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 (2000–2004), 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 30–50% 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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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. High quality.no . Wind and storm surge from Hurricanes Katrina and Rita in 2005 destroyed 113 of the nearly 3. 6977 Bygstad. 1 Inflation-indexed to 2007.4 per year in the 11-year period from 1995 to 2005. The first is a direct Maritime Montering is one of Europe’s largest supplier of marine accommodation systems. Source: Cambridge Energy Research Associates (CERA)1 and InflationData. Greg Holland of the National Center for Atmospheric Research in Colorado states.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.5 hurricanes per year in the 25-year period from 1905 to 1930 to an average of 8. cost effective solutions and focus on customer satisfaction. Norway Tel: +47 57 71 60 00 • Fax: +47 57 71 60 01 E-mail: post@maritimemontering. have been our trademarks since the company was established in 1981. commonly referred to as ‘downers’. Maritime Montering AS Address: Bjorvikstranda.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). very closely related to increase in sea-surface temperatures in the tropical Atlantic Ocean.800 production platforms in the GOM. causes an increase in operating costs in at least two ways. “We’re seeing a quite substantial increase in hurricanes over the last century.” 5 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.6 with Hurricanes Gustav and Ike destroying an additional 60 platform structures during the 2008 hurricane season. from an average of 3.

if not create. but usually also reduces the time required to complete the well plugging process. structural engineering for safe platform structure removal. 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.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. 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. Other countries with fewer years of oil and gas production.6 billion in total losses to the offshore energy industry. Therefore. All of these options serve to increase the operator’s liabilities on their balance sheet. and another code (§250. Lease operators are now faced with paying much higher insurance premiums. Some countries such as the US. energy. heavy lift vessels to complete the removal (see Figure 3) and the arranging of trawl services to ensure full site clearance – can all 64 EXPLORATION & PRODUCTION – VOLUME 7 ISSUE 1 . 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. for example. Mitigating Decommissioning Costs Knowledge of current decommissioning issues is important to understand the willingness of oil and gas producers to increase. especially on the world’s 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.9 effect outside of that country. jobs in the industry’s service sector. developing current and proposed well schematics. however. the agency that is responsible for decommissioning activities in the US Outer Continental Shelf (OCS).8 The cost of damage caused by Hurricanes Gustav and Ike has yet to be fully determined. Well plugging and infrastructure decommissioning have been moving to the forefront of concern in many oil. 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. Norway. diving services for pipeline flushing and terminating.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. offers a multitude of options to help reduce the cost of well abandonments. which is “to save or create over three million jobs while investing in priorities like healthcare.. insurance companies underwriting well and platform assets have either significantly raised underwriting premiums or have abandoned underwriting oil and gas assets altogether.10 This goal could be accomplished in part by the US Government directing its regulatory agencies such as the MMS. one of which includes providing a rigless well abandonment solution that not only eliminates the cost of a rig or hydraulic workover unit. to apply pressure on operators to adhere to abandonment and decommissioning schedules prescribed by law. It was estimated by Dr Robert Hartwig of the Insurance Information Institute that Hurricanes Katrina and Rita caused over US$11. The United States Code of Federal Regulations (§250. pipelines and platform structures that have been knocked to the ocean floor. Inc. Once the wells are plugged. However. It is anticipated that regulatory pressures in the US could increase further to help achieve one of the goals of the Obama administration’s American Recovery and Reinvestment Plan.3 The second cost increase that affects all operators is the cost of insurance. 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. the next stages of decommissioning – including casing sectioning. and education that will jumpstart economic growth”. despite rising costs. Under US law. The cost of abandoning and decommissioning a downer platform is estimated to range between five and 50 times the cost of a conventional abandonment. and cost energy insurers at least US$5 billion in claim payments. as all of the key issues drive up the cost to the lease operators responsible for decommissioning end-of-life assets. regulatory pressure in itself is not always sufficient to ensure that decommissioning plans are executed within the prescribed time period.1710) requires that all wells on a lease be permanently plugged within one year after the lease terminates. As a consequence of the high cost of hurricane damage claims.and gas-producing countries. decrease or sustain abandonment and decommissioning programmes. TETRA Technologies. decommissioning service providers would be remiss if they failed to offer cost-saving options to lease operators (their customers) that would reduce. This action would act to sustain. such as Thailand. preparing pre-work and post-work regulatory documents and assisting with or performing the management and oversight of the entire decommissioning process. gas or sulphur production in paying quantities. 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 Netherlands and the UK have been decommissioning ageing infrastructure for years under rigid environmental and legal guidelines. but they must also balance these liabilities against expected earnings and profit objectives. engineering and developing detailed plugging procedures. or is not useful for lease operations and is not capable of oil. the potential for significant damage to the environment from any oil and/or gas well and its associated infrastructure does exist. instead of increase. the cost of decommissioning. 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.

