Spike in GoM decommissioning quickens need for deepwater expertise

An expected surge in Gulf of Mexico decommissioning activity based on low oil price signals will accelerate the decline in shallow water asset stocks and hasten the need for industry to focus on the challenges of deepwater projects.

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The decommissioning market in the Gulf of Mexico, presently the largest in the world, is set to increase in activity in 2015 and 2016 as low oil price signals improve the case for decommissioning.

The falling number of potential shallow water decommissioning projects will lead to a steady fall in activity after 2020 and as this work declines, the demand for deepwater projects is set to rise, Mark Kaiser, director of the Research & Development Center for Energy Studies at Louisiana State University, and author of the Offshore Decommissioning Report 2015, told DecomWorld. 

DecomWorld is a sister publication of Upstream Intelligence.

The Gulf’s shallow water market is worth around $27 billion and the total stock of assets to be decommissioned has been depleting by 5-7% a year, according to the Offshore Decommissioning Report 2015.

The drop in crude oil prices has shifted perceptions on decommissioning activity. The number of structure removals is expected to rise from 210 in 2014 to as high as 250 in 2015 and 2016, the highest total reached since the peak years of 2011 and 2012, the report said.

In January 2015, there were 2,578 active structures residing in water depth of less than 400 ft; 1,194 of these structures were producing, 726 were idle (formerly producing), and 658 were auxiliary (never producing).

At the same time, there were 96 active structures in water depth greater than 400 feet. More than 4,500 structures had been decommissioned in water depths of less than 400ft, compared with just 12 carried out in deeper water.

The sustained oil price slump has brought forward expected deepwater decommissioning dates and accelerated the need for operators and equipment suppliers to look beyond the short term surge in shallow water projects and plan for the extra challenges faced by higher cost deepwater projects.

Although the contractors and suppliers who deal with shallow water work are highly experienced, much of their equipment and techniques cannot be transferred to the deepwater and ultra deepwater fields – which can be more than 3km below the water line.

Deepwater projects are subject to higher levels of regulatory scrutiny and require specialized heavy-lift vessels to remove topsides, as well as purpose-built intervention vessels to carry out the plugging and abandonment of riserless subsea wellheads.

The unit cost to decommission Deepwater projects is much greater, due to operational complexity and increased spread rates for marine vessels.

Shallow water surge

Some 1,200 GoM wells were plugged and abandoned in 2014, and 210 structures removed, and total decommissioning spending came to between $1.6 and $1.8 billion, according to the Offshore Decommissioning Report 2015.

Eric Smith, the associate director of the Tulane Energy Institute, told Decom World he expects to see the number of shallow water removals accelerate “because production is plummeting and we’re not drilling any new wells.”

Figures from the Bureau of Safety and Environmental Enforcement (BSEE) show that as of February 2015 there were 241 platforms in the Gulf that fell into the category of “idle iron”, and a further 294 on expired or terminated leases.

In the past, operators have postponed decommissioning structures under idle iron rules by stating that they were planning to drill further wells or use a platform as an auxiliary infrastructure, however market conditions now provide greater incentive to avoid deferral.

According to Smith, the current absence of drilling activity is making it more difficult to argue for prolonging structures beyond their remove-by dates.

Another factor is the sharp fall in gas production in the Gulf, from over 4,000 billion cubic feet in 2003 to around 1,000 bcf in 2014, according to the U.S. Energy Information Administration. As older wells run out, operators have transferred resources to onshore shale gas production.

“We’ve had production decline at a very high rate, to the point at which the pipelines are not sustainable. So now we’re faced with a few platforms that can still be productive, but how do you get the gas to shore?” Smith said.

Pipeline flow limits are impacting the ability for pipeline operators to respond to the market’s demands, he said.

“That's officially what's happening: the pipeline operators go to the regulators and say ‘we can keep this pipeline for the last 10% of the gas flow but to do so we need to increase the rate by a factor of 10’ and the regulator says ‘absolutely not’, so they hand over the keys and say ‘we're done’. It's starting in the western Gulf but it’s spreading to the central Gulf now.”

P&A gains in importance

The Offshore Decommissioning Report 2015 report found that well P&A activity has been rising as a proportion of total decommissioning work, reaching an all-time high of 49% in 2014 compared with 35% in the peak decommissioning years of 2011 and 2012. The share of decommissioning spending on structures declined from 65% in 2011 to 51% in 2014.

While the relationship between structure removals and abandonment has fluctuated, major incidents-- such as the toppling of Taylor Energy's Mississippi Canyon 20-A production platform in the mudslide that followed 2004’s Hurricane Ivan and the BP Macondo well blow out in 2010-- have seen more operators look to reduce their exposure to environmental risk by plugging wells as soon as they become unproductive.

Companies are tending to do the P&A work with the platform in place as conditions are more favorable.

“Taylor was toppled with 25 unplugged wells, and they had to drill nine relief wells to intercept,” Smith said.

“That situation is everyone’s nightmare and it’s why people went from doing the whole removal at the same time to now P&Aing wells as soon as they’re finished and you have a conductor and a riser to work through.”

Smith added that larger companies are more liable to P&A wells before selling their fields on to smaller companies, because they can retain liability in the event that the incumbent cannot perform its duties.

Deepwater challenges

The shift towards decommissioning deepwater facilities will present a range of new challenges for companies.

“It’s going to take a different set of people and equipment to do the removals successfully,” Smith said.

“In the Gulf you have a sizeable number of deepwater structures now, and they are starting to age out. It’ll be onesies and twosies, but when you’re talking about floating production facilities, there may be no pipeline, but there will be subsea wellheads, which are tough to P&A. And when you’re pulling out spars and tension leg platforms (TLPs) then it’s a bigger game,” he said.

Although the industry achieved a striking success with the removal of the Red Hawk Spar last year, accomplished with the Versabar 10,000 heavy lift ship, Smith said new challenges lie ahead.

“Nobody has had to go in and remove a giant structure like the Shell Ram Powell TLP, so there is a question mark over where the vessels are going to come from that are going to be able to do that,” he said.

The expected surge in decommissioning activity will put pressure on offshore equipment resources and industry experts have warned that operators should take a collaborative approach to decommissioning projects, grouping together work on adjacent fields, to maximise cost reductions.

Source: Offshore Decommissioning Report 2015