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Ministry of Business, Innovation & Employment

Preliminary Review of Onshore Petroleum Abandonment Risk

October 2016

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110005-RPT-X0001

Advisian New Zealand

Advisian MBIE Petroleum Abandonment Study Document Number 110005-RPT-X0001.docx

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Disclaimer

This report has been prepared on behalf of and for the exclusive use of MBIE, and is subject to and issued in accordance with the agreement between MBIE and Advisian.

Advisian accepts no liability or responsibility whatsoever for it in respect of any use of or reliance upon this report by any third party.

Copying this report without the permission of MBIE and Advisian is not permitted.

Description Author Review Advisian Approval Date

Approved for Use

G Hooper

H Nicholson

J Field

6th October 2016


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Ministry for Business, Innovation and Employment (MBIE) commissioning statement

MBIE commissioned this report to inform the assessment and response to the Parliamentary Commissioner for the Environment’s (PCE) June 2014 recommendation for the government to introduce an industry funded levy to pay any remediation costs from abandoned onshore petroleum wells.

Petroleum is owned by the Crown and the Crown issues rights to prospect, explore and mine for petroleum, including under private land. The Crown does not grant access to private land, but the Crown Minerals Act 1991 sets out a regime for land access to be acquired from land owners and occupiers.

As the PCE identified, land owners and occupiers are potentially exposed to remediation or decommissioning costs if an abandoned petroleum well leaks or a site needs decommissioning and no permit holder can be held accountable. Alternatively, government may choose to step in to investigate and remediate upstream petroleum sites.

To understand the size of the issue, MBIE asked Advisian New Zealand to estimate the potential cost to third parties (land owners and occupiers or government) of remediation or decommissioning costs for abandoned upstream petroleum sites. The information in this report will be evaluated as the government considers the need for any increased government oversight of abandoned onshore petroleum wells and the form this might take.


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Table of Contents

1 Summary 1

2 Methodology and Approach 4

3 Derivation of the Cost Factors for Abandonment 9

4 Assessment of Financial Exposures 13

5 Results 15

6 Conclusion and Recommendations 19

MBIE Petroleum Abandonment Study

Advisian MBIE Petroleum Abandonment Study Client Reference: 110005-RPT-X0001.docx

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1 Summary This work covers a preliminary assessment undertaken on behalf of the Ministry of Business, Innovation and Employment (MBIE) to develop an estimate of the average cost for decommissioning and remediation1 work that might need to be undertaken in respect of the abandonment2 of upstream, onshore petroleum infrastructure (including all active and inactive petroleum wells, their associated topside facilities, and onshore production stations from historic, current and future on-shore petroleum operations) in New Zealand.

In a conventional evaluation of this type, detailed work would be necessary to both assess infrastructure decommissioning costs and to document the sub-surface characteristics of the individual wells or fields, in order to establish well status, local geological conditions and any specific environmental exposure that might influence costs. One might also anticipate the need for field inspections to better understand the nature and extent of potential hazards associated with abandoned wells; and thus the overall risk profile for the total population of wells drilled in New Zealand.

In this instance, such an approach was not possible as the required level of data was not currently available to the Ministry. Instead, a preliminary high level assessment was requested so as to better frame the issues and enable an initial assessment of the likely risk profile and the financial exposure that might ensue under different scenarios. The approach adopted took a macro view which examined the known inventory of producing and non-producing wells on the basis of generic assumptions on well abandonment and waste treatment practices within New Zealand, and from international experience. These assumptions were informed by a preliminary survey3 undertaken by MBIE Energy and Resource Market Group of approximately 90 wells for which data was unknown and operational status needed to be confirmed.

From this base an assessment was then made of the potential liabilities that might transfer to third parties from abandonment of upstream oil and gas operations in the eventuality that these costs are not met by the original owner due to them no longer being in existence or able to be held legally liable, going out of business or having insufficient financial strength to meet any rehabilitation and reclamation costs from a loss event.

The existing MBIE data base of all known onshore wells (some 957 in total) was stratified into 17 different well-categories according to whether the wells were producing or non-producing, owned or orphaned (no recognized owner) and their recorded well-status. The details of the stratification

1 Remediation is taken to mean the excavation, transportation, disposal and other treatments for contaminated soils and groundwater contamination as required. Where used in this report reclamation is simply the reinstatement of disturbed soils or landscapes.

2 In this report abandonment (or abandoned) refers to the status of a wellbore when the operator has gone and all operations and activities are terminated. In a general sense the well would have been plugged and all regulatory requirements met; however this may not always be the case, especially for wells abandoned early in the NZ petroleum record.

3 MBIE Draft Preliminary Report, Well Investigation Project, August 2016 .



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scheme and stratification logic are discussed in detail in the body of this report. Distinction is also made between wells drilled pre 1955 and post 1955, and wells drilled post 2005 in respect of waste management practices. This relates to the nature of risk and what is considered “modern” well abandonment and environmental practices.

Additionally, it is important to reflect the current situation in New Zealand, as well as focus on previous practices. Petroleum well operations are covered in Part 6 of the Health and Safety in Employment (Petroleum Exploration and Extraction) Regulations 2013 4 . These regulations impose duties on all well operators to ensure that there is no unplanned escape of fluids so far as is reasonably practicable, and that both suspension and abandonment of a well is done safely. In particular, the imposition of a well examination scheme provides an independent check on well design, construction, operation, and abandonment activities.

It is therefore essential that the analysis undertaken reflects the true nature of any abandonment scenario and, in this regard, the existing producing assets have been treated differently from non-producing assets. For producing assets it is reasonable to assume that suspension or abandonment of a well will be covered by existing regulatory and licensing requirements. And, whilst there may reside a future residual risk of failure from technical or other causes following abandonment during the operating life of that asset, business failure, from whatever cause, is the only likely scenario that would result in any financial exposures being directed back to third parties (and potentially the Crown).

In respect of the non-producing assets, distinction needs to be made between those assets (and their associated wells) to which ownership (and thus risk from any potential well failure) can be assigned and those for which there is no known owner and thus any residual risk can in some instances transfer to the land owner or land occupier under current regulatory settings in the Resource Management Act 1991. We have made no assumption on the role that the Crown may want to assume in this situation.