2008. Foster M. Odling D.”12 1.whitehouse. 13. Minerals Management Service. 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.org/media/presentations/ energy/ (accessed 2 February 2009). 2008.com/weather/hurricane/2007-07-29-morehurricanes_N.pdf (accessed 31 January 2009).org. Available at: www. near-term solutions for reducing well abandonment and infrastructure decommissioning costs are required. Available at: www. Available at: www.3351 LD Papendrecht • The Netherlands Tel. “As TETRA expands its range of decommissioning services globally. Obama B. 11. 9.com/ news/article.tpl (accessed 3 February 2009).uk/pdfs/cera-report. Minerals Management Service.iii.mms.com/inflation/Inflation_Rate/Historical_ Oil_Prices_Table.eurogrit. These near-term solutions are available through planning. Hartwig RP. Available at: www. AFX News Limited. Rivara A.Well Abandonment and Decommissioning – Current Issues be provided or arranged by a single-source company. and it is expected that this trend will continue. 10. Available at: www. Our abrasives meet the highest international standards and are for example perfectly useful in the oil. lower project costs can result. Study Links more Hurricanes.mms. 7.cfm (accessed 5 February 2009). Federal Register. Inc.html (accessed 4 February 2009).thaidecom. Inc.gov. Cambridge Energy Research Associates (CERA). 3.” Another cost-reducing solution offered by some integrated companies is to provide oil.oilandgas. Anderson E.O. Edwin Goldman.uk/issues/economic/econ08/index. We feel that a way to mitigate costs is through the provision of integrated services under one roof.rigzone. Available at: www..epmag. 5. remarks. Available at: www. the price of oil and gas that is needed to fuel that growth will rise. Louisiana State University.usatoday. Kaiser MJ. we are mindful of increasing costs. Tholen M.gov/index.com • Website: www. 8. US Department of the Interior. When multiple services are provided by one company. Available at: www.and gas-producing property owners with an avenue for asset divestment. Inc. 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.asp?a_id=72463 (accessed 6 February 2009). ■ been produced. 6.: +31 (0)78-6546770 • Fax: +31 (0)78-6449494 • E-mail: info@eurogrit.. Possibilities are practically unlimited above and below sea level. Therefore. “This provides an attractive buyer with expertise in the decommissioning process to whom exploration and production companies can sell mature fields. 4. as any shift away from fossil fuels as a primary energy source will be a lengthy process. Dodson R. Designers of the best abrasives from Holland Eurogrit is one of the largest producers of advanced blast cleaning abrasives. www. Senior Vice President of the Offshore Division of TETRA Technologies. 2. Available at: ecfr. offers this option through its wholly-owned subsidiary Maritech Resources.gov/homepg/whatsnew/hurricane/2005/ katrina.gomr. innovation and the application of new technologies by the companies providing decommissioning services. Available at: www.com/archives/ managementReport/774. A single-source provider such as TETRA Technologies.inflationdata.com .gpoaccess.decc.com 12. Once the world’s economies begin to recover from the current recession and return to growth.gomr.and gas industry. US Department of the Interior. Available at: www.htm (accessed 6 February 2009). Historical Crude Oil Prices. Vergano D. Eustace J. 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.htm (accessed 4 February 2009).3350 AD Papendrecht • Noordhoek 7 .gov/agenda/ economy/ (accessed 4 February 2009).asp (accessed 6 February 2009). SURFACE PREPARATION CORROSION PROTECTION BLAST CLEANING P. Box 184 .html (accessed 4 February 2009).gov/cgi/t/text/ text-idx?c=ecfr&tpl=/ecfrbrowse/Title30/ 30cfr250_main_02.

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