DecomWorld Findings Reveal US Idle Iron Mandate puts £3.5bn Price Tag on GoM Decommissioning Market

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DecomWorld have found that the new landmark mandate issued by US Department of the Interior for the removal of ‘Idle Iron’ in the Gulf of Mexico will trigger a short-term 25% increase in decommissioning activity, valued at US$3.5bn. For full information visit: http://www.eyeforenergy.com/decommissioning/Idle-Iron-Mandate-Updates.shtml

The mandate will enforce the plugging and abandonment (P&A) of around 1200 wells per year and the removal of roughly 130 structures per year over the next 3-5 years.

A notice to lessees (NTL) issued on September 15 by Secretary of the Interior Ken Salazar and Bureau of Ocean Energy Management, Regulation and Enforcement Director Michael Bromwich, will have far-reaching impacts on the size and timing of decommissioning in the Gulf of Mexico.

The mandate will enforce the plugging and abandonment (P&A) of around 1200 wells per year and the removal of roughly 130 structures per year over the next 3-5 years.

The estimated total cost to perform the requirements specified by the NTL is likely to range between US$1.4 to US$3.5 billion, according to Mark Kaiser, Professor and Director of the Research & Development Division at the Center for Energy Studies, Louisiana State University.

The new rules outlined in NTL 2010-G05 require wells that have not been used for the last five years to be to be permanently abandoned, temporarily abandoned, or zonally isolated within 3 years after Oct 15, 2010. If wells are zonally isolated, operators have 2 additional years to permanently or temporarily abandon the wellhead.

Similarly, platforms and supporting infrastructure that has been idle for five or more years must be removed within 5 years as of October 15, 2010.

For operators, the outlook is not bright. A combination of the sheer volume of demand for contractor services triggered by the NTL, coupled with potential storm damage, will likely place an upward pressure on contractor prices.

“[The] NTL will fundamentally change the way operators plan for and decommission idle wells and structures in the future…[The regulation] may cause unintended consequences in profitability and overall economics,” warns Kaiser.

“If we have hurricanes passing through wrecking havoc in the future, and operators delayed their [decommissioning] activity, [operators] might get caught in an unfortunate situation,” he adds.

Poor liability management?

The latest NTL on idle iron rules was triggered by the findings of a 2008 MMS review on the presence of idle infrastructure in the GoM. The review revealed that a significant number of idle platforms and wells had been neither removed nor permanently plugged.

“The attitude has always been to defer decommissioning. Operators clearly seem unable to manage their liabilities, and now the government has stepped forward, there is nothing they can do but comply and clean up after themselves,” says Jan Groot, Jan Groot, project manager at offshore oil and gas decommissioning consultancy, PlatformBrokers. “Obviously this will make it more expensive, as there are not enough contractors available,” he adds.

But according to Kaiser, in 2009, decommissioning activity in the GOM was already at record levels - the highest levels ever achieved in the Gulf - in terms of plugging and abandonment and structure removals. He says decommissioning capital expenditures ranged between US$650 million to US$1.5 billion.

“In part, this was because operators were anticipating the NTL and were preparing for the increased oversight,’ explains Kaiser.

“In 2011 decommissioning activity is likely to exceed 2009 levels as a direct result of the NTL. I'd expect decommissioning activity to exceed 2009 levels by 15 to 25%.” he adds.

The NTL 2010-G05 will become effective October 15, 2010 and companies have been given 120 days to submit a company-wide plan for decommissioning idle facilities and wells.

If you would like further information on decommissioning and well P&A activity in the Gulf of Mexico – download the brochure for the only decommissioning focused meeting in the region – the Decommissioning & Abandonment Summit, Gulf of Mexico 2011. (Omni Hotel, Houston, March 15 – 16.)

Download the brochure here: http://www.eyeforenergy.com/decommissioning/index.shtml

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James Taylor
DecomWorld
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