If you can’t keep people employed digging holes, pay them to fill the holes they have already dug. That seems to be at least part of the logic behind a new mandate from Interior Secretary Ken Salazar.
The mandate, which the federal Bureau of Ocean Energy Management, Regulation and Enforcement issued last week, requires oil and gas companies to permanently plug about 3,500 out-of-use wells in the Gulf of Mexico. Around 650 production platforms will also have to be dismantled. If it hasn’t been used for five years, then it’s got to go, according to the new rules.
The change in regulations came during the six-month moratorium on deep-water drilling imposed by the Interior Department after the Gulf oil spill in April. The Obama administration maintains that the halt, which has idled 33 rigs, will cost only about 8,000 to 12,000 jobs, but other reports put the number far higher. Louisiana alone could lose around 20,000 existing and potential new jobs due to the moratorium, Gov. Bobby Jindal said in a statement.
Most of the wells that must be permanently sealed under the new regulations were “shut in,” or temporarily plugged, because they were no longer cost-effective to operate. There’s still some good stuff down there, but the market price does not currently justify the cost of extracting it. Previous regulations didn’t require energy companies to permanently seal wells or dismantle platforms until one year after the end of a lease. This meant that as long as one well in a field was producing, numerous other wells in the same field could be shut in with temporary caps.
The industry term for all this unused extraction infrastructure is “idle iron.”
Using temporary plugs, rather than permanent ones, allows oil and gas companies to return to old wells if they become economically viable again. When prices are low, a company may not be able to operate a marginal well profitably. If prices climb, it can be worthwhile for the company to put that well back into operation. Improvements in technology can also make it worth restarting production, by making more oil or gas accessible or by making it easier to extract the accessible reserves.
Keeping shut-in wells is an important part of many energy companies’ business models. An oil and gas partnership that our firm manages always has at least a few wells shut in at any given time, and some of those wells stay shut in for years. (Since these wells are all onshore, they aren’t subject to the administration's new policy.) Permanently plugging idle wells in the Gulf of Mexico could cause oil and gas companies to lose $6 billion to $18 billion in revenue from future production, Mark Kaiser, director of Research and Development at the Center for Energy Studies at Louisiana State University, told The Wall Street Journal.
Nevertheless, the government insists that complying with the new regulation will benefit oil and gas companies. In a Notice to Lessees, the Interior Department told operators in the Gulf of Mexico that “This idle infrastructure poses a potential threat to the OCS [Outer Continental Shelf] environment and is a financial liability to you and possibly the Federal government if subsequently destroyed or damaged in a future event such as a hurricane.” The notice warns that the potential costs of dealing with old infrastructure damaged in a storm “may even impact the future viability of your company.”
This language is clearly intended to evoke fear of a BP-scale disaster. But to have a big oil spill, you need to have a lot of oil, such as in an exploratory well that strikes a gusher or in a producing field that has plenty of natural pressure. This is not the sort of thing that happens in a well that is closed due to low productivity.
Occasionally, high-producing wells are shut in because the necessary pipeline infrastructure is not ready or because of unfavorable leasing conditions or market prices. But most of the time, if a well isn’t in operation, it is because there isn’t a whole lot in it.
The true risk for disaster comes from drilling new wells. If the Macondo blowout taught us anything, it is that new drilling carries a certain level of risk that is not present with old holes.
By requiring old wells to be permanently shut down, the government is ensuring more drilling in the future. As market or technological changes make operating in previously abandoned fields profitable again, companies that once might have been able to simply reopen old wells will instead have to drill new ones. Like the Cash for Clunkers program that sent serviceable cars to the junkyard in an effort to spur new production, the clampdown on idle iron amounts to a waste of existing materials.
But while oil and gas companies lose valuable assets, workers suffering from the drilling moratorium may gain jobs. Kaiser estimated that the new regulations will prompt companies to put $1.4 billion to $3.5 billion into closing off old wells and dismantling out-of-use platforms. The decline in industry spending due to the moratorium is around $1.8 billion, according to an administration report. Shares of Hercules Offshore, Inc., and Seahawk Drilling, two of the firms most active in the business of dismantling platforms and decommissioning wells, jumped 7.5 percent and 6.6 percent respectively the day the mandate was issued, according to The Washington Post.
As the Obama administration struggles to persuade Americans that the economy is on the path toward recovery without uttering that now-taboo s-word, it is hard not to see the “idle iron” mandate as, at least in part, a politically-motivated make-work program, disguised as environmentalism. The program allows the administration to offer a bone to hard-hit Gulf Coast states, while pretending to the rest of the country that it is protecting our ocean and coastlines.
If something is a real environmental hazard, by all means let's get it cleaned up. But a country that is in hock up to its highest portholes ought to think twice before it abandons potentially valuable wells just to give workers something to do.
Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book,
Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book
The High Achiever’s Guide To Wealth.
