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Offshore Decommissioning

With continued oil price uncertainty, the advent of deepwater decommissioning and escalating abandonment costs, it has never been a more important time for the industry to demystify one of the most overlooked parts of the offshore asset lifecycle: decommissioning. There are estimated 6,500 offshore rigs that will be decommissioned by 2025.offshore-post

When comparing global decommissioning and abandonment (D&A) progress, it’s undeniable that the Gulf of Mexico has the most established track record in the industry. Extensive platform removal and well plugging and abandonment activity has created a thriving supply chain for decommissioning in the region, ever since the introduction of the 2010 Idle Iron NTL regulation.

Outside the Gulf of Mexico, less mature decommissioning regions are beginning to come to terms with the “emerging reality” of decommissioning. National oil companies in the Asia-Pacific region are developing the guidelines and regulation required to kick-start D&A programs, whilst the North Sea is on the cusp of a flourish in activity.

The overarching D&A landscape is undergoing a shift, though, in light of several key industry developments – this, in turn, will impact decommissioning strategy in 2015 and beyond.

The issues:

  • Oil price uncertainty
  • Shift from shallow to deepwater in the Gulf of Mexico
  • Spiraling decommissioning costs
  • Offshore liability changing hands
  • Integrating decommissioning as part of the lifecycle
  • Industry collaboration

Onshore Market Conditions

$18 billion worth of U.S. land rigs have fallen victim to the downturn.

During the downturn, the rush to stack drilling and completion equipment has rendered an unprecedented amount of invested capital unproductive. Looking at the U.S. land rig segment alone, we estimate drilling rigs worth roughly $18 billion in terms of replacement value have gone idle. It’s important to note that fair value is different (and currently lower) than replacement value.

Across the U.S., approximately 1,160 rigs have been idled since late-2014, per Helmerich & Payne estimates. We estimate the replacement value of an A/C rig is $20 million-$25 million per copy, while the idled SCR and mechanical rigs have a weighted average replacement value of about $12 million each. Thus, the total replacement value of idle land rigs in the U.S. today is approximately $18 billion.

And herein lies a key oilfield crash dilemma. In down cycles, service and drilling contractors become increasingly desperate to cut operating costs, but they must also shepherd their unproductive (stacked) capital assets, lest they rust away and the value be impaired.onshore-post

When the recovery eventually comes, there will be a large portion of the stacked fleet that requires significant reinvestment because working order was not preserved. For portions of the stacked legacy fleet, the reinvestment needed will never again make economic sense and impaired rigs will be retired. Some of the $18 billion has already been permanently lost. The longer the downturn lasts, the more value will be lost.