Engineering & Construction

Well Abandonment and Decommissioning Current Issues

a report by

G a r y S i e m s 1 and R i c h a r d W a r d 2
1. Technology Director; 2. Vice President, Global Sales and Marketing, Offshore Division, TETRA Technologies, Inc.

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 and gas 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.
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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 (pink dotted 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 tightening of 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 to both declining revenues and the economic slowdown.

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.

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.

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

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 former Soviet Union. Mr Ward has a BSc in mechanical engineering from Texas Tech University. E: dward@tetratec.com

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TOUCH BRIEFINGS 2009

Well Abandonment and Decommissioning Current Issues

Figure 1: Upstream Capital Cost Index
300 250 200 Cost index 150 100 50 0 2000

Figure 2: Upstream Capital Cost Index and Crude Oil Prices

2008 extrapolated cost index

300 250 200 Cost index 150 100 50 0 2000

2009 cost index likely range

300 250 200 150 100 50 0 Price per barrel (US$)

Upstream cost index

2009 average 2001 2002 2003 2004 2005 2006 2007 2008 2009

2001

2002

2003

2004

2005

2006

2007

2008

2009

Upstream cost index

Oil prices inflation-adjusted

Source: Cambridge Energy Research Associates (CERA).

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

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 1905 to 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.
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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 from Hurricanes 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

The increase in the quantity and strength of tropical storms passing through the GOM combined with the ageing oil and gas production

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

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Well Abandonment and Decommissioning Current Issues

Figure 3: Platform Decommissioning

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

increase to the cost of plugging and decommissioning wells, pipelines and platform structures that have been knocked to the ocean floor. The cost 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. Lease operators 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 selfinsuring 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 Impact Although wells that have been severely damaged by natural disasters have not yet caused any major environmental damage in the hardhit 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 is not useful for lease operations and is not capable of oil, gas or sulphur production in paying quantities.9

effect outside of that country, especially on the worlds national oil companies (NOCs), which may have fewer restrictions and may even be encouraged by their governments to reduce spending on nonproduction 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 associated with 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 a multitude 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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EXPLORATION & PRODUCTION VOLUME 7 ISSUE 1

Well Abandonment and Decommissioning Current Issues

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 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. been produced. This provides an attractive buyer with expertise in the decommissioning process to whom exploration and production companies can sell mature fields.12

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-morehurricanes_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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