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Offshore Oil’s $105B Hangover Compounds Industry Woes  | Rigzone

Offshore Oil’s $105B Hangover Compounds Industry Woes  | Rigzone

(Bloomberg) — Aging offshore oil wells that once brought market prominence to Europe, the U.S. Gulf and Brazil are increasingly money losers that companies want shut down amid low oil prices and a struggling global economy. But the effort won’t be cheap.

The cost worldwide: An estimated $104.5 billion by 2030, according to Wood Mackenzie Ltd. At least 23 platforms a year could be retired in the North Sea alone, Rystad Energy Inc. reported in May, while the national oil company in Brazil has said it’s planning to spend $6 billion to retire 18 platforms, pipelines and other infrastructure by 2025.

Companies can’t just abandon aging offshore wells. In most cases, regulators who approved them required pricey guarantees to make sure they’re properly sealed, and there are environmental issues involved in their upkeep. That can mean the use of divers or robot submarines to plug wells and pipelines on the ocean floor, an expensive proposition, as well as cutting apart and moving steel platforms that can weigh as much as 17,000 tons.

“Abandonment costs will haunt the industry in the years to come, especially if governments get tougher with parent company guarantees,” said Marcelo de Assis, the head of Latin American upstream research at Wood Mackenzie Ltd. “The crisis fast forwarded the situation.”

The spectacular decline in North Sea production since it peaked in the 1990s has left so much equipment unused that, by 2025, oil companies will spend more on removing redundant equipment than developing new fields, according to Wood Mackenzie.

Deepwater production was a new frontier for the oil industry in the 1980s and 1990s, and many of these projects are now reaching the end of their lives.

But the push to close offshore wells comes as the oil industry has suffered some major blows. They include a price war between oil giants Saudi Arabia and Russia that flooded the world with oil, a pandemic that destroyed demand and skepticism from investors who want less money spent on exploration and more returned to them.

At the same time, the U.S. shale boom has drastically lowered the cost of opening and operating a well on land, as well as closing one, compared with the price tag tied to wells offshore.

Despite a recent uptick in oil prices, they remain too low and volatile to lure buyers to the aging and small-producing fields Brazil’s Petroleo Brasileiro SA. and other deep-water operators are walking away from. The small- to mid-sized producers with low enough costs to turn a profit from exhausted oil fields are protecting their balance sheets, and banks are reluctant to provide funding.

In the U.S. Gulf of Mexico, which generates about 15% of the nation’s output, explorers are expected to spend about $1 billion a year over the next half decade to decommission hundreds of wells, according to Wood Mackenzie.

While the collapse in oil prices is having an effect on more offshore wells permanently shut, there’s also a push in the Gulf to extend the lives of some aging infrastructure. The key: Drilling new wells near existing platforms that can be fed by undersea pipelines as a way to cut costs.

“Companies are doing everything they can to avoid abandoning facilities because that’s very expensive,” Justin Rostant, principal analyst at Wood Mackenzie, said in a phone interview. “They’re just bringing in third-party production wherever they can to extend the life of these facilities.”

It costs an average of $10 million per well in deepwater and about $500,000 a well in shallow waters to plug and abandon a well in the Gulf of Mexico, Rostant said. Most wells shut down in the U.S. Gulf are coming from shallow waters, where the wells are the oldest and have lost their ability to make money.

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