The scope of the study thus included all 957 onshore wells, their associated well head facilities, pipelines and other related infrastructure. Excluded were the Omata and Paritutu tank farms (as it was considered that exiting operators in these shared facilities would not allow them to fail) plus the Kupe, Pohokura and Oaonui production stations (servicing offshore facilities) as well as the Maui and Vector gas transmission lines.

Our examination of the data base tells us that most of the petroleum drilling in NZ has occurred Post 1955 - giving some degree of comfort that whilst the tail may be long (over 100 years), the number of wells drilled before modern abandonment practices were adopted in this country is relatively small (143 or 15%) and thus exposures can be readily constrained to a limited number of exposures categories. It is thus unlikely that further stratification will add significantly to the level of accuracy offered by the approach adopted here.

4 Well operations and well examination schemes under the Health and Safety in Employment (Petroleum Exploration and Extraction) Regulations 2013, WorkSafe NZ, Interpretive Guidelines, July 2015.



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It is important to reiterate that this analysis has been commissioned by MBIE to support its understanding of the risk profile of onshore upstream petroleum operations (past and future) and require abandonment in the future, re-abandonment or other forms of decommissioning or remediation, but for which there is no known operator, or no operator is legally liable, or no operator is willing to pay. Risk can thus be specifically defined as the financial exposure to third parties (including local and central government, land owners and occupiers) from all future losses attributed to well failure and abandonment. It assumes that potential losses to operating companies are accounted for on their existing balance sheets, or can be met by future revenues.

We have thus looked at the possible costs of abandonment, de-commissioning, remediation and reclamation at a generic level and then ascribed cost factors based on historical records from both past and present operations, and relevant international data. Because we have no knowledge of likely future petroleum activity in this country it was necessary to establish a time frame for the assessment period. In the absence of any specific data we have taken a 10 year horizon and assigned a “likelihood of loss” within that period. In the absence of more detailed information, we have assumed that the costs of remediation of any environmental harm from already abandoned wells will most likely fall to third parties. This approach could be deemed conservative but at this stage a conservative approach is appropriate to reflect the degree of uncertainty in the derived costs that apply.

The approach adopted therefore has sought to establish the likely financial exposures that might fall to third parties outside of the industry for each of the individual stratification categories, depending on; the assessed liability, the likelihood of loss, and/or the potential for company failure. Again these are concept-level estimates and could vary significantly on a well-to-well basis.

In order to better reflect the uncertainties inherent in the approach taken we have then used a simple @Risk model to derive an expected average yearly value and estimated value range for the expected costs to third parties.

We caution that a more in-depth analysis may well suggest changes to the assumed distribution curve and probability settings used in this analysis. The model approach taken has been developed to accommodate any such revisions. The data presented here is a “first cut” at the problem and our expectation is that further iterations will allow further refinement of the figures.

This preliminary analysis suggests that the expected financial exposure to third parties over the forward 10 year period will likely range from between $–41 - 56 million at a 90 percent confidence level, with a mean value of $47.7 million; equating to approximately 4.8 million/y. Under the model assumptions used the cost of abandonment for wells-only accounted for 88% of the total liability. Of these, the known hydrocarbon and orphaned wells accounted for approximately 93% of the liability enumerated.

Finally, we reiterate, that the focus of this study has been on providing an initial definition and framing of the potential risk exposure to Third Parties (including the Crown) from onshore oil and gas facilities (both past and present) that might require plugging, abandonment or other forms of decommissioning or remediation, but for which no operator is legally liable and no other operator is willing to pay these costs. Further, more detailed work is required to give a better resolution of the problem going forward.



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2 Methodology and Approach This analysis was commissioned by MBIE to clarify and help support its understanding of the risk profile of onshore upstream petroleum operations that have already been abandoned or might in future be abandoned or might otherwise require decommissioning but which might be orphaned as there is no known operator, no operator is legally liable, or no operator is willing to pay. Risk can thus be defined as the financial exposure to third parties (including local and central government, land owners and occupiers) from all future losses attributed to well failure and abandonment.

Specifically three scenarios were identified as providing possible risk exposures:

1. Risk posed by petroleum operations that have been abandoned and operations halted, but requiring remediation or further decommissioning;

2. Risk of current petroleum operations that become abandoned without decommissioning of wells or infrastructure having occurred (this may happen if a company ceases to trade or is unable to meet its obligations for other reasons such as capability); and

3. Risk posed by petroleum operations that are decommissioned and abandoned in the future according to current regulatory frameworks, but require some kind of remediation (for example, the well leaks).

In order to complete this task the analysis was based on existing data gathered by MBIE from the NZ Petroleum & Minerals (NZP&M) petroleum database of the status and the information available from submitted Well Completion Reports for all known on-shore permits (957 in total as at August 2015), augmented by data gathered by MBIE from an additional survey conducted in June / July 2016 which investigated the operational status of 90 wells that had been identified as having incomplete data and/or uncertain location. This preliminary survey involved site inspections to enable better classification of individual well status. No engineering or technical reviews were undertaken. Results from the survey were used also to inform the subsequent well stratifications undertaken as part of the work reported here.

Due to scope limitations, no reference was made when classifying the total population of 957 wells to other possible sources of well information or any geological reports for individual wells held in the NZP&M database. Instead, discussion with MBIE agreed a stratification approach for the data based on the ownership status of each individual well as, fundamentally, it is the status of ownership and strength of the owner’s financial position that will ultimately determine the extent to which residual risks arising from well abandonment may fall to the Crown, local government or landowners and occupiers. Detailed assessments would require more extensive field investigation and technical evaluations.

The schema used and numbers of wells assigned to each category is shown in the attached Appendix A. In total 17 different well categories were identified and described in the provided schematic. A definition of terms used to describe well-status is provided in Table 1 (following).

The logic used for the categorizing each individual well within the stratification scheme adopted is set out in the following:



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Producing and injecting wells are treated separately. For producing assets it is reasonable to assume that any third party exposure abandonment costs, with the necessary reinstatement of the affected land, area will be directly as a consequence of business failure.

