Oil-Service Firms Tout Boost From US Gulf Well-Plug Order
October 11 2010 - 07:07PM
Dow Jones News
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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