Decommissioning Liability Assessment Workshop

Kevin J. Karl Deputy Regional Director GOMR August 10, 2016 “To promote safety, protect the environment and conserve resources offshore through vigorous regulatory oversight and enforcement.”

BSEE Agenda

1:00 – 1:10 Opening Remarks (Kevin Karl)

1:10 – 2:30 NTL 2016-N03 (Mark Harbison)

2:30 – 2:45 Break

2:45 – 4:30 Global Update of BSEE GOM Decommissioning Estimates General Overview/Potential Impacts (Kevin Karl) Assessing Costs at Permit Stage vs Plan Stage (Kevin Karl) Current and Upcoming Assessment Process (Fung Hassenboehler) Well/Platform/Pipeline Costs (Mark Harbison)

NTL 2016-N03

Decom Cost Reporting Workshop M. Mark Harbison Petroleum Engineer GOMR Decommissioning Support Section August 10, 2016

“To promote safety, protect the environment and conserve resources offshore through vigorous regulatory oversight and enforcement.”

BSEE Implementation of NTL No. 2016-N03

Key Concepts

The fundamental elements of any BSEE decom estimate are single well P&A costs, single platform/facility removal costs, single site clearance and verification cost, and single pipeline segment decom costs.

BSEE estimates assume that all decom activities are performed on a “one off” basis rather than as part of a campaign or multi- asset project. Stated another way, no scale economies are recognized as BSEE has no means to determine when and in what order multi-asset decom projects will occur.

Lease, ROW and RUE decom liability estimates are built up by summing the appropriate well abandonment, platform/facility 6 removal, SC&V, and pipeline segment decom costs.

Key Concepts (continued)

Prior to this NTL, BSEE had essentially no current, actual decom cost data. Until sufficient actual decom data is collected (the purpose of the NTL), BSEE will continue to use algorithms/methodologies based on: 1. BSEE commissioned studies 2. Industry publications and academic research 3. Operator presentations to bankers/analysts 4. Data from operators gathered as part of cost challenge/bankruptcy processes 5. Professional experience The goal of this NTL is to allow BSEE to gather and analyze actual data in order to reduce estimate uncertainty which, in turn, generally translates to minimized estimates. BSEE needs estimates that provide more certainty than that of the mean, median or most likely. No BSEE official wants to have to say, “We thought there was a 50% chance that the bond 7 amount would cover the actual cost.”

Key Concepts (continued)

Should decommissioning liabilities ultimately fall to BSEE, the final cost will be higher than otherwise as BSEE would have to contract with a third party to perform the work, the cost of which would include a profit component for the contractor.

BSEE aims to arrive at a “fair value” decom cost estimate that reasonably approximates the amount a third party would demand to assume the decom obligation today.

Cost Allocations and Classification Except for the most simple decom projects, allocation of costs among decommissioned assets is unavoidable. BSEE does not intend to dictate how allocations are made, but only requires that they be made in good faith, consistent with best practices under GAAP and COPAS guidelines.

COPAS publication Classifications for Summary Form Billing© (MFI- 26) recommends classification of substantially all decom costs under the account Retirement and Abandonment (R&A) Expense. BSEE requires that this expense category be expanded to four accounts for reporting purposes: 1. Transportation and Staging 2. Location 3. Contract Services, Lifting, Diving and Service Units 4. Other Decommissioning Related Costs

Examples of costs appropriate to each of the four accounts above are detailed in the NTL

Cost Allocations and Classification (continued)

Project invoices received from contractors for a broader range of services provided on a lump sum basis will require that the operator and contractor work together to ensure that costs are correctly attributed to the four categories previously described.

BSEE strongly recommends that all allocations be made at the “invoice level”. Although BSEE is not mandating the use or reporting of the allocation methods used, it does recommend that a record be kept in case the Regional Supervisor requires any additional information or clarification.

BSEE strongly recommends that the operator involve the joint interest accounting function in the preparation and certification of the report.

