What Is Mothballing?
Mothballing is the intentional deactivation and preservation of equipment, a production facility, or other valuable assets for potential future use, resale, or disposal. The purpose is to maintain the asset’s value while reducing operating costs during a period of low demand, regulatory restriction, or temporary financial pressure. The phrase comes from storing goods with mothballs (pesticides) to prevent deterioration—here the “preservation” is technical, environmental, and administrative.
Key Takeaways
– Mothballing preserves capital assets so they can be restarted, sold, refurbished, or scrapped later.
– It is common with high-cost, long-lived assets—e.g., oil rigs, aircraft, ships, plants, heavy machinery.
– Proper mothballing requires planning, documentation, scheduled maintenance, environmental controls, and legal compliance.
– Neglecting proper mothballing can turn salvageable equipment into scrap and destroy asset value.
(Source: Investopedia)
How Mothballing Works
– Decision: Management evaluates market outlook, restart costs versus replacement costs, salvage value, and available liquidity.
– Preparation: Equipment is cleaned, drained of corrosive fluids, protected against moisture and pests, and preserved with protective coatings or inhibitors. Critical components are protected (e.g., bearings, electronics).
– Storage: Assets are stored in suitable locations (on-site sheltered space, yards, or specialized storage facilities such as aircraft boneyards or “ghost fleets” for ships). Climate control, covers, sealing, and cathodic protection may be used.
– Ongoing Care: Periodic inspections, running of systems where needed, and maintenance schedules are maintained to prevent deterioration.
– Disposition: When market conditions change, the asset is either reconditioned and restarted, disassembled for parts/resale, sold as-is, or scrapped for salvage metals.
Mothballing Tips (practical guidance and best practices)
– Make the financial case first: Compare expected restart cost + holding cost vs replacement cost and expected future revenue.
– Document everything: Serial numbers, maintenance histories, procedures used during mothballing, storage locations, and parts inventories. This saves time and cost at reactivation.
– Use the right preservation methods: Drain fuels and perishable fluids, add corrosion inhibitors, apply protective coatings, desiccate and seal electronics, and use pest prevention.
– Control environment where possible: Dry, ventilated, and sheltered storage extends life. Where climate control is impractical, use dehumidifiers or desiccant packs and frequent inspections.
– Maintain a minimum inspection/maintenance schedule: Lubrication cycles for bearings, battery care, and checking seals and coatings. Record each visit.
– Manage regulatory and environmental risk: Properly handle hazardous materials, follow contamination and storage rules, and confirm permits/notifications for idle industrial sites.
– Insure appropriately: Mothballed assets may require different insurance terms—confirm coverage for storage, vandalism, environmental liabilities, and fire.
– Plan for security: Prevent theft and vandalism—fencing, surveillance, and inventory controls.
– Preserve critical spare parts: Storing or securing scarce components reduces restart lead times and costs.
– Re-evaluate periodically: Market conditions change—have triggers for restart, sale, or scrapping.
Example Uses and Industry Context
– Oil & Gas Drilling Rigs: Because rigs are expensive and oil prices cycle, properly mothballed rigs can be reactivated at a fraction of replacement cost. Poorly mothballed rigs can become scrap.
– Aircraft: Commercial and military airplanes are placed in long-term storage at “boneyards” with preservation practices to protect avionics, engines, and airframes.
– Ships: Navies and commercial fleets maintain reserve (“ghost”) fleets where vessels are preserved for potential recommissioning or sale.
– Manufacturing Plants: Factories with high fixed costs may be mothballed to reopen quickly for demand spikes while avoiding continuous low-margin operation.
(Source: Investopedia)
Practical Steps to Mothball an Asset (step-by-step)
1. Business Decision & Authorization
– Conduct cost/benefit and scenario analysis (restart cost, holding cost, salvage value, time horizon).
– Get board/management approval and establish a project owner.
2. Inventory & Risk Assessment
– Itemize assets, serial numbers, consumables, hazardous materials, and spare parts.
– Identify regulatory, environmental, and contractual obligations (leases, warranties).
3. Decontamination & Safety
– Remove flammable, perishable, and hazardous materials according to regulations.
