Taking the risk out of WA&D
Jaime Kammerzell
Senior Associate Editor
Operators working on the Gulf of Mexico shelf are evaluating their mature, marginally producing properties and making decisions about their future.
In the GoM, there are approximately 4,200 structures with an average age of over 20 years. Many of these structures are near or past their intended design life, and 400 are over 40 years old. According to the Minerals Management Service, operators will spend $10 billion over the next decade on well abandonment and decommissioning (WA&D) services. Faced with these imminent expenses and depleting reserve bases, operators are looking beyond the traditional WA&D model.
For Tetra Technologies Inc., which provides traditional WA&D services - planning and engineering, well abandonment, heavy lift, and project management - it was a natural evolution to provide flexible acquisition strategies through an exploitation and production company.
Rather than doing WA&D exclusively in a traditional operator/contractor relationship, Tetra takes its philosophy a step further and, in many cases, will buy properties from an operator. By selling a property, the former owner is completely freed up from involvement in the permitting process, regulatory filings, or project management activities. Tetra formed a separate entity, Maritech Resources Inc., to serve as the new owner/operator.
“We soon realized that there was huge potential there,” Matt McCarroll, president, Maritech Resources Inc., says, “not only to take on operatorship of the properties that were ready to be abandoned, but to acquire these properties somewhat earlier in their lives when there are enough remaining reserve value to pay for some or all of the abandonment costs.”
Maritech acquires a property with two goals in mind. The first goal is to maximize the remaining reserve value of the property to get as much oil and gas out of it as efficiently and inexpensively as possible. The second goal is to accumulate a large backlog of abandonment work for Tetra. Once Maritech has depleted the remaining field reserves, it conducts abandonment operations and meets all of the regulatory requirements as efficiently, safely, and inexpensively as possible.
“Once we own a property, we’ll do whatever it takes to exploit the value,” McCarroll says.
Rules and regulations
The MMS requires operators to plug and abandon wells and remove platforms and flowlines within one year after a lease expires. An operator has six months from the date of last production to either reestablish production or conduct another operation to hold a lease.
Operators typically abandon wells in one of three ways:
• Off an existing platform using rigless plug and abandonment equipment
• Off a liftboat
• Off a drilling rig, which is the most expensive option.
For the most part, well abandonment work can be conducted year-round because it is less weather sensitive than platform decommissioning, which involves a derrick barge, a material barge, and divers to cut the legs. Platform decommissioning is typically done in the 2Q or 3Q when the GoM waters are calmer.
The MMS has approved the following options to decommission platforms:
• Tow it to land for salvage
• Reuse it on another location
• Reef it in pre-approved reef sites.
Another incentive for an operator to take a closer look at its mature fields is the Financial Accounting Standards Board statement 143, which requires companies to recognize abandonment obligations as a separate liability on their balance sheets.
“What it forced companies to do to take a closer look at their WA&D liabilities and consider divesting these properties rather than retaining the liabilities on their balance sheets,” McCarroll explains.
To sell these mature fields to an operator like Maritech who specializes in abandonment and who has a good track record of abandoning fields, taking out platforms and pipelines, and plugging wells, is less risky than selling to an operator who doesn’t have as much experience and who might one day declare bankruptcy.
MMS regulations also state that if an operator sells its property, it is never completely removed from the liability should its successor fail.
Benefits package
Operators of mature fields see the value in selling their mature assets to a company like Maritech. They no longer have to take the abandonment risk and tie up capital or people to manage the abandonment projects. Instead, these operators can focus on new drilling or developments to create reserve value.
Most of the properties Maritech buys are the lower end performers for the former owners, the kind of assets that typically get neglected. “We are just more focused on these properties than the former owner,” McCarroll says.
He says that because it is willing to concentrate on these properties, Maritech can often gain more value out of them than the former owners can. Maritech will give the seller credit for the full value of these properties and then strive to extend the life of fields that have been losing money by cutting operating expenses, improving efficiencies, or increasing production and keeping the fields producing at economic limits longer than the former owner would have. Where a seller might abandon the property in a year or two, Maritech may abandon it in three or five years.
