OGJ Newsletter

According to the American Petroleum Institute, operators drilled 9,151 new-field wildcat wells in the US in 1981-a point when upstream investment in the US was at its all-time high (see chart). That number was down to 1,166 in 2001, as 91% of all US wells drilled were development wells.

As the US economy recovers, gas demand should follow suit, boosting North American drilling activity. "Because independent producers working on shorter-term projects dominate the North American energy market, (drilling activity) moves quickly up and down with demand," Vital observed.

"The quality of drilling prospects worries US independent exploration and production companies, which could lead to consolidation," she said. "Government land in the natural gas-rich Rocky Mountains might be less available for drilling than many people think. The Energy Information Administration estimates about 43% of the Rockies' natural gas is unavailable for drilling due to environmental regulations, lack of pipeline capacity, or other barriers to development."

S&P estimates that the six supermajor oil companies have global capital budgets this year totaling $54 billion, down 5.8% from 2001. The lion's share of the current budgets-67%-is likely to be devoted to E&P outside the US and Canada, said Vital.

"The major oils will continue to dispose of aging, high-cost fields in North America and to move toward lower-cost prospects abroad, mostly in deep waters," she said.

In the North Sea, the focus is shifting to smaller projects, while Middle East drilling will likely be "relatively stable," said Vital. "Asia is showing signs of improved drilling activity…Continued investment in Nigeria, (elsewhere in) West Africa, and Russia should drive activity growth."

E&P stocks hang tough

Although share values for publicly traded E&P companies declined during the past 2 weeks, they "on average did not drop as much as the overall market," reported Robert Morris at Salomon Smith Barney Inc. in New York (OGJ Online, July 22, 2002).

Even as the equities market continued to take a pounding, with energy merchant companies approaching collapse early last week, E&P companies were still outperforming other groups, Morris told OGJ.

"Fears that demand for crude oil and products would be tempered by the effects of the falling stock market were somewhat offset by renewed terrorist attacks in Israel" during the week ended July 17, he said.

Morris advised, "Overall, we continue to believe that investors should be positioning to be overweight (in) the E&P sector heading into next winter, given our view that the longer-term fundamentals for natural gas prices remain quite solid. However, near-term movement in the sector will be largely dictated by the overall market without any discernible catalyst among the commodity price front."

Industry Scoreboard

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Industry Trends

US integrated oil companies' second quarter earnings are expected to be down 37% from the second quarter of 2001, reflecting weaker refining margins and lower oil and natural gas prices.

But the sector is expected to demonstrate drastic earnings momentum in the fourth quarter, said Matthew Warburton, an analyst with UBS Warburg LLC, which covers eight US integrated oil firms.

"We currently expect aggregate adjusted net income for the US oil majors to decline year-over-year (y-o-y)by 6% in (the third quarter) and then rise 56% in (the fourth quarter). Thereafter, given our oil and natural gas price forecasts, normalized refining, and marketing margins, and a further improvement in chemical fundamentals, we forecast y-o-y earnings to rise 19% in 2003 and fall 2% in 2004," Warburton said.

The US integrated sector appears to have "weathered the worst of the storm," he said, predicting second quarter 2002 results will mark the first period since second quarter 2001 "where aggregate results have increased sequentially." This year, second quarter earnings are expected to be 78% higher than first quarter earnings.

"Geopolitical tensions in the Middle East and Venezuela, short-term, localized squeezes, and the activity of noncommercial traders in the oil futures market distorted prices (in the second quarter of 2002) while contributing to significant oil price volatility," Warburton said.

Crack speads remained under substantial pressure in the second quarter, causing refining margins to suffer, Warburton said (see table).

"Weaker demand y-o-y for oil products and ample inventories prevented refiners from recovering rising crude oil costs, particularly for heavy, sour barrels. However, we believe that poorer refining results y-o-y and anemic growth in underlying refinery throughput will be partially offset by stronger marketing contributions in most regions," he said.

USB Warburg expects refining and marketing earnings will be well below last year for the US integrated companies that it covers, with aggregate results falling by 70%. The comparison between second quarters for 2002 and 2001 is especially stark because the second quarter 2001 marked a peak in refining profitability over the last decade.

"Yet following the dismal environment in (first quarter 2002), during which seven of the eight US oil majors posted losses in their R&M divisions, (second quarter 2002) results are likely to show a recovery, supported mainly by better marketing margins, and to a lesser extent an upturn in refining," he said.