In respect of those wells to which owners can be assigned then the dominant risk vector is whether wells are recorded as being suspended or completed as one can presume that there remains an ownership interest in these assets. On the other hand wells reported as being plugged and abandoned present a different risk as we assume that acceptance by the owners of any liabilities arising from a potential well failure is in essence voluntary5.

At the next level down we assess the dominant risk vector as being whether wells are recorded as having hydrocarbon shows or otherwise. There are a significant number of wells (68) for which no record is available (unknown) and these have been treated separately. Whilst there is a risk arising from well failure for all wells, the environmental harm and thus consequence of failure is likely to be more significant for those wells that are hydrocarbon-bearing against those for which no hydrocarbons were recorded. However, no hydrocarbon does not mean no risk, especially for wells drilled pre 1955 as in the absence of modern methods there may well be undetected hydrocarbons present.

Distinction is made between wells drilled pre 1955 and post 19556 as this relates to the nature of risk and what is considered “modern” well abandonment practice. Proper abandonment, i.e. decommissioning of a well and isolation of perforated permeable intervals, is a crucial final stage in a well completion. Anecdotal advice suggests that, in New Zealand, the most significant driver for improved abandonment practices was the arrival of a number of global exploration companies in the mid to late 1950s. This led to improved well management practice and thus well integrity can be reasonably assured post 1955. Regardless, an increased regulatory oversight over the recent past has seen continuous improvement in management practice.

In addition we assess that the consequences of environmental harm from poor waste management practices (and thus site remediation costs) is significantly reduced from or about 2005 due to improved industry practices and regulatory interventions imposed by local government7.

Nowadays all drilling and production operations are covered under the provisions of the Health and Safety in Employment (Petroleum Exploration and Extraction) Regulations 2016. These regulations impose duties on well operators to ensure that there is no unplanned escape

5 This assumption reflects the legal situation that, providing all the final regulatory/jurisdictional inspections and approvals have been obtained and the wellbore has been plugged in accordance with the standards of the time the operator cannot be held legally liable for a subsequent well failure.

6 This date aligns with the commencement of Kapuni drilling in the late 1950s. Examination of the well record shows quite limited activity prior to then.

7 Whilst there is no precise single date a number of factors coincided early this century led by the Taranaki Regional Council and from within the major players that led to a sea-change in attitude and best management practice within the industry; e.g. use of unlined flare and blow down pits were largely phased out.



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of fluids so far as is reasonably practicable, and that the suspension and abandonment of a well is done safely. In particular, the imposition of a well examination scheme provides an independent check on well design, construction, operation, and abandonment activities. The risks from any future end-of-field scenario are thus significantly reduced.

In respect of those wells identified as having no recognized owner, we have simply categorised a well in accordance with whether the well is reported as having been plugged and abandoned, or otherwise. The rationale for this simplified partitioning is that in general these wells (no recognized owner) tend to have been completed early in the NZ exploration record and the integrity of the wells (without inspection) is less certain and the requirement for re-abandonment or other remediation action is more likely.

Failure rates are expected to be higher for those wells that have no record of completion against those recorded as having been both abandoned and plugged. We also comment that these wells will be shallow and, as is indicated by the MBIE survey, it is unlikely that much in the way of above ground facilities still exist.

Finally, based on the MBIE survey, there were some 43 wells for which data collected was inconclusive and further technical assessment may be required. These wells have been separately categorised. None appear to present an immediate risk of catastrophic failure, with any environmental impacts likely to be cumulative, or none at all.

The above approach provides a means of arriving at an inventory of the different well categories so as to allow an estimate of the requirements for any future abandonment, decommissioning, or remediation scenario, and thus potential liabilities that might arise. Table 1, below, provides definitions for the recorded well status.

Suspended A wellbore whose operations have been halted for a significant period of time or in a manner that requires significant effort for the resumption of activities. The wellbore can be plugged downhole and fluids injected on top of the plug in order to create a temporary seal to prevent hydrocarbon leakage. Regulatory definitions often govern resumption of production relative to the risks involved. The surface equipment remains in place. Suspended is never the final status of a well.

Plugged and Abandoned

The status of an abandoned well once all final regulatory/jurisdictional inspections and approvals have been obtained verifying that its wellbores have been plugged in such a way or manner as to prevent the migration of oil, gas, salt water, or other substance from one stratum to another and that all required down hole equipment is removed and surface reparations to the wellsite have been completed.

Producing The status of a wellbore during the phase where liquids or gas is being extracted from the wellbore.

Non-Producing

Used generically to describe wells other than those where liquids or gas is being extracted from the wellbore.

Injecting The status of a wellbore during the situation where liquids or gas is being pumped into the wellbore.



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Shut In A wellbore that is in a temporary phase in which the production is briefly halted for economic or operating reasons. Shutting in involves closing valves or shutting off pumps that are required for production or injection.

Abandoned The status of a wellbore when the operator is walking away, with no intention of returning to the well. All operations and activities are terminated. Legally, Abandoned should be a short term status as procedures are underway to permanently plug and seal all of its wellbores (not always the case).

Completed The status of a wellbore when the down hole equipment is being installed and the well is being prepared for service.

Table 1: Well Status Definitions (from MBIE)

Reference must also be made to earlier work undertaken by Transfield Worley which evaluated some 59 wells in the Moturoa Oil Field, Taranaki for the Taranaki District Council8. This study, with the help of reservoir engineers and geo-physicists, involved documentation of the likely cause of failure and the nature and extent of potential hazards associated with abandoned wells.

Almost all of these wells were drilled before 1960 (with many in the 1800s) and it is noteworthy that out of the total 59 wells appraised, the authors identified only 17 wells as requiring some action. In other words 70 percent of the wells assessed were deemed to require no additional action at this time.

This finding has influenced our thinking in terms of assessing risk categories and abandonment requirements for the well population being considered in this study. Most petroleum drilling in NZ has occurred Post 1955 giving some degree of comfort that whilst the tail may be long, the number of wells drilled before modern abandonment practices were adopted in this country is relatively small (143 or 15%) and also it can be assumed that these wells will be shallow and less likely to intersect complex structures.

