Fall in GoM decom activity signals need for technological leap
The Gulf of Mexico’s shallow-water decommissioning boom has come to a halt. Deepwater decommissioning has stronger prospects, with development of affordable technologies crucial to enabling the next phase in offshore removals and abandonments in the United States.
More than 200 structures were removed each year from 2009 to 2014, but the number fell to 113 in 2015, according to the latest data from the US Bureau of Safety and Environmental Enforcement (BSEE).
An eventual slowdown in shallow-water decommissioning was to be expected, given that 96% of the wells and 86% of the structures destroyed by Katrina and four other hurricanes in the 2000s were abandoned and decommissioned by the end of 2014. But the speed of this drop will have come as a surprise to those experts who predicted as many as 250 structures would be decommissioned each year in 2015 and 2016.
Gary Siems, Vice President of Decommissioning at Montco Oilfield Contractors and an industry veteran of four decades, told DecomWorld that falling oil and gas prices have driven many companies into bankruptcy and left remaining operators so cash-strapped that they have been forced to delay decommissioning projects.
This was in stark contrast to 2009-14, when operators had sizeable capital budgets and spent 9-12% of it on well abandonment and decommissioning, he said. But as the oil price has fallen and budgets have declined, the amount of money available for decommissioning has been reduced or has disappeared altogether.
“Once they started losing money they tried to stop decommissioning as soon as possible. Now most operators are focused on maximizing free cash flow and keeping their businesses afloat,” Siems said.
Regulatory pressures were another factor behind the 2009-2014 boom. The Idle Iron Notice to Lessees, issued in October 2010, prescribed a five-year window to address the problem of assets no longer capable of producing oil and gas in paying quantities. Operators with idle assets took them out of service, plugged the wellbores and decommissioned the structures. The peak years were 2011, when 293 structures were removed, and 2012, with 285 removals. More than 1,200 wells a year were plugged and abandoned over this same period.
Plenty of idle iron to be removed
There is still a significant amount of idle iron to remove from the Gulf of Mexico. As of February 2015 there were 241 platforms in the category of idle iron and a further 294 platforms on expired or terminated leases, according to the BSEE. Some of these will have been removed in 2015, but the vast majority remain to be decommissioned. There were about 2,600 platforms and 9,900 wellbores in the Gulf’s shallow waters at the start of 2015, according to last year’s DecomWorld Offshore Decommissioning Report, enough to keep contractors busy for many years.
Siems said the financial realities remain dire for many operators and it is unlikely the industry will see an upsurge in decommissioning in 2016. At $45 a barrel many companies will continue to plunge further into debt. Even if the price rebounds to $50-$60, bringing most companies back into positive cash flow, the small- to medium-sized operators in the conventional shelf will continue to struggle. Any profits would soon disappear, servicing prior debts accumulated over two years of low oil prices.
“I expect to see more companies filing for bankruptcy. The conventional shelf is done and I don’t think we will ever see a substantial uptick in drilling. This is primarily because the ageing infrastructure is in such poor condition that it ruins the economics of drilling for new hydrocarbons. It’s also because there are fewer opportunities. The largest reservoirs have been discovered and produced over the last 60 years,” Siems said.
Another factor in the reduction in decommissioning projects is the consolidation in the number of operators working in the GoM. Chevron, for example, recently sold 19 of its Tier 2 and 3 conventional shelf properties to Cox Oil Offshore and has stated publically that it will sell its Tier 1 conventional shelf properties by the end of 2017. Fewer operators means fewer decommissioning projects, Siems said.
“When you reduce the number of operators, you reduce proportionally the number of dollars available for decommissioning. We could end up with fewer than 10 operators in the conventional shelf and only around five or six will be capable of doing any significant volume of work.”
Deepwater dependent on technology
The deepwater market is in better shape and has been providing larger operators with their profits, but a big increase in decommissioning in these waters remains unlikely in the near-term. According to the DecomWorld report, the deepwater GoM is populated with 114 structures and about 1,000 wells, but the cost to decommission them is much greater than in shallow waters due to operational complexity and increased spread rates for marine vessels.
Siems estimates there will be one or two deepwater projects decommissioning projects a year in the near-term. Mark Kaiser, director of the Research and Development Center for Energy Studies at Louisiana State University and author of the 2015 DecomWorld report, expects five to eight deepwater structures to be decommissioned between 2015 and 2018.
Technological issues could also hold back the deepwater decommissioning market for years, according to Delaney Olstad, Global Business Development Manager, Weatherford. Olstad said the technology gap makes addressing a lot of the subsea infrastructure financially unviable.
“You need a riser system and that requires a full-blown FPSO [floating production, storage and offloading vessel], and those cost $250,000-$1 million a day,” he told DecomWorld. There are companies working on riserless systems and other new technologies in development. Eventually technology will change the market for oil abandonment in deepwater and shallow-water assets but it will take time. In the oil market, even once the technology exists, it can take a long time for it to be accepted.”
By David W. Smith