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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.
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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Enginee
ring
&
Construction
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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
Well Abandonment and Decommissioning Current Issues
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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Well Abandonment and Decommissioning Current Issues
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
64
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.
Well Abandonment and Decommissioning Current Issues
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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