Also, as previously commented upon, the current regulatory framework offers a greater assurance of well integrity and abandonment practice. Continuous improvement in NZ industry practices and technology can be expected in line with internationally accepted good practice and thus risk exposures going forward may well be less than the risks enumerated in this report, which are strongly weighted by legacy issues.

There is, moreover, a need to differentiate between a forced abandonment and a conventional end-of-field decommissioning scenario. It is only the unexpected failure (business or technical) that will drive any residual risks back to the Crown or other third parties. For producing fields the likelihood is that under a business failure scenario any producing assets will be on-sold to other parties who will, presumably, take on any future abandonment responsibility for these facilities.

This has been taken into account in this study with an assumption incorporated into the analysis on the number of wells likely to be resold under a forced sale scenario. It is evident that exploration company profitability (and hence minimised potential for bankruptcy) is enhanced by

8 Taranaki regional Council, report for Moturoa Oil Field Investigation: Stage1, prepared by Transfield Worley Ltd., Doc Ref 500364-RPT-X0001_RB.doc, February 2003.



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a high oil price and vice versa. Thus the risk profile (as manifested in the probability settings used in this study) are dependent on oil price. In this study we have assumed a conventional oil price outlook whereby prices remain at current low levels for the near to medium term before a gradual return to higher prices more in line with historic trends.

Our examination of the data base provides the following breakdown of the 957 wells:

Producing & Injecting

160

Non Producing & Injecting

797

Orphaned9

230

- Suspended, completed, shut in 25

- Plugged and Abandoned 165

- Further Investigation 40

"Owned"10 567

Suspended, completed, shut in 153

- Hydrocarbon 107

- Pre 1955 0

- Post 1955 107

- Unknown and Non-hydrocarbon 46

Plugged and Abandoned 411

- Hydrocarbon 184

- Pre 1955 22

- Post 1955 162

- Unknown 42

- Pre 1955 18

- Post 1955 24

- Non Hydrocarbon 185

- Pre 1955 5

- Post 1955 180

Further Investigation 3

Total Well Sites 957

Table 2: Well categorization breakdown analysis

9 Orphaned wells are assumed to be orphaned on the basis that the operator either no longer exists or the previous operator has no legal responsibility to make good.

10 A permit holder still remains in business. However, it is not clear if they retain legal liability and that question has not been explored in this report.



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3 Derivation of the Cost Factors for Abandonment In examining total risk exposures we have chosen to treat separately the exposures that might potentially arise from the existing producing assets from those exposures that could be expected to arise from possible well failure and poor completion of the 797 non-producing wells in New Zealand.

WorleyParsons has completed a number of industry studies in the recent past in respect of almost all of the current producing assets. These studies have variously examined the costs associated with the decommissioning of a particular site, its production facilities and associated pipelines and tank farms. In general the basis for the types of assessments undertaken has included examination of costs associated with:

Mobilisation/demobilisation

Project management and contract management

Well abandonment and completion

Facility decommissioning and demolition

Site reclamation, and

Contingency allowances (20%)

The contingency allowance used above is typical of an estimate of this type and is intended to take account of unforeseen items, but excluded is any allowance for owner’s contingency for change in scope or project delivery methodology. We have assumed a similar contingency throughout this analysis (See Table 3) but have increased project and contract management costs (15 percent) for the well abandonment programme to take account of the fact that the facilities owner or operator is either no longer extant, capable or solvent to undertake any required remediation activity. Decommissioning costs generally include an allowance for minimal recovery values, but does not assume any recovery of major equipment items and resale. Also, site reclamation simply assumes releveling and regrading, but no site remediation or ongoing environmental monitoring. Pipelines are assumed abandoned in place.

For the purposes of this study we have aggregated these various estimates into a single estimate, extended to cover those various production assets not formally assessed in prior work. Individual estimates are deemed to be commercial and confidential and cannot be revealed. Assets we have covered in this study include the following production stations plus their associated pipelines.

Kapuni

McKee / Mangahewa

Cheal

Sidewinder

Kaimiro /Ngatoro

Kowhai / Turangi

Puka A

Waihapa / TAWN

Copper Moki

Rimu / Kauri / Manutahi



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After discussion with MBIE regards scope the Omata and Paritutu tank farms were excluded from the assessment (as it was considered that exiting operators in these shared facilities will not allow them to fail), as were the Kupe, Pohokura and Oaonui production stations (deemed offshore facilities) and the Maui and Vector gas lines (out of scope).

We do not suggest that the abandonment estimate developed here contains a full inventory of all oil and gas onshore assets but are confident it represents a sufficiently detailed estimate adequate for screening purposes and the long-term capital budget evaluation required. Furthermore detailed appraisals would be necessary to support any formalised cost estimate.

For non-producing assets we have based our estimates on methods and approaches common in Alberta, Canada, with regards their orphaned well recovery programmes. The huge number of dormant and inactive wells in that Province (over 12,000 wells inactive for periods greater than 10 years with more than 42,000 inactive wells in total) has led to legislative intervention and the establishment of an Orphan Fund to deal with the significant financial and environment liabilities arising. There are currently 705 wells in the Province’s Orphan Well program – these are wells with no financially viable owner/operator that require either abandonment and reclamation, or just reclamation.

Post-abandonment in Alberta has an obligation on licensees to suspend currently inactive wells so as to reduce the risk to the public purse and, as well, the Province has tightened licensee registration to include a liability rating system for individual cases based on the ratio of deemed assets to deemed liabilities. Licensees with an unfavorable liability rating are required to reduce their liabilities or to post security deposits for abandonment and reclamation costs.

Arriving at a robust estimate of abandonment and reclamation costs requires a good knowledge of well-bore conditions as well as understanding of the environmental and site conditions. This degree of interrogation was not possible in this study, but the experience from the Alberta programme has been useful to inform this study regards the magnitude of costs that might be incurred post-abandonment in respect of current non-producing wells.

We have assumed the following specific cost framework:

Mobilisation/demobilisation

Surface excavations and demolition of wellhead structures

Re-entry and drilling out to re-abandon properly.