– Lock out/tag out energy sources and render equipment safe for long-term storage.
4. Preservation Actions (equipment-specific)
– Mechanical: Drain fluids or fill with preservation oils; coat exposed metal; rotate shafts and bearings periodically.
– Electrical/Electronics: Remove/secure batteries; seal and desiccate electronics; apply protective coatings to contacts.
– Engines & Turbines: Fog engines with corrosion inhibitors; turn over periodically to coat internal surfaces.
– Structural: Protect surfaces from UV, salt, and moisture; use sacrificial anodes or cathodic protection for submerged/metal parts.
5. Environment & Storage
– Choose appropriate storage (indoor preferred; outdoor covered with breathable covers as minimum).
– Control moisture (desiccants, dehumidifiers) and ventilation; use pest control measures.
6. Documentation & Tagging
– Attach visible tags with status, preservation date, next inspection date, responsible party, and contact info.
– Store digital records (photos, checklists, serial numbers, supplier names).
7. Maintenance & Inspection Schedule
– Create a calendar for inspections, run-ups, lubrication, battery maintenance, and resealing.
– Keep logs of all maintenance and findings.
8. Legal, Environmental & Insurance Compliance
– Notify regulators if required, maintain permits, and adjust insurance coverage to reflect idle status and exposures.
9. Disposal or Reactivation Plan
– Define business triggers and timelines for reactivation, refurbishment, sale, or scrapping. Include estimated costs for each path.
Reactivation Checklist (to resume operations)
– Review documentation and preservation records.
– Inspect structural integrity, seals, fasteners, and coatings.
– Replace/charge batteries and check electrical systems.
– Reinstall drained fluids and filters; check for contamination.
– Replace perishable parts (gaskets, seals) as needed.
– Conduct gradual start procedures and monitor for leaks, vibration, and performance.
– Re-certify equipment and train personnel on updated procedures.
– Update insurance and regulatory filings before returning to service.
Accounting, Tax & Legal Considerations
– Accounting: Mothballing may require impairment tests or changes in depreciation if the asset’s useful life or recoverable amount changes. Consult accounting standards (e.g., IFRS/GAAP) and your auditors.
– Tax: Treatment of mothballed assets (capital vs. expense, salvage treatment) varies by jurisdiction—check with tax advisors.
– Contracts: Leases, warranties, and supplier contracts may have clauses about inactivity; review them to avoid penalties.
– Environmental liabilities: Mothballed industrial sites may still carry cleanup obligations—plan for long-term remediation risk.
Costs and Trade-offs
– Up-front and recurring costs: Preservation materials, storage fees, inspections, security, and insurance.
– Opportunity cost: Capital tied up during inactivity and potential technological obsolescence.
– Benefit: Lower restart cost and faster resumption of operations compared with full replacement; potential to capture future temporary demand spikes.
When Not to Mothball
– When the expected cost to preserve + restart exceeds replacement + disposal alternatives.
– When the asset is obsolete or nearing economic end of life.
– When regulatory obligations (e.g., remediation costs) make long-term storage uneconomic.
– When there is no realistic demand outlook to justify holding the asset.
Common Mistakes to Avoid
– Neglecting documentation—unknown histories increase restart cost.
– Using improper preservation techniques (e.g., sealing without desiccation leading to trapped moisture).
– Failing to maintain inspections—unattended assets deteriorate rapidly.
– Not accounting for environmental and legal liabilities.
Conclusion
Mothballing is a strategic option for preserving high-value, long-lived assets during downturns or temporary closures. Done correctly, it preserves value, reduces replacement costs, and preserves optionality for future market recoveries. It requires disciplined planning, technical preservation measures, ongoing maintenance, and attention to accounting, tax, regulatory, and insurance implications. When executed poorly or ignored, mothballing can fail to protect asset value and create larger financial and environmental liabilities.
Source
Primary information summarized from Investopedia: https://www.investopedia.com/terms/m/mothballing.asp
If you’d like, I can provide: a sample mothballing checklist tailored to a specific asset (e.g., aircraft, drilling rig, factory), a template preservation log, or a financial model to compare mothballing vs. replacement/scrapping. Which would help you most?