Reporting Issues Many platform abandonment projects include the cost of cutting and pulling well conductors from otherwise fully plugged and abandoned wells. BSEE requires that these costs be captured and allocated back to individual well abandonment costs. Project managers and/or engineers approve and code decom invoices, which comprise most of the decom expense, but can be unaware of other costs that should be included. A good example of this would be in the situation where operator resources are used in a project and included, per COPAS guidelines, in the joint interest billing statements. Another example is cash received from venture partners intended to compensate the operator for general overhead and certain indirect costs per the joint operating agreement and COPAS guidelines. For these reasons, BSEE strongly recommends that operators involve joint interest accounting resources in report preparation and certification. Decom cost reports certified by responsible individuals within the accounting function will significantly reduce the possibility that the BSEE Regional Supervisor will request more information about reported costs.

Examples Decommissioning Scenarios and Reporting

Single Well Abandonment Reporting

Single Well Single Well Abandonment, PA Abandonment, Project Scenario Association PR Association Decom Activity Type PA PA Multi‐Asset Activity Flag N N Turnkey Contract Flag Y or N Y or N Rigs to Reefs Flag Null Null Permenantly Plugged Well ‐ Casing Not Cut Y or N Y or N Partially Decommissioned Assets Y or N Y or N Activity Duration XX.X days XX.X days API Number or Complex ID‐Structure Number API Number API Number Transport and Staging Costs $ C1 PA $ C1 PA Location Costs $ C2 PA $ C2 PA Costs $ C3 PA $ C3 PA Other Decom Related Costs $ C4 PA $ C4 PA Decom Cost Total $ CT PA $ CT PA Conductor Removal Cost Activity Association PA PR Number of Conductors Removed Null 1 13 Conductor Removal Cost Null $ CCR

Single Structure Removal and SC&V

Single Structure Removal and Single Structure Removal and Project Scenario Site Clearance, PA Association Site Clearance, PR Association Decom Activity Type PR SCV PR SCV Multi‐Asset Activity Flag N N N N Turnkey Contract Flag Y or N Y or N Y or N Y or N Rigs to Reefs Flag Y or N Y or N Y or N Y or N Permenantly Plugged Well ‐ Casing Not Cut Null Null Null Null Partially Decommissioned Assets Y or N Y or N Y or N Y or N Activity Duration YY.Y days ZZ.Z days YY.Y days ZZ.Z days API Number or Complex ID‐Structure Number CID‐SN CID‐SN CID‐SN CID‐SN Transport and Staging Costs $ C1 PR $ C1 SCV $ C1 PR $ C1 SCV Location Costs $ C2 PR $ C2 SCV $ C2 PR $ C2 SCV Costs $ C3 PR $ C3 SCV $ C3 PR $ C3 SCV Other Decom Related Costs $ C4 PR $ C4 SCV $ C4 PR $ C4 SCV Decom Cost Total $ CT PR $ CT SCV $ CT PR $ CT SCV Conductor Removal Cost Activity Association PA Null PR Null Number of Conductors Removed Null Null X Null 14 Conductor Removal Cost Null Null $ CCR Null

Multiple Well Abandonment, Single Structure Removal and SC&V

Project Scenario Multiple Well Abandonment, Single Structure Removal and Site Clearance Decom Activity Type PA PA PR SCV Multi‐Asset Activity Flag Y Y N N Turnkey Contract Flag Y or N Y or N Y or N Y or N Rigs to Reefs Flag Null Null Y or N Y or N Permenantly Plugged Well ‐ Casing Not Cut Y or N Y or N Null Null Partially Decommissioned Assets Y or N Y or N Y or N Y or N Activity Duration XX.X days XX.X days YY.Y days ZZ.Z days API Number or Complex ID‐Structure Number API Number 1 API Number 2 CID‐SN CID‐SN Transport and Staging Costs $ C1 PA1 $ C1 PA2 $ C1 PR $ C1 SCV Location Costs $ C2 PA1 $ C2 PA2 $ C2 PR $ C2 SCV Costs $ C3 PA1 $ C3 PA2 $ C3 PR $ C3 SCV Other Decom Related Costs $ C4 PA1 $ C4 PA2 $ C4 PR $ C4 SCV Decom Cost Total $ CT PA1 $ CT PA2 $ CT PR $ CT SCV Conductor Removal Cost Activity Association PR PR PR Null Number of Conductors Removed 1 1 2 Null Conductor Removal Cost $ CCR1 $ CCR2 $ CCR Tot Null