US refining margins remained well below midcycle in the latest quarter, reflecting the lingering problems of surplus product inventories in the Atlantic Basin and reduced overall demand for petroleum products, he said.

Government Developments

France's Parliament is trying to accelerate the authorization of a directive that would put the country's gas market in line with the 2-year-old gas liberalization process in the European Union.

French Industry Minister Nicole Fontaine told European Energy Commissioner Loyola de Palacio that an ordinance is expected before Dec. 31. Fontaine said Parliament intends to delegate to the government the right to legislate through an ordinance.

The fast-track approach is intended to slash through potentially long, complex parliamentary debates. The directive was supposed to have become French law on Aug. 10, but its adoption was delayed because Parliament linked the EU gas liberalization directive with the opening up of Gaz de France to other investors.

It's not a question of privatizing GdF, but of turning it into a "societ anonyme" to bring in other companies as shareholders (OGJ Online, Mar. 23, 2001).

But the former government balked at opening up GdF because strong opposition erupted from the powerful trade unions within GdF and Electricité de France, both state-owned companies.

However, Prime Minister Jean-Pierre Raffarin assumed office in early June and has said he intends to proceed with opening up both GdF and EdF to other investors. Although GdF and EdF would still be owned primarily by the state, both companies' employees are fearful they could lose many of the advantages they now have as civil servants.

GdF has long wanted other investors to provide both money and alliances to help it expand internationally. Since August 2000, GdF has opened up its market with the EU gas liberalization process, even though the EU directive has not yet been adopted by Parliament.

Outgoing Colombian President Andrés Pastrana, in a move to encourage hydrocarbon exploration in the country, signed a measure that will significantly reduce the amount of royalties oil and gas companies will have to pay the state. Congress approved the new Royalty Law on June 20.

At the official signing act, Pastrana said that his government had seen the biggest surge in foreign investor interest in Colombian oil and gas in recent times and that future governments should continue to attract foreign investment in the petroleum sector. During 2000-01, 60 new association contracts were signed, compared with 32 contracts signed during 1997-99.

The royalties on newly discovered small and medium-sized oil fields producing fewer than 125, 000 b/d-based on an average daily output-were cut to 8-20% vs. a previous flat 20%.

All of Colombia's largest oil fields-except the BP PLC-operated Cusiana-Cupiagua field-produce less than 125,000 b/d.

Private companies producing 400,000-600,000 b/d would see royalties of 20-25%, based on average daily production.

The news was well received by oil companies, whose operating costs have been driven up considerably by frequent attacks on infrastructure by left-wing guerrillas. The new royalties are crucial if foreign firms are to continue to do business in Colombia, say industry observers. Pastrana said he would distribute $278 million in oil royalties to rural municipalities to cover pension costs.

Quick Takes

THE DANISH ENERGY AUTHORITY has granted to Dansk Olie & Naturgas AS (DONG) and other licensees of Nini and Cecilie oil fields in the Danish North Sea authority to develop those fields. Reserves in the two fields are estimated at 65 million bbl of crude oil. Production is planned for late summer 2003.

Nini and Cecilie will be unmanned and tied in to the Siri platform via 10-in. water injection and 4-in. gas lift pipeline connections. DONG, which will become Siri operator Aug. 1, will operate all three fields, having purchased operator Statoil ASA's 40% interest in Siri last spring (OGJ, May 13, 2002, p. 28).

Siri lies in 60 m of water on Block 5604/20 on the Ringkbing-Fyn high about 130 miles west of Esbjerg, Denmark. Other Siri licensees are Enterprise Oil Ltd. 20%, DONG E&P 20%, Phillips Petroleum Co.12.5%, and Denerco Oil AS 7.5%.

An 825 million Danish kroner contract has been awarded to Saipem UK Ltd. (contractor) and Bladt Industries AS (subcontractor) to construct and install the platforms and establish pipeline connections between each field and the Siri platform. The unmanned platforms will be built at Bladt Industries in Aalborg, Denmark.

Total development costs, including project management and reserves, modification of the Siri platform, and oil production and water injection wells, are expected to be about 2.5 billion kroner.

Ownership interests in Nini are DONG 40%, Denerco Oil AS 30%, and RWE DEA AG 30%. Cecilie interests include DONG 22%, Denerco Oil 37%, Denerco Petroleum AS 24%, and RWE DEA 17%.

ATWOOD OCEANICS INC., Houston, has been awarded two new drilling contracts for its Atwood Southern Cross semisubmersible drilling rig.

