Dismantling abandoned oil wellheads is a central aspect of the decommissioning of production facilities. A wellhead consists of multiple layers of conductive oil casing nested with nonconductive cement rings. Plasma-arc cutting is expected to be used in abandoned wellhead demolition owing to its high processing efficiency for conductive materials. Currently, no reports are available on the operating parameters of plasma-arc cutting in oil wellhead dismantling. This study experimentally investigated the penetration parameters of an underwater plasma arc in abandoned wellheads. The stand-off distance, penetration angle, nozzle diameter, plasma arc current, and gas flow rate were considered as the main factors affecting the penetration effect. A composite workpiece consisting of 10 mm thick mild steel and 30 mm thick cement blocks was used to simulate a small segment of an oil wellhead. The penetration depth, removal volume, penetration specific energy, and nozzle loss were used as comprehensive evaluation indicators for optimizing the penetration parameters. Based on the results, the experimental phenomena during penetration were explained and recommended values of the underwater plasma arc processing parameters were provided. This study may advance the development of plasma arc cutting for the demolition of abandoned wellheads.