Giving up oil and gas since the 1940s, the Gulf of Mexico continues to provide traditional E&P companies with opportunities-some big, some small. Yet, some fields and facilities found their productive peaks years ago. The shine has long worn off their once-pristine platforms as they near the time to turn off their lights. For those for which the sun has set, the operator has called in plug-and-abandonment (P&A) professionals and is prepared to pay decommissioning costs. To some of these P&A firms, however, it's only dusk. They take over the property to produce it further, sometimes paying for it, minus the eventual P&A costs. Three of these end-of-life E&P firms are subsidiaries of well-known oil-service companies and have the advantage of insurance and bonding of their larger parents. Clout as a proven going-concern is important in the P&A business. When letting go of a Gulf property, many asset owners want to make sure liability for the asset doesn't come back to them-the federal Minerals Management Service (MMS) can stick a previous owner with the responsibility for P&A if the current owner is insolvent. Also, a poorly handled P&A job can be a public-relations disaster for a prior owner. For example, the Big #1 well may not have belonged to Big International Oil Co. since 1975, but public perception is that the well-and its nasty oil leak-belongs to Big. So much for Big's bid to drill offshore St. Croix. Several circumstances have made P&A services increasingly important in the Gulf. • A new accounting rule, FASB 143, requires that decommissioning liabilities be disclosed, forcing investors to look at this liability closer. • Also, the MMS is stepping up its regular Gulf platform-inspection program as a result of severe damage in the east-central Gulf from Hurricane Ivan, a Category 5 storm, in 2004. Heightened MMS scrutiny may lead to earlier P&A decisions for some operators. • Meanwhile, softening of commodity prices could tip a number of wells into the P&A column. In the past few years, strong prices have extended the economic lives of many Gulf assets. P&A firms report that they're losing bids on what would normally be end-of-life properties to traditional, although small, buyers. When it is time to let go, sellers call for bids. Sometimes the winner is a traditional E&P company that sees great potential for the asset; sometimes it is strictly a P&A firm with no hope for the asset. The rest of the time, the winning bidder is a combination firm, such as Energy Resource Technology, Maritech Resources and SPN Resources. Energy Resource Technology Inc. A business of long-time Gulf services business Cal Dive International Inc. (Nasdaq: CDIS), ERT was formed in 1992 to buy end-of-life Gulf properties and assume P&A liability. "When ERT started, we were the only company acquiring properties within our niche. Today there are many," says Johnny Edwards, ERT president. He joined ERT in 1994 after 19 years mostly focused on Gulf assets for Arco Oil & Gas Co. In ERT's first decade, it gained interests in 90 offshore leases from more than 20 operators. "After 1999, the competition grew for this type of property. If we were trying to start in this niche now, it would be challenging." Like others in its niche, ERT specifically looks for end-of-life properties that it believes have not been efficiently worked. The assets may have significant proved undeveloped reserves (PUDs) that the property's current owner found too small to bring into production. Using services from its parent, ERT can more profitably develop the reserves. Cal Dive enjoys the revenue from both businesses. In time, ERT has also taken interests in discoveries and leases in deeper water. Its most recent acquisition was a 37.5% working interest in BHP Billiton's Bass Lite discovery in 7,500 feet of water. The deal comes with varying interests in 50 additional blocks in the eastern portion of the Atwater Valley lease. And, it recently bid on a package of shallow Gulf properties offered by Devon Energy Corp. and involving production of some 13,000 barrels of oil equivalent per day. The package was won by Nippon Oil Exploration Ltd. "That doesn't look like an ERT-type purchase," Edwards says of the size of the deal and the remaining potential of the assets. "In 1994, we would have partnered with a larger company and bid the abandonment work for a smaller part of the package." In 2004, ERT drilled two wells as operator and farmed out eight wells on its leases. Its 2004 production totaled almost 40 billion cubic feet of gas equivalent. For 2005, it has budgeted eight drilling projects. Edwards says higher commodity prices have drastically changed the outlook for what may have been a sunset property during $3 gas and $25 oil. "At these prices, people are interested in half-million-barrel oil wells. Probably everything we've drilled in the last two years wouldn't have been drilled two years ago." ERT receives offers, and accepts some, from traditional E&P companies that want to look on the lease for missed, previously unwanted or deeper opportunities. Farming into the property offers prospects but not P&A responsibility. Lower commodity prices bring more business to ERT. "We've always been able to buy when prices were lower." To protect itself against falling prices, ERT hedges. He expects stepped-up MMS inspections to bring more properties ERT's way. "Ivan was the topping," he says. "The structures were over-designed but the combination of time and a storm like Ivan can take a toll. When the MMS inspects your platforms, it is looking for corrosion and weakened structural supports." Maritech Resources Inc. A subsidiary of The Woodlands, Texas-based Tetra Technologies Inc. (NYSE: TTI), Maritech is among the newer Gulf players seeking end-of-life assets. In the completion-fluids business since 1981 and P&A business since 1995, Tetra performs 1,500 to 1,700 well abandonments a year onshore as well as in the Gulf's inland waters and offshore. It decommissioned more than 45 platforms in the past two years, and that business has grown from revenues of $30 million in 1999 to $135 million in 2004. It formed Maritech in January 2000 as an E&P company that improves the end-of-life property's productivity before Tetra performs abandonment and decommissioning. "We've certainly matured the mission toward growing the asset base and pursuing E&P opportunities," says Matt McCarroll, Maritech president. He joined the firm in 2001 after time with Grant Geophysical Inc. "We're drilling wells-what any operator does-but abandonment and decommissioning is still our primary focus." Maritech operates 34 producing Gulf fields, involving 74 operated structures. It has nonoperated working interest in 15 fields and is involved in a total of 65 active wells. The figures do not reflect an acquisition in June. The