Oil Fields Ltd. (OFL) awarded Atwood a contract to drill a well off Israel. Work will begin in mid-August and is expected to take 30 days to complete.

Before starting that project, however, Atwood will upgrade the rig to Italian requirements and undergo Italian inspections, estimated to take 5-10 days, in order to begin drilling off Sicily and Calabria for Agip SPA, a unit of Italian state-owned energy conglomerate ENI SPA, following the Israel job.

The Agip contract is for two wells-with a third well option-to begin when the OFL project is completed. The Agip work will take an estimated 60-90 days.

APACHE CORP., Houston, made three more Egyptian discoveries in June and July, two of them on its 2.3 million acre Khalda concession in Egypt's Western Desert. Apache operates Khalda with a 100% contractor interest.

Both the Tut 51 and Tut 52 wells were completed successfully, along with the Al Bahig-1X deepwater well on the West Mediterranean concession.

On test, Tut 51 flowed 3,200 b/d of oil and 7.7 MMcfd of gas from 54 of 162 total ft of Khatatba pay. The Khatatba interval also includes 102 ft in the 2B sands, the thickest interval in that section yet encountered on the concession. The well was tested through a 5/8-in. choke with 1,870 psi flowing wellhead pressure. It is producing from three intervals at 11,480-11,993 ft. About 108 ft of Khatatba pay remains behind pipe, as well as 36 ft of Bahariya pay at 6,100 ft.

Tut 52 flowed on test at 29.2 MMcfd of gas and 781 b/d of condensate. It was drilled to extend the limits of the Khatatba reservoir on the southern flank of Tut field. The well was tested through a 1-in. choke with 1,475 psi flowing wellhead pressure. It was perforated in 140 net ft of pay in four Khatatba zones located at 11,774-12,216 ft.

The well also logged 35 ft of potential pay in the Upper and Lower Bahariya at 5,900-6,040 ft. Apache expects to bring the well on production in August upon completion of a 4.2 mile pipeline connecting it to the Salam gas plant.

In addition to the Khatatba pay, Tut 52 logged 89 ft of new pay in the Alam El Bueib (AEB) 5A and 5B sands of 8,940-10,550 ft-the first time those sands have been identified as pay zones in Tut field. Apache said it will drill another well nearby to test the AEB sands.

The deepwater Al Bahig-1X gas well, 37 miles off Egypt in 3,510 ft. of water, is 10 miles southwest of Apache's recent Abu Sir Pliocene discovery (OGJ Online, May 22, 2002). The well was drilled to 8,050 ft TD in the Kafr El Sheik (Pliocene) formation.

Wireline logs and pressure data indicate reservoir quality as good as or better than that encountered in the Abu Sir well, the company said, so Apache will not test the discovery at this time.

Apache, as operator, has a 55% contractor interest in the field; RWE-DEA has 28.33%; and BP PLC holds 16.67%. Apache said it has seven more prospects and leads in the deepwater West Mediterranean concession and plans to drill three more wells there by yearend. F

In other exploration action, Remington Oil & Gas Corp., Dallas, and two other Texas-based independents made a natural gas discovery on West Cameron Block 347 in the Gulf of Mexico. The partners drilled the West Cameron No. 1 discovery well to 11,600 ft TD (11,043 TVD) 50 miles off Louisiana in 82 ft of water. Remington found 100 ft of net gas pay in three zones. WC No. 1 was completed and flowed at 22 MMcfd. Production is expected in first or second quarter 2003. Platform facilities and a pipeline have yet to be installed. Partnership interests for the block are operator Remington 50%, Irving, Tex.-based Magnum Hunter Resources Inc. 25%, and Dallas-based Wiser Oil Co. 25%.

SNøHVIT OPERATOR and Norwegian state oil company Statoil, on behalf of the Sn hvit gas field licensees, has awarded two contracts for development of the Sn hvit gas liquefaction plant being built at Melk ya in northern Norway. The plant, expected to be in service in 2006, will be Europe's first LNG export facility. It is expected to ship about 70 consignments/year of LNG from Melk ya, which is located outside Hammerfest in Finnmark County.

Germany's Linde AG group, Wiesbaden, received a contract valued at 1.6 billion kroner for engineering, materials procurement, and construction management for the plant, which will take gas from Sn hvit, in the Barents Sea off northern Norway.

