In the middle of the regulatory uncertainty that has sprung from this summer's Gulf of Mexico oil spill, offshore services companies are touting a federal mandate to plug thousands of abandoned wells and remove hundreds of unused platforms as a likely source of steady income.

Starting Oct. 15, companies must permanently seal wells that haven't produced oil or gas in five years as part of the government's reaction to BP PLC's (BP, BP.LN) Deepwater Horizon blowout. Federal regulators estimate that throughout the Gulf there are some 3,500 non-producing wells and about 650 idle platforms whose owners must move to dismantle.

Well owners have 120 days from Oct. 15 to file plans with the Bureau of Ocean Energy Management detailing how they'll deal with their derelict properties. And while the push to clear away so-called "idle iron" could run those owners billions of dollars in cleanup costs and future revenue from oil and gas that will be sealed in many of the unused wells, the effort may amount to a government-mandated work program for the relatively small firms that lease equipment and perform underwater plug and abandonment services.

"I can't tell you exactly how that acceleration in activity is going to pan out over the course of the next couple of years, but clearly we will be a beneficiary of this," Superior Energy Services Inc. (SPN) Chief Executive David Dunlap told investors during a conference last week in New Orleans. Superior has told analysts that it plugged about 550 wells last year, which represented about half of the market for that service last year.

Hercules Offshore Inc. (HERO) Chairman John T. Rynd, speaking at the same New Orleans conference, said he expects increased demand for his company's fleet of 41 domestic liftboats, which can generate between $5,000 and $23,000 a day.

Because there's always been plug and abandonment work, "this isn't just going to bust wide open," Rynd said. But the mandate will remove "volatility" from the business over the next few years.

James West, an analyst with securities researchers Barclays Capital, said the industry dismantles about 150 platforms a year and, barring the arrival of new equipment, can probably handle 250 platform removals a year. The number of wells permanently plugged each year could grow from a high now of about 1,200 to as many as 2,000, West said.

"The key here is whether the government actually enforces these regulations, which they never have before," he said.

Another factor that will determine how soon, and to what extent, service companies, like Global Industries Ltd. (GLBL) and Tetra Technologies Inc. (TTI), begin to benefit, according to West: Whether oil and gas firms try to coax more production from idle wells to remove them from the ranks of the abandoned.

With or without a government-induced boom, the plug and abandonment business has been on the upswing. Rynd said abandonment-related income as a percentage of the total revenue derived from Hercules' liftboats grew from 9% in 2008 to 15% last year with further growth forecast.

Dave Brunnert, vice president of intervention services for Weatherford International Ltd. (WFT), said that the string of hurricanes that crisscrossed the Gulf in 2004 and 2005 led to higher insurance rates, which have prompted companies to remove unnecessary equipment.

Plugging ocean-floor wells isn't a huge part of Weatherford's overall income stream, but it's a "rapidly growing part of our business," Brunnert said. "We've seen it coming for a while and we're in good position," he said, to take advantage of the government's decree. Weatherford has a market capitalization of about $12 billion.

-By Ryan Dezember, Dow Jones Newswires; 713-547-9208; ryan.dezember@dowjones.com

 
 
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