Gulf of Mexico structure removal costs examined

June 15, 2009
A study examined structure removal costs in the Gulf of Mexico for operations performed by TETRA Technologies Inc.

A study examined structure removal costs in the Gulf of Mexico for operations performed by TETRA Technologies Inc. from 2003 through June 2008. The data set included 120 projects representing $178 million in expenditures and is one of the largest samples of decommissioning costs analyzed in the gulf.

The study used standard statistical analysis, and we believe the statistical measures are representative of the removal cost of independent operators in the shallow-water gulf during 2003-08.

The study reports costs for preparation, pipeline abandonment, and removal operations across several categories.

Decommissioning represents the end of the production life cycle of offshore structures and involves plugging and abandoning wells, removing infrastructure, and clearing debris from the site. Removal of the topsides equipment, deck, conductors, piles, and jacket is the core of all decommissioning projects and typically is the most expensive.

Cost categories

Decommissioning in general and removal operations in particular involve several activities that may overlap one or more categories.

Removal operations involve mobilization-demobilization of a derrick barge and other service vessels, preparation activity, diving services, explosive services, conductor and pile removal, pipeline abandonment, and structure removal. How a company allocates costs across activity and categories depends on the requirement of the job and a company’s accounting system.

We grouped costs into three main categories (structure preparation, pipeline abandonment, and structure removal) and allocated in proportion to effort the activities that overlapped categories.

Structurepreparation

After completion of well plugging and abandonment activities, normally a crew paid on a day rate prepares a structure for removal. Caissons and well protectors typically require little or no preparation, but fixed platform removal usually requires the dispatching of crews for inspections, cleanup, and cutting operations.

An inspection above and sometimes below water determines the condition of the structure and identifies potential problems with the salvage. Depending on the water depth, divers or remotely operated vehicles perform the inspection. Divers can operate effectively down to 300 ft of water.

On the deck, the crew flushes and cleans all piping and equipment that contained hydrocarbons. They cut loose separately all modules scheduled for removal from the deck and cut the piping, electrical, and instrumentation interconnections between modules. The crew also prepares the modules for the work needed to lift the modules off the deck.

US Minerals Management Service regulations require disposal of fluids and agents used for purging and cleaning the vessels by either pumping them into an injection well or placing them in storage tanks for disposal onshore.

The removal contractor will send the equipment and other metallic debris ashore for recycling or scrapping and the nonmetallic debris as waste for disposal in a landfill.

Pipeline abandonment

MMS regulations require burial to a depth of at least 3 ft below the mud line of pipelines with 85/8-in. diameters or greater and installed in less than 200 ft of water. Companies can request a waiver of the burial requirement for lines 85/8-in. or smaller.

Upon cessation of operations, a company may abandon a pipeline in place if it does not constitute a hazard to navigation, commercial fishing operations, or unduly interferes with other users in the Outer Continental Shelf (OCS).

Pipelines abandoned in place require flushing, filling with seawater, cutting, and plugging with the ends buried at least 3 ft below mud line. Divers or remotely operated vehicles with electrohydraulic tools perform the cutting operations.

To date, companies have abandoned in place most pipelines in the gulf, with very few removed.1

Structure removal

Removal of the jacket, deck, conductors, and piles forms the core of every decommissioning project. We have grouped these activities under one category because most of these activities usually use the same spread.

Typically, structure removal is the most expensive operation in decommissioning, but wellbore abandonment may exceed removal cost if the job entails a large number of unplugged wells, is unusually complex, or encounters problems in plugging the wells.

The removal process involves:

  • Placing the production equipment and deck modules on a cargo barge and moving them to shore for scrap or reuse.
  • Cutting, pulling and removing conductors, casing string, and piles from the ocean floor at least 15 ft below the mud line.
  • Lifting the jacket and taking it onshore, to another offshore location, or to an artificial reef site.

If the structure is within a reef planning site, the operator may have a viable option of toppling it in-place or partially removing it.2

References 1 and 3 discuss further the activity requirements associated with structure removal.

