Modeling Lost Production in the Gulf of Mexico—I. Redevelopment Economics and Impact Assessment

Abstract

The oil and gas industry in the Gulf of Mexico has the greatest weather exposure in the world, and is vulnerable to a range of losses that include physical damage, destruction, business interruption, and pollution liability. During the 2004 and 2005 hurricane seasons, a number of offshore facilities, drilling rigs, and pipelines were destroyed and extensively damaged. In total, Hurricanes Ivan, Katrina, and Rita destroyed 122 structures and severely damaged 76 others. Owners of destroyed assets are faced with a difficult decision: Should the property be abandoned along with its remaining reserves or should the asset be redeveloped? The purpose of this three-part series is to examine the destroyed infrastructure from the 2004 and 2005 hurricane seasons and the likely contribution this collection of assets would have made to future production in the Gulf of Mexico. In Part 1, we describe the weather risk that operators encounter and review the factors that are involved in redevelopment decisions. The impact of the 2004 and 2005 hurricane seasons on the infrastructure and production in the Gulf of Mexico are summarized.

Keywords:

• impact assessment
• lost production
• valuation

Notes

¹Hurricanes are characterized by pressure, wind speed and storm surge, but since there is not a one-to-one relationship between these elements, only maximum wind speed is used in the Saffir-Simpson categorization. Tropical storms correspond to 39–73 mph winds, a Category 1 storm corresponds to 74–95 mph winds, Category 2 storms correspond to 96–110 mph winds, Category 3 storms correspond to 111–130 mph winds, Category 4 storms correspond to 131–155 mph winds, and Category 5 storms correspond to winds greater than 155 mph.

²Subsea safety valves are installed on all GOM wells and prevent fluids from flowing out of the wellbore in the event of damaged and/or destroyed topsides equipment, or in the worse case, loss of the supporting structure.

^a A = 10K Annual Report; T = Trade Press.

^b Costs pertain to assets acquired from Forest Oil.

^a Loss estimates are for the energy industry as a whole and are not necessarily insured amounts.

^b For loss claims without business interruption or operators extra expense identified, the loss claims are included in the physical damage entry.

^c OEE = Operators Extra Expense.

^a Damage rate expressed as percent exposed, computed as the number of structures destroyed and with major damage divided by the number of structures in a 50-mile envelope centered on the storm path.

³Underwater landslides (also called turbidity currents) consist of a flow of water-saturated sediments flowing downslope. Generally viewed as a shelf phenomenon, it may also present risk to structures on the continental slope.

⁴Significant damage is defined as damage that prohibits production or requires complete structural analysis of the platform before returning to production.

^a BOE = Barrels of oil equivalent, computed on a heat equivalent basis, where 6,040 cf of gas provides 1 barrel of oil equivalent. The BOE stream is the combined oil and gas production output.

⁵Reservoir rocks normally contain petroleum hydrocarbons (oil and gas) and water. The water is referred to as connate (or formation) water in the reservoir and becomes produced water when the reservoir fluids are brought to the surface. Sources of this water may include flow from within the producing formation, flow above or below the hydrocarbon zone, or flow from injected fluids and additives associated with production activities (Speight, 2007). Produced water increases over the life of oil and gas wells, making up a large percentage of produced fluids and contributing a significant amount to operating costs. Natural gas wells typically produce significantly lower volumes of water than oil wells, and for this and other reasons, may produce economically at lower rates of production relative to oil wells.

^a Structures are classified as oil or gas producers according to their cumulative gas-oil ratio (GOR) measured in cf/bbl. Structures with GOR ≤ 5,000 are classified as primarily oil producers; structures with GOR > 5,000 are primarily gas producers.

^b BOPD = barrels of oil per day; MCFPD = thousand cubic feet per day; BOEPD = barrels of oil equivalent per day.