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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.
Current issues surrounding well abandonment and decommissioning Figure 2 depicts the upstream capital cost index curve shown in Figure 1
Engineering & Construction
of the associated infrastructure are challenging to operators and superimposed with the average annual cost of crude oil plotted in US$
service providers alike. This discussion of current issues focuses on per barrel. By comparing the years 2000 and 2008, it is apparent that the
the financial, environmental and regulatory issues affecting the cost cost index, or the cost of doing business, in the upstream segment of the
of decommissioning operations in the US Gulf of Mexico (GOM) oil and gas industry increased at a similar rate to that of crude oil prices.
region; however, it is believed that many of these issues may come The question for the future is: are crude oil prices the primary driver of
to affect decommissioning costs worldwide. 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
The costs of developing, operating and maintaining upstream assets crude oil price is the primary driver of changes in cost, one should expect
associated with the exploration, production and transmission of oil and a flattening (green dotted curve) or even a decline in upstream costs (pink
gas have nearly doubled from 2004 to 2008, as indicated by the upstream dotted curve) during 2009, with the amount of change likely being
capital cost index curve shown in Figure 1. The rate of increase during the proportional to the duration and severity of the economic recession
three-year period from July 2005 to September 2008 exceeded 180% currently stifling world economies, reducing their demand for fossil fuels
and, assuming there are no effects from the global economic recession, and causing oil prices to decline from the high levels attained in 2008.
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 Even though operator earnings were bolstered by record high oil prices
the previous five-year period (2000–2004), which posted a modest 10% exceeding US$147 per barrel in July 2008, which allowed greater
(2% per year) escalation of costs in the upstream segment.
1
A similar spending on both infrastructure build and decommissioning projects,
growth trend in decommissioning costs is projected for the UK operators have now been encumbered by the rapid decline in oil prices
Continental Shelf (UKCS) region, where costs are expected to increase experienced over the subsequent five-month period ending in
20-fold over the next 30-year period ending in 2038.
2
December 2008, when prices dropped below US$40 per barrel. The
earnings decline associated with the drop in oil prices and the tightening
Financial Outlook of credit markets as a result of the current global economic recession
The cost of plugging wells and decommissioning offshore infrastructure, have caused a near-term reduction in operating budgets for many oil
which includes wells, caissons, well protectors, fixed platforms and and gas producers, especially for non-income-producing expenditures,
pipelines associated with end-of-life assets,
3
has tracked industry trends, including asset decommissioning. Although there are a few major
with escalating costs caused primarily by “bottlenecks and shortages of producers, including BP PLC, Royal Dutch Shell PLC, Chevron
people, equipment, inputs such as steel, and engineering skills”.
1
Corporation and TOTAL, that plan to keep capital expenditures flat or
Consequently, the cost of doing business has increased for lease slightly up in 2009, many others, such as ConocoPhillips, Occidental
operators, material suppliers and service providers, with all of the Petroleum, Talisman Energy, Inc., Petro-Canada, Lukoil and Gazprom,
increases ultimately being borne by the lease operator, who is challenged have all announced reductions as high as 45% compared with capital
with developing new assets to increase production while absorbing the expenditure in 2008.
4
In the US GOM region, independent producers
increased costs charged by suppliers and service providers. 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.
Gary Siems is Technology Director of the Offshore
Division at TETRA Technologies, Inc. He has over 32
years of sales, marketing and operations management While the full impact of the current economic recession, which may
experience in the oil and gas services industry. Mr
produce a levelling or even a decline in operating costs, has not yet been
Siems holds a BSc in electrical engineering from the
University of Florida and an MBA from the University of
fully recognised throughout the oil and gas industry, the impact on
Louisiana at Lafayette.
operator spending due to reduced earnings and restricted capital inflows
has reduced the number and scale of decommissioning projects. The
Richard Ward is Vice President of Global Sales and
number of these projects could decline even further beyond 2009,
Marketing in the Offshore Division at TETRA
depending on the depth of the recession, the speed of global economic
Technologies, Inc. He has over 40 years of engineering,
recovery and, subsequently, the rebound of oil and gas commodity prices.
project management and offshore construction
experience, including international assignments in the
North Sea, South-East Asia, West Africa and the former
Environmental Effects
Soviet Union. Mr Ward has a BSc in mechanical
engineering from Texas Tech University.
The effect of the environment, such as weather, is another major issue
in offshore abandonment and decommissioning costs. In studies, the
E: dward@tetratec.com
effects of global warming have been linked to an increase in both the
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© TOUCH BRIEFINGS 2009
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