Site reinstatement (e.g. removal of drilling sump / flare pits)

Site remediation

Monitoring post-abandonment

Project and Contract Management

Cost factors assumed for the study are outline in Table 3 below. Again these are concept-level estimates and may vary significantly on a well-to-well basis. The range of values assumed reflects this uncertainty. It is important to note that these estimates are based on current NZ conditions and expectations. Alberta costs typically range in the lower end of the range provided for as we understand that there are specialist providers geared up to undertake the types of activity necessary and, as well, estimated environmental liabilities are very site specific. NZ conditions are presumed to be more onerous due to more intensive land use.



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Table 3: Well Abandonment Cost Table

The above Table 3 estimates are based on corporate experience, and generic assumptions as to what might constitute a reasonable cost range for the activities listed. Environmental liabilities for well facilities will be very site-specific and largely dependent on soil type, environmental sensitivity of the surrounding areas, foot print and complexity of the associated process areas. Groundwater liability will be more dependent on the operational history of the well, its depth and the sub surface geology.

We recommend that for any subsequent assessment these cost factors are more rigorously examined. Experience from Alberta suggests that for a very simple, shallow well (< 1000m) the base case costs for abandonment is around $85,000, with remediation/reclamation where there is minimal/no contamination an additional $35,000. Appendix D provides background data and information derived from the Albert Directive 011 Licensee Liability Rating (LLR) programme11.

The Orphan Well Program spends about 63% of its annual budget on site reclamation (including remediation) and about 32% on abandonment. Their average remediation spend per well (2014/15 data) was $160,000 including assessment. The average reclamation spend per well was $45,000 including assessment, monitoring and closure.

In the above cost framework, Low(A), Medium(B) and High(C) costing scenarios were applied on a generic basis for each of the stratification categories identified, The High value does not necessarily represent a maximum cost, nor the Low value a minimum cost. For example mobilisation/demobilisation costs will be dependent on rig size and complexity of the well-head facilities. The Low value represents a typical cost scenario were one might be attending to say three or four wells off a single pad, with shared assets, whereas the High Value scenario pertains to a deep well situation with its associated flare pit, sumps, etc.

Similarly, in respects of the other cost items we differentiate between Low and High by:

11 Alberta Energy Regulator (AER) Directive 011, 1 August 2015

Cost Categories Definition A B CMob/Demob Per set of wells 0.1 0.3 0.45Well Abandonment Proper plugging, bring in rig 0.3 1 2Facility Decommissioning Property compensationProduction Facilities Site specific 0 0 0Well Site Assets 0 1 2

Pipelines and Tank Farms AbandonmentPipelines abandoned in place, per production station and linked well sites? 0 0 0

Site Assessment and Remediation 0.15 0.5 1Site Reclamation 0.05 0.15 0.25Monitoring per annum (assume 5 year average) 0.05 0.2 0.5Project and Contract Management 0.07 0.30 0.60

Cost Estimate (NZ$m)

Level



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Well abandonment; shallow well versus deep well (over 2 km) – proxy well age. Assume High Value for deep well scenario.

Well site assets; non hydrocarbon (Low Value) versus hydrocarbon and unknown; pre 1955 assumed no operational history (or low volume) whereas post 1955 we allow for greater potential for hydrocarbons with improved geological knowledge of target structures (High Value scenario). Likely costs will most closely lie on average between the Low and High scenarios.

Site assessment and remediation; Low Value expected routine soil and groundwater remediation objectives versus High Value taking into account the potential for extraordinary events; e.g. off-site contamination; proxy pre/post 2005 with Medium cost scenario assigned to all orphan wells due to being shallow wells.

Site reclamation; proxy known ownership versus orphaned (Low Value as assume mostly already worked over) pre 1955 (Medium) and Post 1955 (Low).

Monitoring; Low value expected routine versus High value with provision for potential increased monitoring requirements, proxy non hydrocarbon and post 2005 (Low) from more formalised waste management processes.

Project and Contract Management; we assume a 15 percent cost factor which is higher than normal but takes into account an escalation of contract management costs to reflect that any work is likely to be picked up by a third party and not the original facilities owner / operator.

Lastly, it was necessary to establish a time frame for the assessments. In the absence of statistically relevant data for New Zealand we have taken a 10 year horizon for the analysis and assigned a “likelihood of loss” within that period.

We comment, that in the absence of more detailed information we have at this stage taken a rather conservative stance in respect of the orphaned wells for site assessment and ongoing monitoring to reflect the degree of uncertainty and the fact that the cost of any remediation of environmental damage may fall to third parties. It is likely that a broader examination of the risks may materially reduce expected financial exposures.



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4 Assessment of Financial Exposures In order to arrive at an estimate of the overall financial exposures that might arise from any future losses attributable to well failure and abandonment we have constructed a simplified model that allows a preliminary estimate to be made on the basis of the assumed likelihood of loss for each category of well type.

As previously outlined, we have chosen to treat the exposures that might potentially arise from the existing producing assets differently from exposures that could arise from the other known non-producing wells. The derived overall financial exposure has then been determined as given in the attached two spread sheets (Appendices B and C).

In Appendix B we have separately calculated an estimated total cost per well for abandonment, restoration and reclamation cost for each of the 17 well stratification categories. As noted above, Category 1 (Producing Assets) has been separately estimated and the derived costs entered directly into the model.

These data are then transferred to Appendix C as input to an @Risk analysis to derive an expected annual cost arising from the financial exposure to third parties (including the Crown) from all future losses attributed to well failure and/or abandonment where this scenario applies. This is done by taking the assessed liability (consequence) for each individual well category and applying assumptions on either the number of companies likely to fail in a 10 year period on average, or the likelihood of an unintended loss (with its associated environment harm) arising from failure of a failed / abandoned well.

The likelihood of business failure has been modelled based on an assumed discrete probability profile for two separate operator groupings; the major players and the minor firms. This does not suggest that the operating standards of the minors and majors are in any way different (both are required to follow the new standards NZ introduced in 2013 to attract world class operators and ensure best practice follows international standards) but this categorisation is intended to reflect financial standing.

We have also made an assessment of the likelihood that any consequently abandoned operating or stranded assets might be resold, thus reducing any contingent liabilities to third parties12. These factors are subjective at best, but are based on the view of the authors having canvased opinion from both officials and the industry.