Belgium's Tractebel SA unit Tractebel Industry Engineering will supply product tanks and vessel loading systems under a 2.3 billion kroner contract. The assignment includes the design and construction of four cylindrical storage tanks and associated piping and loading systems connecting the tanks to export jetties. The tanks will be built on site, with construction to start next May and complete in autumn 2005.

The US Federal Energy Regulatory Commission has approved Kern River Gas Transmission Co.'s $1.2 billion pipeline expansion that will double capacity to western markets via a 716 mile extension through California, Nevada, Utah, and Wyoming by late 2003.

FERC's action was the first to be issued under the commission's National Environmental Policy Act prefiling process. Agency officials said the permitting on the project took 12 months-6 months less than the historical time span for approvals for pipeline expansions of a similar size and nature. The Kern River expansion will parallel the initial pipeline, minimizing environmental impacts.

Dominion Transmission Inc.'s proposed 280 mile Greenbriar Pipeline from Kanawha County, W.Va., to Granville County, NC, and El Paso Corp.'s 800 mile Blue Atlantic Transmission System are also utilizing the streamlined permitting rules, FERC said. Blue Atlantic would extend from Sable Island, off Nova Scotia, Canada, to the northeastern US. x

In other pipeline action, Kinder Morgan Energy Partners LP (KMEP), which operates Plantation Pipe Line Co., plans to increase capacity on a 190 mile segment of the Plantation common carrier pipeline that transports refined products throughout the southeastern US. The proposed $116 million project, needed to meet the area's growing need for gasoline, diesel, and jet fuel, would involve replacing an 8-in. pipeline between Bremen, Ga., and Knoxville, Tenn., with a 20-in. pipeline. The project is supported by long-term contracts with major oil companies, and FERC has already approved Plantation's tariff structure. "The proposed replacement pipeline, which will double capacity on the segment of the pipe between Bremen and Knoxville toellipse90,000 b/d, will generally follow the alignment of existing utility corridors and rights-of-way. Construction is expected to take place in 2004, with completion targeted for (fourth quarter 2004)," the company said. KMEP owns 51% of Plantation Pipe Line, while ExxonMobil Pipeline Co. owns 49%.

THE US DEPARTMENT OF JUSTICE and the state of Delaware filed civil suits against Motiva Enterprises LLC in connection with a fatal July 2001 tank explosion at Motiva's 144,000 b/d refinery in Delaware City, Del., and numerous other environmental violations.

DOJ alleges the company, a joint venture between Royal Dutch/Shell Group and Saudi Refining Inc., violated the Clean Water Act and other environmental laws. DOJ says the accident, which led to a death, injuries, and a 1 million gal spill of sulfuric acid and hydrocarbons, was avoidable because the company did not perform proper maintenance.

"The tank that exploded had a long history of corrosion, holes, and other problems and should have been taken out of service long before the explosion," said Tom Sansonetti, assistant attorney general for DOJ's Environment and Natural Resources Division. "By filing this suit, we aim to ensure that measures are taken to prevent such an incident from ever happening again." DOJ said criminal charges may be filed later.

Motiva declined to discuss specific allegations, but in a written statement said it plans to continue discussions with federal and state authorities "in an effort to fairly and promptly settle this matter."

Williams commissions Canyon Station platform

Williams Field Services, a unit of Williams Cos. Inc., Tulsa, has commissioned its 500 MMcfd Canyon Station production-handling platform 60 miles south of Mobile Bay, Ala.

The fixed-leg platform stands in 300 ft of water on East Main Pass Block 261. It will treat, process, and handle natural gas and gas liquids from 10 deepwater wells 55 miles away in Camden Hills, Kings Peak, and Aconcagua fields, which lie in 5,000-7,200 ft of water.

From the Canyon Station platform, Williams will operate all subsea well monitoring, flow control, and chemical injection functions. The company is using a new methanol recovery process, developed by Houston-based Paragon Engineering Services Inc., to provide flow assurance for the deepwater wells.

Gas fields are being developed by their owner companies and operated by TotalFinaElf E&P USA Inc., Marathon Oil Co., and BP PLC.

The fields link into the Canyon Express gathering system operated by TotalFinaElf and jointly owned with Marathon, BP, Pioneer Natural Resources Co., and Nippon Oil Exploration USA Ltd. (OGJ, May 6, 2002, p. 52).

Dual 12-in. flowlines from the fields are slated for completion over the next 2 months, allowing first deliveries through the platform to begin in September. From the platform, three pipeline outlets will deliver gas onshore to a variety of markets.

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