Cooperative, coordinated strategy may be best approach to decommissioning challenges

By Glenn Legge, Endeavor Management

For decades, the offshore energy sector and its regulators have acknowledged, but failed to solve, a chronic problem – how to reduce the collective cost of decommissioning and abandonment (D&A) of structures that have reached, or are past, end of production. This issue has been the subject matter of industry articles, conferences, and regulatory proposed rulemaking processes. This subject matter is a bit like the existence of ghosts – occasionally discussed but rarely seen.

The current quagmire

In the last year we have seen the Bureau of Ocean Energy Management (BOEM) provide proposed rules for Risk Management & Financial Assurance for Leases on the Outer Continental Shelf (OCS) in the Gulf of Mexico (GoM). These proposed rules created a sharp response from the offshore energy sector, including a lawsuit in federal court.

In addition, the US General Accounting Office (GAO) issued a February 2024 report that was highly critical of BOEM and BSEE. The report stated that BOEM “holds about $3.5 billion in bonds from companies to cover a potential cost of $40-$70 billion” for decommissioning costs in the federal waters of the GoM. The GAO’s report addresses concerns that this multibillion deficit may end up being paid by taxpayers, rather than the offshore energy sector. To make the financial assurance aspect more challenging, the current state of the financial bonding market, which has been under severe pressure due to the rash of operator insolvencies in the United States.

The GAO addressed the thirty federal bankruptcy proceedings involving offshore operators in the GoM that did not have sufficient financial assurance/bonding to decommission the end-of-life assets operated by these insolvent companies, including ATP, Energy XXI, Stone Energy and Fieldwood Energy. The GAO also acknowledged the use of surety bonds to secure decommissioning obligations as opposed to allowing these obligations to revert to predecessors in interests (PIIs) that previously operated the assets in need of decommissioning. 

A common concern of both BOEM and the GAO is the sheer number of offshore energy structures that are either not being maintained or are minimally maintained, which will increase the cost of decommissioning. These older structures may create navigational hazards in the GoM and could increase the risks of environmental damage from wells that have not been suitably plugged and abandoned.

Similarly, the Westwood Global Energy Group consulting firm has recently estimated that the UK offshore energy sector could be faced with $26 billion in decommissioning costs over the next decade. In addition, the report indicated that deferred decommissioning may result in pressure on the decommissioning supply chain and day rates which could increase D&A costs by a further $5.5 billion. 

Based upon financial analyses from both the US and the UK regulators, the cost of decommissioning and abandonment will continue to increase as these offshore structures age and increase in number. These shared concerns recognize that the costs of safely decommissioning offshore structures inherently increase as these platforms age.

Although much of the offshore energy sector has been critical of BOEM’s proposed financial assurance rules, the proposed Renewable Energy Modernization Rules from the Bureau of Safety and Environmental Enforcement (BSEE) concerning Rights of Use and Easements (RUE) appear to be well received. BSEE essentially views the use of RUE’s as the most practical means for companies to utilize federal leases in the GoM for a variety of purposes, including CO₂ injection and storage.

Fortunately, there may be some effective and commonsense strategies to address the massive amount of D&A obligations in the GoM in a safe and cost-effective manner. Like many situations in life, these solutions can be drawn from existing and past experiences in the international and domestic offshore energy sectors.

Effective P&A strategies

To date, much of the P&A work in the GoM has not been executed in a timely or cost-effective manner. This is not so much a criticism of the offshore decommissioning sector, but rather of the lack of a focused, cohesive and mutually supportive industry, and regulatory strategies to execute decommissioning in an efficient manner. Fortunately, we can borrow from the past to fashion a more effective roadmap for future P&A work in the GoM.

In 2016, BOEM’s Regional Director, Mike Celata, and Jim Christie, Head of Decommissioning for the UK Oil and Gas Authority addressed the challenges facing their respective offshore energy sectors at a Decommissioning and Abandonment Summit in the United States. Similar to current industry concerns, the panel discussed numerous issues related to BOEM’s then recently promulgated and more financially stringent regulatory requirements.

The discussion acknowledged the advantages of creating cost-effective, tailored decommissioning campaigns involving separate operators utilizing “shared” decommissioning spreads for geographically proximate offshore structures. When asked how separate operators “sharing” a decommissioning contractor for proximate projects would be viewed by UK regulators, Christie acknowledged that there was no “hard line” prohibition for such a strategy as long as it complied with applicable EU anti-competitive regulations. Interestingly, the US perspective was not as confident that a “shared” decommissioning approach would comport with all US “anti-competitive” regulatory concerns.