In respect of the older abandoned or suspended wells we have simply applied a loss factor that takes into account the probability of loss over the 10 year period. Our benchmarks for this assessment have been data derived from Alberta experience and assumed default value of a 1 in 500 probability failure rate per year for wells dating from 1955 and a 1 in 300 probability failure rate for wells spudded before 1955. To this data we have applied an @Risk module utilising 5,000 iterations and based on a skewed normal distribution to arrive at an estimate of the likely Total Financial Exposure over the forward 10 year period.

12 We comment that these factors are very dependent on oil price. Clearly the likelihood of business failure and the attractiveness of any stranded asset can be correlated to future revenue, and thus oil price. We have not taken this into account here.



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The model allows the currently assumed failure rates to be adjusted and the outcomes further tuned should future work offer more detailed information or in-depth analysis. Data from Alberta on their incident / failure rates over a total population of approximately 550,000 oil and gas wells suggests that approximately 5% of all wells show some leakage13. The percentage of leaking wells increases as wells age and for deviated wells. Hydraulically fractured wells will also show some degree of accelerated leakage 14. We caution that the data from Alberta will not be directly transferrable to the NZ situation due to different historical settings, the increased leakage rates arising from well deviation and construction practice and casing failure history as a possible result of high H2S environments.

13 Internal research Advisian Canada, ex Alberta Energy Regulator(AER) data set

14 To the best of our knowledge hydraulic fracking is currently constrained to existing operating wells, and thus may not present significant additional risk over that expressed in this report as the risk vector implied is company failure.



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5 Results Appendix C presents the model output for a single iteration of the 5,000 model runs undertaken for the assumed base case of: 1:500 year leakage rate for the post 1955 wells; 1:300 year leakage rate for orphaned wells, and; the assumed resale rates given below. The mean value and derived value range is thus calculated from the combination of all runs and displayed in a derived risk profile. The results are tabulated below and shown diagrammatically in the figures that follow.

In order to better delineate the risks to the Crown we have separated the well categories 1-4 from well categories 5 to 17 in the analysis so we can model two scenarios; the exposure to the Crown from well abandonment alone and the implications of bringing the costs of infrastructure deconstruction and site reclamation into the equation.

As can be seen below the derived estimates reflect the selected distribution curve. The results for well categories 1-4 are dominated by the assumed discreet distribution employed to model company failure and expected re-sale rates. The probability settings and assumed well re-sale rates are as shown:

@Risk Discrete probability settings

min likely max

minor 80% 15% 5%

major 95% 4% 1%

Assumed re-sale rates

Category 1 Category 2 Category 3

minor 90% 85% 70%

major 95% 90% 75%

The PERT skewed normal distribution used to describe well failure rates for well categories 5-17 reflects Advisian experience with uncertainty in these type estimates. The distribution curve used is essentially a normal distribution but with a long tail to allow for the outliers that can occur where significant additional costs may ensue because of unidentified unknowns.

The overall base case result is as presented below:

Wells Only Wells Plus Infrastructure

Mean Value 90 per cent range

Mean Value 90 per cent range

Group 1-4 14.0 11.9 – 17.40 19.5 16.5 – 24.4

Group 5-17 28.2 24.5– 31.8 28.2 24.5 – 31.8

Total Combined Value (Approx.) 36.4 – 49.2 41.0 – 56.2

Table 4: Loss Model Output for the assumed Base Case – estimate of third party financial exposures.



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In this instance we arrive at an estimated mean value of $47.7 million or a mean annual exposure of $4.8 million. Figures 1-3 below present the expected cost ranges as output from the model runs.

Figure 1: @risk simulation; Well categories 1-4 (wells only)

Figure 2: @risk simulation; Well categories (1-4) (wells+ facilities)

39.3% 50.1% 10.7%

11.90 17.40

10

12

14

16

18

20

22

24

26

28

0

5

0

5

0

5

0

5

0

Cell Q20

Curve #1

Minimum 11.814

Maximum 26.269

Mean 13.997

Std Dev 2.468

Values 10000

89.3% 10.7%

16.10 24.40

16 18 20 22 24 26 28 30 32 34 36 38

0

5

0

5

0

5

0

5

0

Cell R20

Curve #1

Minimum 16.481

Maximum 36.301

Mean 19.467

Std Dev 3.357

Values 10000



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Figure 3: @risk simulation; Well categories 5-17

In addition to the above analysis a sensitivity analysis was undertaken for the case where the likelihood of third party exposure probability was increased (from a 1:300 failure rate to 1:150 and from a 1:500 failure rate to 1:300 depending on attributed risk for the individual categories) across all well categories from 5-17. The purpose of doing so was to test the likely impact of having underestimated failure rates and the potential outcomes from adopting a more conservative stance.

The results for this case gave a mean loss estimate of $46.7 million for those wells, with the 90 percentile estimates ranging from $41.0-52.3 million. This is an approximate 66% increase in the attributed risk exposure for these well categories.

Figure 4: @risk simulation; Sensitivity analysis - Well categories 5-17 for a doubling of the assumed probability failure rate.



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A further sensitivity case was also examined looking at variation in the assumed re-sale rates for the Category 3 non-hydrocarbon but suspended pre 2005 wells. These wells are significantly less likely to be on-sold than the Category 1, 2 wells as they are less likely to be part of any producing field that might get picked up following business failure. As can be seen these assumptions have a limited influence on the derived losses, with the results reflecting the inherent uncertainties in the methods adopted.

These results are summarized below:

Sensitivity Analysis; Category 3 re-sale rates

Mean Value $NZ 16.8 14.0 11.8

Resale minor 50% 70% 80%

Resale major 60% 75% 85%

There thus remains a considerable uncertainty associated with the assumed business failure distributions and assumed re-sale rates. Irrespective, the stratification is a useful tool in isolating this risk vector from those associated with orphaned or otherwise suspended or abandoned wells. In any future analysis it would be useful to extend the stratification to specify if wells are in exploration or production permits. This information would be relevant for assessing the likelihood of a particular well being resold if a company ceased trading.