Posted by Larry M. Elkin, CPA, CFP®
If you can’t keep people employed digging holes, pay them to fill the holes they have already dug. That seems to be at least part of the logic behind a new mandate from Interior Secretary Ken Salazar.
The mandate, which the federal Bureau of Ocean Energy Management, Regulation and Enforcement issued last week, requires oil and gas companies to permanently plug about 3,500 out-of-use wells in the Gulf of Mexico. Around 650 production platforms will also have to be dismantled. If it hasn’t been used for five years, then it’s got to go, according to the new rules.
The change in regulations came during the six-month moratorium on deep-water drilling imposed by the Interior Department after the Gulf oil spill in April. The Obama administration maintains that the halt, which has idled 33 rigs, will cost only about 8,000 to 12,000 jobs, but other reports put the number far higher. Louisiana alone could lose around 20,000 existing and potential new jobs due to the moratorium, Gov. Bobby Jindal said in a statement.
Most of the wells that must be permanently sealed under the new regulations were “shut in,” or temporarily plugged, because they were no longer cost-effective to operate. There’s still some good stuff down there, but the market price does not currently justify the cost of extracting it. Previous regulations didn’t require energy companies to permanently seal wells or dismantle platforms until one year after the end of a lease. This meant that as long as one well in a field was producing, numerous other wells in the same field could be shut in with temporary caps.
The industry term for all this unused extraction infrastructure is “idle iron.”
Using temporary plugs, rather than permanent ones, allows oil and gas companies to return to old wells if they become economically viable again. When prices are low, a company may not be able to operate a marginal well profitably. If prices climb, it can be worthwhile for the company to put that well back into operation. Improvements in technology can also make it worth restarting production, by making more oil or gas accessible or by making it easier to extract the accessible reserves.
Keeping shut-in wells is an important part of many energy companies’ business models. An oil and gas partnership that our firm manages always has at least a few wells shut in at any given time, and some of those wells stay shut in for years. (Since these wells are all onshore, they aren’t subject to the administration's new policy.) Permanently plugging idle wells in the Gulf of Mexico could cause oil and gas companies to lose $6 billion to $18 billion in revenue from future production, Mark Kaiser, director of Research and Development at the Center for Energy Studies at Louisiana State University, told The Wall Street Journal.
Nevertheless, the government insists that complying with the new regulation will benefit oil and gas companies. In a Notice to Lessees, the Interior Department told operators in the Gulf of Mexico that “This idle infrastructure poses a potential threat to the OCS [Outer Continental Shelf] environment and is a financial liability to you and possibly the Federal government if subsequently destroyed or damaged in a future event such as a hurricane.” The notice warns that the potential costs of dealing with old infrastructure damaged in a storm “may even impact the future viability of your company.”
This language is clearly intended to evoke fear of a BP-scale disaster. But to have a big oil spill, you need to have a lot of oil, such as in an exploratory well that strikes a gusher or in a producing field that has plenty of natural pressure. This is not the sort of thing that happens in a well that is closed due to low productivity.
Occasionally, high-producing wells are shut in because the necessary pipeline infrastructure is not ready or because of unfavorable leasing conditions or market prices. But most of the time, if a well isn’t in operation, it is because there isn’t a whole lot in it.
The true risk for disaster comes from drilling new wells. If the Macondo blowout taught us anything, it is that new drilling carries a certain level of risk that is not present with old holes.
By requiring old wells to be permanently shut down, the government is ensuring more drilling in the future. As market or technological changes make operating in previously abandoned fields profitable again, companies that once might have been able to simply reopen old wells will instead have to drill new ones. Like the Cash for Clunkers program that sent serviceable cars to the junkyard in an effort to spur new production, the clampdown on idle iron amounts to a waste of existing materials.
But while oil and gas companies lose valuable assets, workers suffering from the drilling moratorium may gain jobs. Kaiser estimated that the new regulations will prompt companies to put $1.4 billion to $3.5 billion into closing off old wells and dismantling out-of-use platforms. The decline in industry spending due to the moratorium is around $1.8 billion, according to an administration report. Shares of Hercules Offshore, Inc., and Seahawk Drilling, two of the firms most active in the business of dismantling platforms and decommissioning wells, jumped 7.5 percent and 6.6 percent respectively the day the mandate was issued, according to The Washington Post.
As the Obama administration struggles to persuade Americans that the economy is on the path toward recovery without uttering that now-taboo s-word, it is hard not to see the “idle iron” mandate as, at least in part, a politically-motivated make-work program, disguised as environmentalism. The program allows the administration to offer a bone to hard-hit Gulf Coast states, while pretending to the rest of the country that it is protecting our ocean and coastlines.
If something is a real environmental hazard, by all means let's get it cleaned up. But a country that is in hock up to its highest portholes ought to think twice before it abandons potentially valuable wells just to give workers something to do.
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