Multiple Well Abandonment, Multiple Structure Removal and SC&V

Project Scenario Multiple Well Abandonment, Multiple Structure Removal and Site Clearance Decom Activity Type PA PA PR PR SCV SCV Multi‐Asset Activity Flag Y Y Y Y Y Y Turnkey Contract Flag Y or N Y or N Y or N Y or N Y or N Y or N Rigs to Reefs Flag Null Null Y or N Y or N Y or N Y or N Permenantly Plugged Well ‐ Casing Not Cut Y or N Y or N Null Null Null Null Partially Decommissioned Assets Y or N Y or N Y or N Y or N Y or N Y or N Activity Duration XX.X days XX.X days YY.Y days YY.Y days ZZ.Z days ZZ.Z days API Number or Complex ID‐Structure Number API Number 1 API Number 2 CID‐SN 1 CID‐SN 2 CID‐SN 1 CID‐SN 2 Transport and Staging Costs $ C1 PA1 $ C1 PA2 $ C1 PR1 $ C1 PR2 $ C1 SCV1 $ C1 SCV2 Location Costs $ C2 PA1 $ C2 PA2 $ C2 PR1 $ C2 PR2 $ C2 SCV1 $ C2 SCV2 Costs $ C3 PA1 $ C3 PA2 $ C3 PR1 $ C3 PR2 $ C3 SCV1 $ C3 SCV2 Other Decom Related Costs $ C4 PA1 $ C4 PA2 $ C4 PR1 $ C4 PR2 $ C4 SCV1 $ C4 SCV2 Decom Cost Total $ CT PA1 $ CT PA2 $ CT PR1 $ CT PR2 $ CT SCV1 $ CT SCV2 Conductor Removal Cost Activity Association PA PA PA PA Null Null Number of Conductors Removed Null Null Null Null Null Null Conductor Removal Cost Null Null Null Null Null Null

Questions

15 Minute Break

Decommissioning Liability Assessment Workshop

Kevin J. Karl Deputy Regional Director GOMR August 10, 2016 “To promote safety, protect the environment and conserve resources offshore through vigorous regulatory oversight and enforcement.”

Global Update of BSEE GOM Decommissioning Estimates General Overview/Potential Impacts:

Current estimates will be updated (wells, platforms, pipelines) before end of August

Removing estimates based on proposed wells submitted in Plans (EP/DOCD)

Will now assess costs at time of APD submittal as well as when applications are received to install platforms and pipelines

<#>

Global Update of BSEE GOM Decommissioning Estimates

General Overview/Potential Impacts (Cont.):

Following global update in August, BSEE will be in a position to update costs on a frequent basis (e.g., daily)

Will reflect permits/applications submitted

Will remove costs after completion of decommissioning activities

BOEM to be notified upon BSEE updates in internal system <#>

Global Update of BSEE GOM Decommissioning Estimates

General Overview/Potential Impacts (Cont.):

All BSEE updated estimates will be available to industry via the online query as currently done Lease Number Area/Block ROW Number RUE Number

Upon global update and for any subsequent updates, the online query will be updated to coincide with internal updates <#>

Information available to industry will be expanded

Old Lease Liability Query Results

New Lease Liability Query Results

Global Update of BSEE GOM Decommissioning Estimates General Overview/Potential Impacts (Cont.):

Basis for change in BSEE estimates:

3rd parties

Actual costs submitted per regulation and NTL 2016-N03 Note proposed regulation coming to require pipeline decommissioning costs to be submitted

Challenges from industry

<#>

Global Update of BSEE GOM Decommissioning Estimates

General Overview/Potential Impacts (Cont.):

Overall impact of upcoming August update: Large decrease due to exclusion of Plan wells Decrease on shallow water pipeline segment estimates Increase on shallow water wells (<400 feet) Increase on shallow water platforms Decrease on subsea wells that have not been completed

<#>

Global Update of BSEE GOM Decommissioning Estimates General Overview/Potential Impacts (Cont.):

Premature to say what the actual impact will be on a lease, ROW, RUE basis Likely by the 2nd workshop on August 25th

Further refinement once we receive more actual decommissioning cost data Any updates to algorithms isn’t expected more than annually

Platforms and Pipelines don’t lend themselves to point estimates <#>

Global Update of BSEE GOM Decommissioning Estimates

General Overview/Potential Impacts (Cont.): For transparency purposes and for planning purposes, it appears that BSEE decommissioning estimates for wells will be:

Dry tree wells on fixed structures in <= 400 feet: $450,000 except TA status with surface casing plug: $150,000 Any well with TA status before April 2011: $150,000 Dry tree wells on fixed structures in > 400 feet: Dependent on water depth Ranges from $565,000 (water depth of 401 feet) to $770,000 (water depth of 1400 feet) Dry tree wells on floating structures: $2,056,000 ($1,325,000 for temporarily abandoned wells) Wet trees in <= 400 feet: <#> $2,500,000 Wet trees in > 400 feet: $13,250,000 ($20,559,000 after completion operations)

Global Update of BSEE GOM Decommissioning Estimates

Assessing Costs at Permit Stage vs Plan Stage:

“Conditioned” APD requiring that any BOEM demand received be satisfied before APD is considered approved Drilling cannot commence until compliance with BOEM demand Violation will result in INC, shut-in, and/or other enforcement measures

Applications to install platforms and pipelines will also be “conditioned” Installation cannot commence until compliance with BOEM demand Violation will result in INC, shut-in, and/or other enforcement <#> measures

Global Update of BSEE GOM Decommissioning Estimates Assessing Costs at Permit Stage vs Plan Stage (Cont.):

Industry assumes some risk

Strongly encouraged to engage and submit bonding in advance of any BSEE submittals when possible Primarily APD submittals Ensures operations can commence timely BSEE well estimates are know in advance Lease, ROW, RUE level estimates will be updated, posted, and available from the online query <#>

BSEE Website: www.bsee.gov @BSEEgov

BSEEgov

Bureau of Safety and Environmental Enforcement

“To promote safety, protect the environment and conserve resources offshore through vigorous regulatory oversight and enforcement.”

Decommissioning Liability Assessment Workshop Fung C. Hassenboehler Chief, Decommissioning Support Section August 10, 2016

“To promote safety, protect the environment and conserve resources offshore through vigorous regulatory oversight and enforcement.”

Questions and Responsibilities Lessee or Operating Rights Owner – BOEM ROW holders – BSEE Pipeline Section Decommissioning Status and Data Discrepancy Wells – BSEE District Offices Pipelines – BSEE Pipeline Section Platforms – BSEE Office of Structural and Technical Support Estimated Decommissioning Cost – BSEE Decommissioning Support Section

Important Updates Separate the assessment of platform removal costs and site clearance costs Pipelines with “ABN/REM” decommissioning status code Pipelines that may require removal Approved/pending permit applications will be assessed Cancellation Status

Current - Decom Liability Assessment Triggers Triggers for Routine Triggers for Companywide Assessments: Assessments:

Lease Assignments Requested by both: Plans (DOCD and BOEM’s Risk EP) Management Bond Cancellations Operation Group ROW Assignments BSEE’s ORD Industry Requests

Upcoming - Decom Liability Assessment Process After the initial global update, all Leases, RUEs, and ROWs will be reassessed frequently. Only the ones that have liability valuation changes will be updated. Common reasons for liability valuation changes: Installation Decommissioning Modification to wells, platforms, or pipelines Permit application status changes Changing algorithms

Current - Decom Liability Public Information

The estimated decommissioning liabilities for each lease/rue/row are recorded by the following categories: Site Clearance – includes both platform site clearance cost and pipeline decommissioning cost Platform Removal Cost Borehole Plug Cost

The system default “Platform Removal Count” and “Borehole Plug Count” recorded in our website are generally not representative of the number of 37 platforms and wells assessed.

Upcoming - Decom Liability Public Information

Wells Well Status Code

Platforms Installation Date Removal Date Site Clearance Date

Pipelines Status Code

Association with Leases/ROWs/RUEs Leases Wells – bottom hole lease Lease Term Pipelines – originated lease (if lack of originated lease, then destination lease) Platforms – surface lease ROWs ROW pipelines ROW accessory platforms RUEs Platforms used for the RUE purpose There should be no pipelines or wells assessed on the RUEs.

Association with Leases/ROWs/RUEs How are the liabilities assigned during asset authority transfers? Both the proposed authority and the existing authority will be assessed. Once the proposed authority is effective and the existing authority is terminated, the liability will be assessed to the latest effective authority. ROW assignments Platforms transferring from Lease authority to RUE authority