Finally we comment that the Orphan Well Association, Calgary, have developed a risk management tool for the province’ s Energy Regulator15 that helps assess the risk associated with individual wells according to; Health and Safety, Environmental, Regulatory and Stakeholder concerns. These consequences are weighed against the technical difficulties and probability of success and or of increasing the risk associated with remediating the wells. The tool is used to prioritize wells for abandonment / reclamation. Lower ranked wells can then be placed in long term risk mitigation and monitoring class, and the issues addressed as resources become available.

15 http://www.aer.ca/rules-and-regulations/directives/directive-079 Abandoned Well Risk Assessment Model

http://www.aer.ca/rules-and-regulations/directives/directive-079



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6 Conclusion and Recommendations This work represents is an initial representation of the potential risk exposure to Third Parties (including the Crown) from onshore oil and gas facilities (both past and present) that might require plugging, re-abandonment or other forms of decommissioning or remediation, but no operator is legally liable and no other operator is willing to pay these costs.

The methodology developed offers a scalable approach suitable for screening purposes and the concept-level estimates undertaken. The estimates derived are founded on a range of generic assumptions based on WorleyParsons in-house corporate experience and understanding of the uncertainties surrounding the provided data, supported by relevant data from Alberta Calgary as appropriate. Further, more in-depth analysis may be required to support any formalised costings. This should include further review of well failure data from other comparable petroleum regions to ensure a robust statistical basis for assessing the New Zealand risk.

We understand that MBIE intend to pursue further studies to review the status of New Zealand’s onshore petroleum wells. An intended output is to update the petroleum exploration data base to ensure that the data base accurately reflects the well status of all wells. In this report we have referred to experience in Alberta derived from the Province’s Orphan Well program. In particular we refer to the risk management tool developed by the Orphan Well Association that allows abandoned wells to be prioritised and ongoing monitoring instigated to give a reasonable assurance that potential environmental risks are identified early and addressed as needed.

We note that under the model assumption the cost of abandonment for wells-only accounted for approximately 88% of the total liability. Of these, the known hydrocarbon and orphaned wells (categories 2, 3, 5, 6, 14, 15 and 16) accounted for approximately 93% of the liability enumerated.

Regards further work, Advisian recommends that consideration be given to development of a lookup table or some other means to allow the price of oil to be incorporated into the loss model as an additional variable. This is particularly germane in the current low oil price climate where there remains a risk that existing producing assets are on sold to new entities having less financial standing than the incumbent. A review of current permit holder’s potential liabilities from a forced abandonment scenario would help inform such a study.

We recommend that any such work adopt a formal statistical survey methodology targeted towards improved understanding of the critical risk vectors so as to maximize the value of the data collected and to allow introduction of a more formal approach to predicting the likely risks and financial exposures.



Appendix

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Appendix A Flow Chart of Stratification

All New Zealand Wells

Onshore957

Producing and Injecting

160

Post 1955160

Pre 19550

Non producing and not injecting

797

Orphaned230


165

Suspended, completed, shut in, etc

25

X Stratification Categories

Flow Chart of Stratification

“Owned”567

Hydrocarbon184

Unknown42

Non Hydrocarbon

185

Post 1955180

Pre 195522

Post 195524

Post 1955162

Pre 195518

Pre 19555

Post 200566

Post 200511

Post 200558

Pre 2005104

Pre 200513

Pre 2005114


411

Suspended, completed, shut in, etc

153

Hydrocarbon107

Unknown & Non

Hydrocarbon46

Post 1955107

Pre 19550

Post 200554

Pre 200553

12

3

4

5

6

7

8

9

10

11

12

13

14

15

FurtherInvestigation

3

FurtherInvestigation

4016

17



Appendix

110005-RPT-X0001.docx

Appendix B Cost Table

Cost Table

Blue cells = inputs Factor is determined from external input costs (see Table 3)

CategoryNumber of Wells

Producing & Injecting Pre 1955 Orphaned

Plugged & Abandoned Hydrocarbon Pre 1955 Pre 2005

Mob/Demob

Factor (NZ $ million)

Well Abandonment


Facility Decommissioning


Production Facilities


Well Site Assets


Pipelines & Tank Farms Abandonment


Site Assessment and Remediation


Site Reclamation

Factor (NZ $ million) Monitoring


Project and Contract Management


Total per site(NZ $ million)

1 160 Yes No - - - - -2 54 No - No No Yes No No C 0.45 C 2 A 0 A 0 B 1 A 0 A 0.15 A 0.05 A 0.05 A 0.07 3.773 53 No - No No Yes No Yes B 0.3 B 1 A 0 A 0 B 1 A 0 B 0.5 B 0.15 B 0.2 B 0.3 3.454 46 No - No No Unknown/No - - A 0.1 A 0.3 A 0 A 0 A 0 A 0 A 0.15 A 0.05 A 0.05 B 0.3 0.955 58 No - No Yes Yes No No B 0.3 A 0.3 A 0 A 0 B 1 A 0 A 0.15 A 0.05 A 0.05 A 0.07 1.926 104 No - No Yes Yes No Yes B 0.3 A 0.3 A 0 A 0 B 1 A 0 B 0.5 B 0.15 B 0.2 B 0.3 2.757 22 No - No Yes Yes Yes - A 0.1 A 0.3 A 0 A 0 A 0 A 0 B 0.5 A 0.05 A 0.05 A 0.07 1.078 11 No - No Yes Unknown No No A 0.1 A 0.3 A 0 A 0 B 1 A 0 A 0.15 A 0.05 A 0.05 A 0.07 1.729 13 No - No Yes Unknown No Yes A 0.1 A 0.3 A 0 A 0 B 1 A 0 B 0.5 B 0.15 B 0.2 B 0.3 2.55

