A decade ago Cal Dive began to implement the strategy that has made it a dominant player in the salvage market, a regulatory driven business that serves as a hedge against downturns in commodity prices. The MMS estimates that it will cost over $5 billion to remove the 4,200 platforms and over 20,000 wells that have been installed in the Gulf of Mexico over the last 50 years. Government regulations require that the well be plugged and abandoned, pipelines serving the field be capped and buried, the platform removed and the site cleared of all debris within 12 months after lease expiration.
Offshore magazine recently affirmed Cal Dive as the number one player in the decommissioning market as CDI was responsible for 24% of the structures removed from the Gulf during the years 1996 through 1998. As the market leader we were busy throughout 1998 even though the number of two-pile or greater platform removals declined by almost 50%. Profitability suffered as Hurricane Georges and several named tropical storms idled Cal Dive Barge-I and our well servicing assets while we were still incurring high third party costs for tugs and material barges. Our well recognized position in the salvage industry also brought one of the more emotionally challenging projects as the Sea Sorceress was engaged to recover the wreckage of Swiss Air Flight 111.
There is a significant backlog of structures where the decommissioning "clock is ticking," evidenced in part by the fact that permits have already been filed for 152 platform removals in 1999. For this reason and because we were turning away work in 1998, CDI entered into an alliance agreement with Horizon Offshore that significantly expands our salvage and pipelay services. Horizon operates three derrick barges, the Pacific Horizon, Atlantic Horizon and Phoenix Horizon, that have lift capacities ranging up to 800 tons. As a result we will no longer have to subcontract those projects where the lift exceeds the 200-ton capacity of the Cal Dive Barge-I.
Energy Resource Technology was formed to offer customers the option of selling mature properties rather than having to manage the eight separate phases of the decommissioning process. 1998 was a lackluster year for ERT in terms of financial results and property acquisitions. Our natural gas price averaged $2.12/mcf in contrast to $2.57 in the prior year. In addition, production declined 14% as a number of key wells went offline in the second half and efforts to reestablish production were expensive. We elected to sell two offshore blocks in 1998 as we did in the prior year. While this runs counter to the goal of growing our reserve base, in each case we were able to lock in acquisition economics in situations where ERT was not operator of the field. Our ending balance of proven developed reserves remained constant at 30 bcf even though the significant decline in natural gas prices caused a 2 bcf downward reserve revision.
ERT's success is a function of three variables: lower salvage costs using CDI assets, operating the field more cost effectively and extending reservoir life through well exploitation operations. Taking over as operator is important not only to lower lease operating expenses but also to control the decision as to which contractor will abandon the field.
Oil company downsizing and layoffs induced by this protracted period of low commodity prices are providing an opportunity to add properties and technical talent. We have recently hired the following technical disciplines to assist in exploiting potential property acquisitions and the value of existing ERT reserves:
Geophysicists: 2-D and 3-D seismic evaluation of existing properties so that ERT receives a promoted position in drilling operations conducted by independent oil and gas companies.
Drilling Engineers: Provide procedures, quality control and offshore supervision for both rig and through tubing well work on recompletion and remedial workovers.
Reservoir Engineers: Ensure that budgeted production goals are achieved while also developing economics for potential property acquisitions.
The rapidly declining number of rigs drilling for natural gas in the United States in the face of increasing consumption has put in place a set of dynamics which we believe will self correct in the future. The Gulf remains the most significant source of this product as it provides almost 30% of the natural gas consumed in this country. 1999 should represent a unique opportunity to expand the reserve base of ERT while at the same time assisting customers who are grappling with reduced operating budgets and manpower levels yet facing large abandonment obligations.
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