Balancing risk mitigation with production activities in the Gulf of Mexico

Prior to the unprecedented damage caused by hurricanes Katrina and Rita in 2005, many operators delayed plugging and abandoning depleted wells as long as possible. However, the 113 toppled and 56 severely damaged structures and hundreds of downed wells associated with the 2005 hurricane season caused many to rethink this approach. If more of the Gulf of Mexico’s idle structures had been removed and more of the inactive wells had been permanently or temporarily abandoned, the storm-related costs would have been reduced significantly, as would the environmental impact from damaged wells which have leaked or may leak in the future.

Today, producers and operators balance the desire to reduce the risk of storm damage to production assets and the growing need to produce marginal properties. Weighing risk versus potential reward is a critical activity that involves several considerations, including the cost of insurance, age and height of structures, production activity of wells, and future utility of idle structures.

In 2005, three of Maritech Resources’ 118 platforms were destroyed and 16 associated wells were downed. Two-and-a-half years later, the company is still in the process of abandoning and decommissioning these destroyed assets, and dealing with insurers to recoup covered losses. While neither future storm activity nor the cost of insurance, which has risen almost fivefold (for less coverage with higher deductibles), can be controlled, companies must sharpen their focus on mitigating the risks associated with both existing production assets and newly acquired properties.

One strategy is to accelerate abandonment and decommissioning activities to P&A non-productive wells and to remove unnecessary structures ahead of future storms. In 2006, Maritech removed five structures and 63 inactive wells were plugged; in 2007, 15 structures were removed and 56 inactive wells were plugged; and in 2008, the expectation is to remove 15 structures and plug 60 inactive wells. Ironically, the company’s permits to abandon 14 wells associated with two of the three platforms destroyed in the 2005 storms had been filed. Had the wells been plugged sooner, costs would have been significantly reduced.

In general, it costs 10 to 40 times as much to P&A a downed well as it does an intact well. A downed, leaking well can be even more expensive. A complete P&A involves setting several depth-determined cement plugs and removing the tree, casing, and wellhead equipment to an established depth (usually 15 ft) below the mudline.

Even before 2005, industry focus on abandonment and decommissioning was gaining momentum. The June 2001 issuance of SFAS No. 143, “Accounting for Asset Retirement Obligations,” by the Financial Accounting Standards Board further accelerated this momentum. However, lessons learned in 2005 highlighted the necessity for reducing liabilities on offshore production assets more than any other event and seems to have resulted in an increase in this activity. According to the MMS, 1,260 offshore wells were plugged in 2007 – just about double the number plugged in 2003 (631) and 2004 (604).