10 18 No - No Yes Unknown Yes - A 0.1 A 0.3 A 0 A 0 A 0 A 0 B 0.5 A 0.05 A 0.05 A 0.07 1.0711 66 No - No Yes No No No A 0.1 A 0.3 A 0 A 0 A 0 A 0 A 0.15 A 0.05 A 0.05 A 0.07 0.7212 114 No - No Yes No No Yes A 0.1 A 0.3 A 0 A 0 A 0 A 0 A 0.15 A 0.05 A 0.05 A 0.07 0.7213 5 No - No Yes No Yes - A 0.1 A 0.3 A 0 A 0 A 0 A 0 A 0.15 A 0.05 A 0.05 A 0.07 0.7214 165 No - Yes Yes - - - A 0.1 A 0.3 A 0 A 0 A 0 A 0 A 0.15 A 0.05 A 0.05 B 0.3 0.9515 25 No - Yes No - - - A 0.1 A 0.3 A 0 A 0 B 1 A 0 C 1 B 0.15 C 0.5 B 0.3 3.3516 40 No - Yes No - - A 0.1 A 0.3 A 0 A 0 A 0 A 0 C 1 B 0.15 C 0.5 B 0.3 2.3517 3 No - No No - - A 0.1 A 0.3 A 0 A 0 A 0 A 0 B 0.5 B 0.15 C 0.5 B 0.3 1.85

Stratification Cost Categories



Appendix

110005-RPT-X0001.docx

Appendix C Example Model Run

ESTIMATION of 3rd PARTY RISK from NZ onshore Oil Well Leakage

RISK DISCRETE Distributi

on

no. of wells for

sale % resold

no. of liability wells

Rev G Sept'16

Wells ONLY

Wells & facilities min likely max Operators Exiting of bankrupt printdate 19/09/16

no. wells liability liability % no. wells (mean) operator's wells by jdebNZ$kk NZ$kk split-major/minor based on average of 5 minors and 3 majors at any one ti

Producing wells min likely max30% minor 48 0 0 1 1 10 90% 1 3.3 4.2 minor 80% 15% 5%

post 1955 1 160 530 666 70% major 112 0 0 1 0 0.00 95% 0 0.0 0.0 major 95% 4% 1%

Non producing/ but operators still working in NZ Hydrocarbon, but suspended newer wells

40% minor 22 0 0 2 1 5 85% 1 2.7 3.8post 1955 2 54 146.3 203.6 60% major 32 0 0 1 0 0.00 90% 0 0.0 0.0 $/bbl = high mid low

min = 11.8 40% minor 21 0 0 2 1 5 70% 2 4.4 6.9 P 10 12

post 1955 3 53 117.9 182.9 60% major 32 0 0 1 0 0.00 75% 0 0.0 0.0 mean = 14 P 90 17

40% minor 18 0 1 2 1 4 70% 2 1.3 1.6 max = 26unknown/non HC 4 46 35.6 43.7 60% major 28 0 0 1 0 0.00 75% 0 0.0 0.0

11.8 16.5 << Output totals: categories 1 to 4

RISKPERT Distribution Results of @Risk run: Wells+facilities 1-4Non producing/ but operators still working in NZ Assume 1 in 500 year leakage rate

Plugged abandoned hydrocarbon, or non-hydrocabon suspended $/bbl = high mid lowmin likely max min = 16

P 10 16.240% minor 23 0 1 2 0 0.0198 0.040 0.9 mean 19.5

post 2005 5 58 111 n/a 60% major 35 0 0 1 0 0.0198 0.040 1.3 P 90 24.4 max 36

40% minor 42 0 1 2 0 0.0198 0.040 2.3 pre 2005 6 104 286 n/a 60% major 62 0 0 1 0 0.0198 0.040 3.4

Older "owned" abandoned, unknown or suspended non- hydrocarbon Use RiskPert distribut'n with Alberta odds:- 9k out of 500k in 10 years

Assume 1 in 300 year leakage rate

40% minor 9 0 2 3 0 0.0329 0.050 0.3pre 1955 7 22 24 n/a 60% major 13 0 0 1 0 0.0329 0.050 0.4

50% minor 6 0 0.0198 0.040 0.2post 2005 8 11 19 n/a 50% major 6 0 0.0198 0.040 0.2

50% minor 7 0 0.0198 0.040 0.3

pre 2005 9 13 33 n/a 50% major 7 0 0.0198 0.040 0.3

50% minor 9 0 0.0329 0.050 0.3pre 1955 10 18 19 n/a 50% major 9 0 0.0329 0.050 0.3 $/bbl = high mid low

min = 18 50% minor 33 0 0.0198 0.040 0.5 P 10 24.5

post 2005 11 66 48 n/a 50% major 33 0 0.0198 0.040 0.5 mean 28 P 90 32

50% minor 57 0 0.0198 0.040 0.8 max 38pre 2005 12 114 82 n/a 50% major 57 ` 0 0.0198 0.040 0.8

50% minor 3 0 0.0329 0.050 0.1

pre 1955 13 5 3.6 n/a 50% major 3 0 0.0329 0.050 0.1 Owned wells requiring further investigation

17 3 5.6 n/a 100% minor 3 0 1 2 1.0 1.0 0% 1 0.1 564 5.0

Orphaned - plugged & abandoned 14 165 156.8 n/a 100% N/A 165 0 0.0329 0.050 4.7

Orphaned - suspended, completed, shut-in , etc15 25 83.8 n/a 100% N/A 25 0 0.0329 0.050 2.5

Orphaned wells requiring further investigation16 40 94.0 n/a 100% N/A 40 0 0.0329 0.050 2.8

28.2 << Output total: Categories 5-17 957


Likehood of 3rd party exposure in 10 yrs (probability)

Results of @Risk run: Wells 5-15Results of @Risk run: Wells 5-17Assume 1 in 300 year leakage rate



Third party liability : NZ$ millions

Risk Discrete distribution




Category

RESULTS OF @Risk run: 1-4 Wells onlyThird party liability : NZ$ millions

Results of @Risk run: Wells+facilities 1-4

RESULTS OF @Risk run: 1-4 Wells only

@Risk Discrete probability settinmgs

Likehood of 3rd party exposure in 10 yrs (probability)

No of companies likely to fail in a 10 yr period on average

3rd party liability:

$ NZ millions in ten year period WELLS ONLY

3rd party liability:

$ NZ millions in ten year period

WELLS & FACILITIES

Third party liability : NZ$ millions



Appendix

110005-RPT-X0001.docx

Appendix D Alberta Energy Regulator Directive 011

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