Steve Kirby considers oil well decommissioning costs
Steve Kirby looks at why oil well decommissioning costs have been underestimated, and how operators can prevent costly surprises.
Why do we get the cost of well abandonment wrong?
Over the next 10 years, Oil & Gas UK estimates that more than 1,200 wells in the UK will be plugged and abandoned. The estimated expenditure on this activity is £7.7bln, which represents 46% of the total estimated decommissioning cost for the period. Given the scale of the expected price tag, there is major focus on trying to understand and reduce the cost.
The likely cost of well abandonment has come as a shock to some operators and it is important to understand the background to this surprise.
When a field development is first sanctioned, the financial analysis includes an estimate of the eventual decommissioning cost. This cost will have been discounted over the expected field life – therefore, the ‘present day’ cost will be quite small in relation to the overall project cost. Perhaps, to quote a colleague, ‘many people are only interested in highlighting the costs associated with getting to the profit area as soon as possible and leave the inevitable consequences of finishing the job to someone else’.
Over the life of a project, the operator will re-evaluate the potential costs of decommissioning. There is industry guidance on the topic including recommended frequency and accuracy, as both factors increase as decommissioning approaches. The downside of these costs is that they drive right through to the bottom line of a company’s accounts, something that is not always welcome, leading to a tendency to be ‘optimistic’.
In the wells area it is the method of developing and interpreting this analysis that is questionable. This can lead to a systemic underestimation of cost.
Quite often, engineers will break the abandonment process into a sequence of operations and determine a range of likely durations for each. This information will be run through a Monte Carlo simulation to develop a range of possible outcomes and the probabilities they will occur. The basic method is sound, but there are downsides in three areas.
Firstly, if the sequence is too detailed, then a convergence in distribution will occur, giving a restriction in the number and range of possible outcomes. It is much better if the abandonment sequence is kept at a very high level such as plugging the reservoir, plugging the wellbore then removing the wellhead.
Secondly, the range of likely durations used will probably be optimistic. Previously, engineers used a deterministic approach, not recognising possible extreme events. Given the amount of well abandonment that has occurred in the North Sea, there is good real-life data available within operator organisations, from commercial companies and in published papers.
The third area lies in the interpretation of the simulation data. In the industry it is very common to describe a range of outcomes by referring to the probability of occurrence, typically P10, P50 and P90. These numbers are then fed into the equation to generate likely costs. It is at this stage that the cost estimation can go wrong.
Using these values assumes a ‘normal’ distribution of outcomes. The reality is that the actual range of outcomes will have a positive or right-skewed distribution – in other words, a long tail representing the more difficult or problematic wells.
Based on published data, the mean or most likely outcome of a well abandonment programme is around P65 of the distribution. This happened in a recent major platform-decommissioning project, meaning the average well cost was 20% greater than the P50 of the outcomes. Fortunately, the project set the budget expecting this outcome, so the wells came in on plan.
Going forward, how can we reduce the surprise of well abandonment costs? It can be summarised in four simple steps:
Use very simple high-level stages in determining the well abandonment process.
Use as much appropriate real-life data as possible. Do not exclude data for difficult wells.
Remember the mean or most likely outcome will exceed the P50 of the likely outcomes by some significant margin.
Be realistic. Avoid the temptation to be ‘optimistic’.
This process in itself will not reduce well abandonment costs but will greatly assist in managing expectations.
Steve Kirby recently retired after a 35-year career in the oil industry, principally in drilling engineering. Steve first became involved in well decommissioning in 1994. Working for BP, he managed a number of programmes plugging suspended subsea exploration wells from well intervention vessels (LWIV) and was Well Engineer on the abandonment of the Donan field – a ‘world first’, using an LWIV. He was Well Engineer for the North West Hutton decommissioning project, plugging 24 wells and clearing 40 well slots. After BP, Steve worked as a Consulting Engineer on further abandonment projects and provided wells input for a number of Decommissioning Cost Provision Deeds. Prior to retiring, Steve worked as Wells Advisor with Oil & Gas UK, contributing to its range of published guidelines.