_

Oil_Prices_Table.asp (accessed 6 February 2009).

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