Data source

The database created includes jobs performed in the gulf by TETRA Technologies from 2003 through June 2008. The work done was for 20 operators, mostly large and medium-size independents, and 1 major.

In total, the jobs involved 120 projects and the removal of 133 structures.

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All costs reported are in current (nominal) dollars and are not adjusted for inflation. Reported cost of the sample totaled $178 million and was mainly concentrated on platform removals in the 100-300 ft water depth category (Table 1).

A review of invoice, job, and accounting reports provided the cost and operational data. The created database included structure location, customer, work performed, year of operation, total job cost, cost by work performed, contract type, structure type, number of structures, number of piles per structure, number of conductors, structure disposition, deck and jacket weight, vessels employed, and activity duration.

Also recorded were comments on the nature of the activity, such as hurricane-destroyed structures, inclement weather, and lift problems.

All jobs reviewed were in water depth less than 500 ft on a turnkey basis. The majority of the sampled projects involved one structure per job.

Work activity categories include preparation, pipeline abandonment, and removal services. Not all jobs recorded costs for all categories. Deck and jacket weight was also unavailable for all projects.

Categories

Structure type and water depth are the primary subcategories employed, but we also grouped and analyzed projects according to number of piles, structure disposition, and weight. Ideally, we would like to group structures into families with similar jacket and deck weight, design characteristics, number of wells, etc., and then compute average removal cost within these individual categories.

The difficulty with this approach is that as additional constraints (category levels) are imposed to create more homogeneous categories, the number of elements within a given category will decline and with it the minimum size for reliable statistical inference. In other words, with each new layer of description added, the size of the categories will decrease to a point where they may have only a few elements.

Water depth and structure type commonly are employed to proxy weight, design, and complexity characteristics, but we recognize that a large amount of individual variability is not captured due to differences in age, production capacity, structure configuration, and other factors. We thus expect standard deviation values per individual category to be relatively high and on-the-order of the mean values.

Structure preparation

Caissons and well protectors usually do not require preparation, and in our sample, only one caisson reported preparation cost. If the operator prepared the structure for removal or employed a third party, then the removal contractor will not need to perform this service and not report the cost for this activity.

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Based on 35 job reports, the average preparation cost for fixed platforms ranged from $79,000 to $242,000, depending on water depth (Table 2).

Preparation cost mostly reflects structure complexity and age, and to the extent that water depth captures these characteristics, we cannot nor should not, assume the water depth correlation provided by the sample represents a general relation.

The average preparation cost across all water depth categories is $130,000.

Pipeline abandonment

Thirty-one projects reported pipeline abandonment cost (Table 3). Abandonment cost increased with water depth and averaged $272,000/structure across all water depth categories.

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Standard deviations are of the same order of magnitude as the average, indicating that for all practical purposes, pipeline abandonment cost is not captured adequately by the water depth categorization. Unavailable for analysis were such additional factors as pipeline size, length, and connection type.

Pipeline abandonment costs in 2003-08 ranged between 1.2 to 3.3 times greater than average cost reported across similar categories for the period 1998-2003.4

Structure removal

Table 4 breaks down the 133 structures removed by water depth and structure type. More than half of the removals involved fixed platforms (80), followed by caissons (38), and well protectors (15).

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Table 5 shows the average removal cost per water depth and structure type. The removal cost of caissons and well protectors increase with water depth. Average removal cost for a caisson in 0-100 ft of water is $500,000. The average cost for a 101-200 ft water depth is $1.2 million or slightly more than twice the 0-100 ft cost.

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For fixed platforms, removal cost ranges from $865,000 (0-100 ft) to $2.6 million (201-300 ft) and are 1.5 to 2 times the cost of caisson removal.

The standard deviations per category are large and frequently about half of the average—especially as water depth increases. This indicates that the water depth and structure type categories do a somewhat better job of explaining the variation in the sample data.

