Thursday, September 16, 2010

Plugs Ordered on Idle Wells

Oil and gas companies must permanently plug thousands of Gulf of Mexico wells idle for five years or more under a federal order issued Wednesday.

The mandate could cost well owners billions of dollars, but it could also create jobs for rig workers idled by a federal clampdown on new offshore exploration.

The U.S. Interior Department and its offshore-drilling oversight agency said companies must cement 3,500 wells that aren't producing oil or gas. Another 650 oil and gas platforms must be dismantled if they are no longer being used, the government said. The mandate becomes effective Oct. 15.

Companies will have 120 days to submit plans to decommission production facilities and wells. Under the regulation, any well that has not been used during the past five years for exploration or production must be plugged. Production platforms and pipelines must be decommissioned if no longer in use.

Owners of such wells would have to pay for the permanent sealing of the wells and abandon the opportunity of reopening them for production.

The announcement boosted the stock prices of some oil-field service and offshore drilling companies, as investors bet the companies could profit from new government-mandated work.

Mark Kaiser, director of Research and Development at the Center for Energy Studies at Louisiana State University, estimated that the cost to plug and abandon idle wells more than five years old and remove idle structures could total $1.4 billion to $3.5 billion. He estimated that companies would be giving up $6 billion to $18 billion in lost revenue from future production.

The biggest hit would likely be to smaller oil producers who specialize in wells that produce marginal amounts of oil and gas.

Executives at companies involved in the Gulf of Mexico oil and gas industry have been warning for weeks that the Obama administration's moratorium on new deep-water wells, and a sharp slowdown in permits for new shallow-water wells, threaten the jobs of thousands of rig and support workers.

Concern among some lawmakers about risks posed by abandoned wells flared after the huge oil spill caused by the April 20 explosion of a BP PLC well in the Gulf. That well, which has been temporarily plugged, could be permanently sealed by Sunday, the head of the federal spill response, Coast Guard Adm. Thad Allen, said Wednesday.

Oil and gas companies often close wells temporarily with valves or cement, but such plugs are designed so that the wells can be reopened later. Once a well is permanently plugged, however, it is almost impossible to restart production if technological advances or rising prices justify renewed activity.

But the Interior Department said idle wells and platforms could threaten the environment and pose a financial liability if destroyed or damaged by an event such as a hurricane.

"As infrastructure continues to age, the risk of damage increases," Bureau of Ocean Energy Management Director Michael Bromwich said in a statement. "This initiative...requires that these wells, platforms and pipelines are plugged and dismantled correctly and in a timely manner to substantially reduce such hazards."

The American Petroleum Institute said it had expected the new rules. For most operators, "compliance will not be an issue," said spokeswoman Cathy Landry. But she expressed concern about the ability of companies to get the permits needed to decommission equipment.

Existing regulations already require wells to be plugged and platforms to be dismantled within one year after a lease is terminated. But some lawmakers complain that the rule hasn't been enforced. A BOEM spokeswoman declined to comment. Under the new regulations, companies must decommission unused equipment even if the associated leases are still active.

The government's success in overseeing the plugging of abandoned wells could depend on funding. The Interior Department has asked Congress for money to hire six workers to oversee the plugging and decommissioning process. It isn't clear yet whether Congress will approve the funding.



Post a Comment

<< Home