Scrap and Storage Markets in the Gulf of Mexico—IV. Conceptual Economic Models

Abstract

Near the end of the production life of every field, a number of important decisions have to be made regarding divestment and abandonment strategies. In the final part of this series, the authors describe the factors and tradeoffs involved in end-of-life business decisions and introduce conceptual economic models to illustrate divestment timing and decommissioning decision making. Spreadsheet models are used to illustrate the economic models.

Keywords:

• divestment timing
• economic limit
• spreadsheet modeling

Notes

¹Many sellers also require that buyers post a financial bond to mitigate some of this risk.

²The government enforces the posting of supplemental bonds since, ultimately, it is the final responsible party if all previous owners are unable to perform abandonment requirements. The bond is meant to approximate the cost of decommissioning, but the bond may not be adequate to cover the cost of service at the time of removal. Supplemental bonds are reassessed when properties are bought and sold, and are only required if none of the owners satisfy economic criteria. The criteria are developed to indicate a company's financial strength and ability to operate as an ongoing concern.

³A hurricane-destroyed structure can significantly increase decommissioning cost, sometimes as high as 10–50 times the cost of normal operations.

⁴Platforms must be maintained to assure the structural integrity of the platform as a workbase and are inspected periodically in accord with the provisions of API RP 2A, Section 14, Surveys. A report must be submitted annually stating which platforms have been inspected, the extent and area of inspection, and the type of inspection employed; i.e., visual, magnetic particle, ultrasonic testing, etc. Use of an inspection interval which exceeds 5 years requires approval by the MMS Regional Supervisor. Inspection enforcement encourages operators to remove idle iron in a timely fashion if the Regional Supervisor does not grant an extension on the 5-year inspection schedule.

⁵For example, investment may be used to enhance recovery through gas lift, water injection or similar technique, or additional drilling may be undertaken through sidetract wells in an attempt to increase production. If the investment is expected to result in a production increase that has positive present value, then the investment is likely to be undertaken. An asset that appears uneconomic in isolation may create opportunities enabling the owner to undertake other investments on nearby field developments.

⁶For example, 1. If the operator maintains ownership of the structure, then storage and insurance cost will be incurred (C ₁ ≠ 0, C ₂ ≠ 0); 2. If the operator transfers title of the structure to a contractor with a yard, then C ₁ = C ₂ = 0; 3. If the structure is located at the reef site (S = R) or in close proximity (S ≈ R) then d(S, R) = 0 and RF = 2d(P, S) + τ(S).