We expect removal cost to increase with water depth and structure complexity because these factors are proportional roughly to the size of the rig and the time of the operation. We also recognize that our results are sample dependent and may yield significant individual variations.

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Removal cost depends upon the removal options available to the operator. Among the 80 fixed platforms removed, operators reefed more than half in place or towed them to a reef site (Table 6).

In 0-100 ft water depth, reefed structures represent about a third of the total number removed. This increased to 84% in 101-200 ft and 94% in 201-300 ft.

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These percentages are slightly higher than aggregate gulf reef capture statistics and represent the individual characteristics and circumstances of the structure.5 Projects in deep water cost more than onshore removal, likely due to the increased complexity of the operation or structure type (Table 7).

Without the reef option, the cost to decommission platforms would exceed the values depicted.

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Table 8 reports the removal cost statistics for structures grouped according to number of piles. We employ 3-pile, 4-pile, 6-8 pile, and 8+ pile categories and compute average removal cost per category.

The data exhibit reasonably consistent patterns across water depth and number of piles, but category elements vary widely. For 3-pile structures, removal cost ranges from $654,000 (0-100 ft) to $1.67 million (201-300 ft). As the number of piles per structure increase, there is a general increase in cost with water depth.

For 6 and 8-pile structures, removal cost ranges from $986,000 (0-100 ft) to $2.72 million (201-300 ft). The average removal cost of an 8+ pile structure is 2.1 times greater than a 3-pile fixed platform.

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For caissons with skirt piles, removal cost ranges from $463,000 (0-100 ft) to $871,000 (201-300 ft). Caissons without skirt piles (Table 9) are more expensive to remove and cost $498,000 (0-100 ft) to $1.52 million (101-200 ft). The sample size for the 0-100 ft category has more than a dozen projects for each caisson type, and in this case, the costs for monopole and skirt-pile removal are similar.

In the 101-200 ft water depth categories, the sample sets has less than 5 elements, which is at least partially responsible for the cost differences observed between the two categories.

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To underscore the variability that exists in removal operations, we considered the removal cost of fixed platforms over time. Table 10 shows the number of fixed platforms removed, with Table 11 showing the average removal cost.

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Average removal cost generally increases with water depth where sample sizes are sufficiently large. It is not possible to delineate the elements that explain why cost varies in the manner shown, but the usual suspects responsible are market conditions (supply and demand, which determine day rates), structure characteristics, and environmental conditions at the time of the operation.

Total cost

Table 12 shows the total cost for removing a caisson, well protector, or fixed platform. This total includes caisson and well protector removal and pipeline abandonment and fixed platform preparation, pipeline abandonment, and removal cost.

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We grouped caissons and well protectors together because they have reasonably similar functional characteristics and often do not require preparatory activity.

For caissons and well protectors, the total removal cost ranges from $686,000 (0-100 ft) to $1.5 million (101-200 ft). For fixed platforms, average removal cost ranges from $1.1 million (0-100 ft) to $3.5 million (201-300 ft).

Weight

The maximum load weights expected during the operation determines the minimum derrick barge required to remove a structure. Engineers estimate this weight using blueprint specifications and physical characteristics of the structure and derrick barge such as lift capacity, boom length, deck size, and jacket length.

Weight correlations depend on data availability and quality. We focus on the total weight relationship. In removal operations, the heaviest lift weight will determine the derrick barge required. For structures in deep water, jacket weights tend to dominate.

As foundations transect a larger water column, the deck-to-jacket weight ratio will decrease if the deck weight remains constant. For fixed platforms in shallow water, deck weight usually dominates jacket weight, but as water depth increases, jacket weights will often exceed deck weight.

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Table 13 shows the average removal cost as a function of total deck, jacket, pile, and conductor weight. Caisson removal is 2-4 times more expensive on a per-ton basis than fixed-platform removal.

Structure installation

Removal operations are essentially the reverse of installation activities. The cost to remove a structure should therefore approximate installation cost for similar structures in similar water depth categories.