company's operated gross production is now 60 million cubic feet of gas and 3,500 barrels of oil per day. Its year-end 2004 net proved reserves totaled 22 billion cubic feet of gas and 2.6 million barrels of oil. It plans to drill up to 10 wells this year on the properties in which it will have a working interest. Major acquisitions have been from El Paso, Apache, Unocal, Shell and other producers. In an example of one deal, Maritech was paid $3.9 million in 2003 to assume all abandonment liability of a shut-in field, quickly re-established production, examined potential targets, and started a three-well drilling program with privately held, The Woodlands-based Arena Energy Inc. The pair found eight productive reservoirs at a $3.5-million net cost to Maritech. Average daily production from the new wells is more than 26 million cubic feet of gas and 250 barrels of oil per day. Maritech's working interest is 38% after payout, which occurred in May. Its estimated rate of return on the property is more than 100%. The finding and development cost was less than $1 per thousand cubic feet equivalent. Maritech and Arena Energy may drill seven or eight wells this year on Maritech leases. Other drilling partners have included Mariner Energy and Newfield Exploration. P&A firms have been called scavengers. "We buy the stuff most others run away from," McCarroll says. "We reduce operating costs and improve production rates. We're not smarter than the previous owner; we just focus 'A' people on a 'C' property." Maritech runs into traditional E&P companies when bidding for what might have been sunset properties when commodity prices were lower. "The best place to find oil and gas is where it's been found before," he says. "So, there are a lot of start-ups in the Gulf. They're trying to buy these kinds of properties. While we want these properties too, we also try to take fields where it is assumed they have only abandonment potential." McCarroll sees increased interest in deep rights on Gulf leases. "Sellers are wanting to retain deep rights more and more, which is an issue. While we won't drill the deep shelf, we certainly see the potential and would like to see those wells drilled on our property. We've done deals in which the seller has kept the deep rights. And, we've had third parties approach us for deep rights." A 17,000-foot well was drilled on a Maritech lease last year. The target was noncommercial. McCarroll isn't surprised the shallow Gulf remains active today. "Not in this price environment. It doesn't take a lot of reserves to drill an economic project. A billion cubic feet of gas at $6 is the same as 3 billion at $2." Abandonment costs can vary from $500,000 for one property to $10 million for another. "There have been several small companies that have gone bankrupt after buying a property, and the seller had exposure for the abandonment costs not performed by the buyer. "The MMS never releases former owners from abandonment liability. Our advantage is that we're part of a financially strong corporation, and Gulf of Mexico abandonment is part of our core business." He expects more sunset properties on the market as a result of stepped-up MMS inspection and as the Gulf continues to deplete. "The increased emphasis on corrosion this year will certainly make some operators get rid of old platforms." Also, a softening of commodity prices would bring more fields Maritech and Tetra's way. "The snowball effect will hit one day." SPN Resources LLC. A subsidiary of Harvey, Louisiana-based Superior Energy Services Inc. (NYSE: SPN), Houston-based SPN Resources is an acquire-and-produce company that draws upon its parent's production-enhancement assets and services, as well as its P&A and decommissioning capabilities. "For us, it makes sense to acquire not only an asset that is nearly ready for P&A but one with productive life and exploitation possibilities," says Greg Miller, president of SPN Resources. "For the seller, it makes sense to trust a company with over a billion dollars in production- and abandonment-related assets to complete the abandonment process." Miller joined Superior in 2003 to lead the newly formed SPN Resources. A petroleum engineer, he was previously with Chevron, working on its Gulf of Mexico and onshore assets, and more recently with Optimal Energy, a privately held E&P that is focused on the Gulf Coast. SPN Resources has made Gulf of Mexico acquisitions in the last 18 months from Unocal Corp. (its first one), Marathon Oil, Apache, BP and Amerada Hess. Current net production is in the range of 7,100 to 7,600 barrels of oil equivalent per day. Its assets involve 35 shelf blocks (32 operated); 343 wells (146 producing); 64 structures; and 129,788 net acres. In its first two years, SPN Resources has already worked on and recompleted numerous wells in addition to plugging many wells and decommissioning structures. "We will aggressively abandon wells when they become uneconomic," Miller says. "This includes some of the roughest wells in the Gulf." The company has decommissioned all the 22,000-foot, hydrogen sulfide, Norphlet wells in Mobile Bay offshore Alabama that it acquired from Unocal. To exploit its assets that aren't ready for abandonment, SPN Resources partners with seismically driven exploration companies. "We're purposefully staying out of the exploration business," Miller says. "We're not competing with Superior's customers." At what point does a traditional E&P company decide to let go of a property? There are many factors. Each property has its own lifting costs and estimated decommissioning costs. One property may be economic at $35 oil; another may not. "We're looking at bidding on a property today with a $35-a-barrel lifting cost," Miller says. "That's exceptionally high." At $50 oil, the asset may be profitable, but if prices fall, the owner may consider P&A. "Some companies want to sell their high-lifting-cost properties to protect against falling oil prices and to have their metrics compare favorably with industry averages," Miller says. For now, SPN Resources operates in the Gulf of Mexico only. The next likely region for an active P&A business is the North Sea. And then there are some unique circumstances at times, such as BP's recent sale of some fields offshore Trinidad & Tobago that were interesting to SPN Resources. Its parent has existing oil-service operations in the area. To take on bigger-structure abandonments in the Gulf, Superior has ordered a new derrick barge that can handle up to 880 tons. It should be ready for work in third-quarter 2006. SPN Resources' main service vendor is its parent, which can use the in-house jobs to remove seasonality and cyclicality from its other subsidiaries' Gulf schedule. But SPN Resources does take bids. After all, this is a business-and a profitable one.