“If a field is producing 1 MMcf/d for a company whose total production in the GoM is 400 MMcf/d, that operator is unlikely to mess with an incremental million cubic feet of gas. We currently operate 60 MMcfe/d, so that extra million cubic feet of gas is important to us,” McCarroll says.
By buying these marginal fields, Tetra and Maritech gain an asset that has exploitation potential. Maritech makes money as a traditional operator of oil and gas properties, and, through Maritech, Tetra accumulates a significant baseload of future abandonment work. Tetra can schedule its activities so as to better take advantage of operational efficiencies.
“For example, we can plan our work on a geographic basis and use equipment when it is in one part of the Gulf to do all the work in that area. We keep our crews and our equipment busy for longer periods of time, which allows us to bid more competitively on third party work,” McCarroll says.
The company also is gaining expertise on how to economically produce mature assets. “At these product prices, opportunities that weren’t attractive five years ago are very attractive today. A 1 bcf sidetrack opportunity at $6 gas is worth $6 million, but at $2 gas, it is only worth $2 million. That’s a big difference in determining economic value,” McCarroll points out.
Maritech buys packages consisting of from one to as many as 20 fields. Within the mix, there may be some fields where the leases have already expired and the abandonments will be done within months. Then there may be some fields Maritech thinks will produce for 10 years. But the long-life production is a double-edged sword, McCarroll explains. “The longer remaining production life is great, but, at the same time, extending the lives of these properties increases our risk because we are assigning an initial abandonment cost to them based on today’s costs and today’s regulations, and we may not abandon the properties for 10 years. Over that time, costs may escalate more than we anticipate, regulations may change, but we don’t know how extensive the changes will be.”
That’s the risk Maritech takes. But the seller is going to benefit from the transaction because Maritech is willing to pay a fair price for the remaining reserve value. “A lot of times, for example, we say the reserves are worth $5 million and the abandonment liability is $20 million. You owe us $15 million. But we will take that $15 million and allocate a portion of it to each of the fields based on the actual abandonment costs. The seller pays us that money when we actually abandon the field,” McCarroll says. “When the $15 million is discounted to a present value, the effective cost can be significantly less than $15 million.”
Maritech acquired a West Delta field in 2001. The company assigned it no reserve value and the seller agreed to pay $35 million WA&D on a turnkey basis. The field was producing about 400 b/d, but was not profitable because the former owner had to purchase gas to run the fields and its operating expenses were over $400,000/month. Maritech took over operations, cut operating expenses, and improved efficiencies in the field, which is now producing 600 b/d. The company is also selling gas instead of buying gas and it has reduced lease-operating expenses to $190,000/month.
“We’ve made a lot of money on the property,” McCarroll says. “It is still profitable. We’ve already abandoned 30 wells and removed 10 structures. We’ve set up a schedule where the former owners pay us a predetermined amount per well per structure. As we do work, we send them a bill, and their total cost won’t exceed $35 million. The rest of this field probably won’t come out for another three to four years, and they thought they were going to pay $35 million over two years. In reality, it will be six or seven years before they will have paid out the total. In the meantime, they can do other things with their money.”
In March 2003, Maritech acquired an 87% working interest in a West Cameron block. The field was off production, and Maritech thought it would abandon the field later that year. The seller agreed to pay Maritech $4 million when Maritech finished the abandonment work. Maritech assumed all of the liability and risk and gave no value to the field. Maritech did some remedial work on the well and reestablished production. The field was modestly profitable for a year. Then Maritech conducted a detailed field study and brought in a drilling partner. Last fall, the partners drilled three new wells, spent $16 million, and found eight productive reservoirs. Production has averaged over 26 MMcf/d since December 2004. The project has already paid out for Maritech and its partner. As for the seller, it shouldn’t have to pay the $4 million in abandonment costs until after 2010 when Maritech expects to abandon the field.
Maritech started in 2000 with just seven operated fields. Today it operates 34. In the past five years, the company has plugged over 120 wells and removed 40 structures. With a solid track record, Maritech is poised to take on even more WA&D projects in the near future.•