For 2003 to 2008, TETRA Technologies installed 20 structures: 3 caissons, 5 well protectors, and 12 fixed platforms. The sample is small and is used for illustrative purposes.

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The average cost (Table 14) to install a caisson ranges between $534,000 (0-100 ft) to $833,000 (101-200 ft). Well protectors and fixed platforms exhibit more similarities in installation expenditures than for removal operations, probably due to the pile driving and barge requirements.

For jacket structures, installation cost ranges from $1 million (0-100 ft) to $2.8 million (201-300 ft), reasonably consistent with the structure removal costs (Table 5).

Analysis limitations

Various unique conditions govern decommissioning costs. These conditions include the structure, site, operator, and contractor, as well as the prevailing environmental, engineering, market, operational, and regulatory conditions at the time of the operation.

The unique nature of offshore operations drives the variability observed in cost statistics, and a factor analysis only partially can explain the costs.

Sample select problems in statistics occur when the sampling is not random. In this study, one service provider performed all removal projects, and although the data set represents a large and diverse collection of structures and water depths, the observations cannot be construed as a random sample. The projects involved only one removal company and mostly independent operator structures.

We believe the data is representative of the independent sector but does not represent project cost for majors.

The majority of jobs were in water depth less than 350 ft. Deepwater and floating structures and subsea wells are much more expensive and complex to decommission. Extrapolation of the summary statistics outside the aforementioned categories is not valid.

Observations

Removal operations usually contribute the most to decommissioning cost, and because service cost varies with market conditions, cost deserves careful and frequent review.

Removal costs vary a lot because a host of uncertain and unpredictable factors influences the operation.

Cost estimates are judgments, made by managers and engineers, of the costs expected to arise based upon a comparison of similar projects, site characteristics, market conditions, and the collective experience of the estimator. Project managers try to manage and reduce uncertainty, but cost estimates will always be uncertain because of project uncertainties, unpredictable and uncontrollable conditions, and imperfect information. ¿

References

  1. Pulsipher, A.G., editor, Proceedings: An International Workshop on Offshore Lease Abandonment and Platform Disposal: Technology, Regulation, and Environmental Effects. 1996.
  2. Dauterive, L., “Rigs-to-reefs, policy, progress, and perspective,” MMS 2000-073. US Department of the Interior, Minerals Management Service, Gulf of Mexico OCS Region, New Orleans, 2001.
  3. Manago, F., and Williamson, B., editors, Proceedings: Public Workshop, Decommissioning and Removal of Oil and Gas Facilities Offshore California: Recent Experiences and Future Deepwater Challenges, MMS OCS Study 98-0023. 1997.
  4. Kaiser, M.J., Pulsipher, A.G., and Byrd, R.C., “Decommissioning cost functions in the Gulf of Mexico,” ASCE Journal of Waterways, Ports, Harbors, and Ocean Engineering, Vol. 129, No. 6, 2003, pp. 286-96.
  5. Kaiser, M.J., The Louisiana artificial reef program, Marine Policy, Vol. 30, 2006, pp. 605-23.

The authors

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Mark J. Kaiser ([email protected]) is professor and director, research and development, at the Center for Energy Studies at Louisiana State University. His primary research interests are related to policy issues, modeling, and econometric studies in the energy industry. Before joining LSU in 2001, he held appointments at Auburn University, American University of Armenia, and Wichita State University. Kaiser has a PhD in industrial engineering and operations research from Purdue University.

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Richard Dodson is the former vice president of TETRA Technologies Inc. He was the founder and president of Pacer-Atlas Inc., which was acquired by TETRA and the founder and president of Sunstone Corp. He previous was a US Marine Corp commissioned officer. Dodson is a member of AESC, NACE, and SPE.

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Matthew Foster is a staff accountant at TETRA Technologies Inc. He has worked with the heavy-lift group since June 2006. Foster has an MS in financial management from Texas A&M University.