The representatives from BOEM and the UK Oil and Gas Authority stated that they would consider any reasonable financial assurance for decommissioning including the use of suitable insurance. In summary, the panel members indicated the importance of communications between the regulators and industry in creating new methods to secure decommissioning costs.

The path forward

The path forward suggested here has three major elements:

1. Utilizing tailored, multi-operator decommissioning strategies
2. New decommissioning capabilities
3. Repurposing offshore structures for new energy projects.

It is time for the offshore energy sector to utilize a comprehensive new strategy for addressing the significant decommissioning challenge in the US GoM. Cooperative and coordinated strategies utilized by separate operators to decommission and abandon geographically proximate structures is a fairly straightforward and achievable tactical approach. The goal is to safely and cost effectively deploy marine assets with the minimum logistical and costly vessel movements and spread deployments. 

In light of the rash of offshore operator insolvencies in the US, the energy sector must consider alternative strategies, including the use of “contract” operators that can continue late life production while contemporaneously assessing, planning and safely executing decommissioning and abandonment strategies for specific structures/wells.

In addition, operators must consider the functional and cost benefits related to coordinating decommissioning and abandonment plans for separately operated, but geographically proximate, offshore structures. In an abundance of caution, operators and contractor groups may want to seek input from federal regulators, including BSEE, or the Securities and Exchange Commission (SEC) for publicly traded operators, to confirm that the use of a shared decommissioning system would not be considered to be an “anti-competitive” business strategy. This is especially relevant in light of the current number of structures in the GoM that are at the end of life. There is precedent for these types of cooperative industry projects, as evidenced by the creation of Marine Well Containment Company to address the deepwater drilling moratorium that was ordered following the Deepwater Horizon oil spill.

One of the essential and evolving challenges for late-life facility operators is the ability to secure adequate financial assurance in compliance with the anticipated regulatory requirements of BOEM and BSEE. The rash of operator insolvencies over the past 5-10 years has significantly reduced the number of commercial bonding entities that have historically provided financial sureties for the offshore sector. This critical lack of financial capacity will require the energy sector to seek alternative (and innovative) means to address financial surety requirements. 

Fortunately, the industry is currently witnessing the evolution of alternative “end of life” strategies in the Gulf of Mexico. In the US, one of these strategies involves repurposing existing structures for alternative energy utilization. One of the leaders in this area is an educational/industry entity associated with the University of Houston – the Repurposing of Offshore Infrastructure for Continued Energy (ROICE) program. The ROICE program participants include independent operators, decommissioning companies, service companies and contractors.

The ROICE program has analyzed various structures in the US GoM that are near end of production life as candidates for repurposing for CO₂ injection/storage, green hydrogen production, wave energy and data center location. ROICE is supported by federal funding, as well as substantial in-kind contributions from operators, service companies and contractors. Although repurposing existing structures would involve preliminary decommissioning (removal of hydrocarbon processing and other non-essential equipment and plugging wells) the vast majority of the operator’s final decommissioning/asset retirement obligations to remove the entire structure would be delayed 20-25 years. In 2024 and 2025, the ROICE program was invited to provide whitepapers and presentations on the engineering/technical, financial, regulatory and commercial elements of ROICE repurposing projects to the offshore industry at the Offshore Technology Conference in Houston, Texas.

The ROICE Program participants include Endeavor Management, Promethean Energy and Promethean Decommissioning – companies that have helped create a framework for repurposing offshore structures and are currently working directly with federal regulators including those from BSEE. A particular focus has been on “orphan” platforms that have no solvent operators or predecessors in interest. Endeavor Management and Promethean recently completed a “first of its kind” decommissioning campaign working directly for BSEE on orphaned structures in the GoM.

As the offshore energy sector gradually transitions into alternative energy activities (CO2 injection/storage, Green H2 production, wave energy, data storage) it will be interesting to see how the London Insurance Market responds. That market has historically provided insurance for significant and evolutionary offshore projects. It may again provide effective risk management and financial assurance programs for energy transition projects which have much smaller aggregate exposures, based upon the lack of hydrocarbon exposures.

Looking forward

The current regulatory, financial and operational activities in the US GOM are undergoing significant changes, which create some uncertainties for ongoing and future offshore projects. The current executive administration will likely continue to provide robust support for offshore hydrocarbon production and investment in new projects. Going forward, the significant variables will be the applicable regulatory structure that will impact the operational and financial issues related to D&A, and possible repurposing of structures at end of life. The industry will no doubt continue to display its impressive trend of innovation in these offshore sectors, and will likely “borrow” functional strategies from past achievements to address the seemingly persistent and evolving challenges of the future.