Iraq, Russia, and LNG expected to be year's top OGJ news topics

Jan. 5, 2004
Iraq, Russia, and liquefied natural gas will be the major news topics of 2004, say the writers and editors of Oil & Gas Journal, who look forward to a year of progress in technical subjects ranging from clean fuels to deep drilling.

Iraq, Russia, and liquefied natural gas will be the major news topics of 2004, say the writers and editors of Oil & Gas Journal, who look forward to a year of progress in technical subjects ranging from clean fuels to deep drilling.

In Russia as in the US, the year's news will be strongly shaped by politics. Both countries have presidential elections this year. And both enter 2004 under the heavy influence of political events late in 2003.

Casting a long shadow forward in Russia is the October jailing of OAO Yukos Chief Executive Officer Mikhail Khodorkovsky, a politically active critic of Russian President Vladimir Putin. And questions loom in the US about whether Congress can pass comprehensive energy legislation after failing to do so in November for the second year in a row and whether it even will try.

These expectations emerge in answers by OGJ writers and editors to questions from the author. The answers are reported here in accordance with OGJ's format, with general subjects first followed by technical subjects organized in order of the hydrocarbon value chain.

Instability in Iraq

Whatever the political spell cast over the year by the Russian and US elections, many OGJ editors expect 2004's standout news story to be the stabilization and reconstruction of Iraq.

This observation, from Associate Editor Judy R. Clark, is typical: "Instability in Iraq will continue to haunt the news in 2004 as [former President] Saddam [Hussein] loyalists and outside influences savage coalition attempts to establish political reform and social and economic order."

At the time of this writing, the effect on Iraqi instability of Saddam's capture wasn't clear.

Senior Staff Writer Steven Poruban portrays the Iraqi story as "a mixed bag of news" around a series of questions: "How long with the US have to occupy the area? When will a new government be established to take control? Will the new government even survive the ever-rising population of rebel groups?"

Senior Writer Sam Fletcher characterizes the Iraqi story as "the tail that's wagging the dog as far as markets are concerned."

On the one hand, he notes, military unrest feeds worry about supply disruption and elevates the price of crude oil. On the other hand, the possibility of Iraq's rapidly rising production creates fear of oversupply.

But he sees Iraqi production potential as "highly overrated at the moment.

"No one really knows yet how badly those reservoirs may have been damaged through years of neglect and lack of equipment."

While Fletcher believes achievement of Iraq's full production potential will take years, Executive Editor Bob Williams considers the recovery so far to be surprisingly strong and the main reason that the Organization of Petroleum Exporting Countries cut the group quota by 900,000 b/d Nov. 1.

Development of an Iraqi fiscal and contractual regime for exploration and production will be vitally important, Williams notes.

"The rush of foreign investment into Iraq in the coming years surely will give the other Persian Gulf exporters pause [and reason] to consider their own hurdles to investment."

Williams notes that reduction of Iraqi supplies in the oil market has helped OPEC manage the price of crude recently.

With Iraq poised to increase exports, "fractures are beginning to appear in OPEC."

Fletcher sees the same development, noting requests by Iran, Venezuela, and Nigeria for larger OPEC quotas. The countries have raised or are assessing their reserves estimates.

While Fletcher expects OPEC to adjust quotas at some point, "the most interesting thing is how thin its cushion of spare capacity has become in recent years."

Russia's growth

OGJ's news writers think Russia will maintain growth in production and foreign investment despite the late-2003 crackdown on Yukos by Putin. But they expect non-Russian companies contemplating investment in Russia to exercise new caution.

"Russia's role in the distribution of crude oil and natural gas worldwide will grow," says Clark. Putin, she adds, "will take actions to neutralize fears and work to entice investors back."

Fletcher agrees.

"Putin apparently was surprised by the industry's strong reaction [to the imprisonment of Khodorkovsky] and is attempting to reassure them [investors]. But it may take some time for all of the kicked-up dust to settle."

Williams expects reprisals by the Putin administration against unpopular oligarchs to subside after Russia's presidential election in March. But he expects "a residue of uncertainty that will continue to slow the momentum of investment in Russia's oil and gas sector for some time to come."

Williams further notes that OPEC's cohesion has helped Russia by providing both price strength and market-share gains. Russia, he says, will join Iraq as a factor critical to OPEC's further success in defending oil prices.

LNG booms

Limited for decades to point-to-point trade, LNG faces rapid market growth and for OGJ editors represents a long-running story of rapidly growing importance.

"Natural gas is becoming a worldwide commodity because of the increased availability of LNG," says Clark. "That will affect pricing, and more LNG facilities will be built to accommodate this trend."

Growth in trade of LNG, she says, will help the economies of developing countries and boost compressed natural gas as a vehicle fuel.

Paula Dittrick, senior staff writer, sees a challenge in the US, where LNG increasingly must supplement domestic production: "The US public must lose its long-held not-in-my-backyard attitude about LNG facilities."

Bob Lawson, senior editor-technology, shares her view.

"I see the squeeze on natural gas supplies in the US getting more attention, along with the continued ban on LNG facilities on the West Coast," he says.

Will gas prices stay high enough to support the push for LNG plants, terminals, and associated pipelines? At least one OGJ editor thinks they will.

"Natural gas has definitely gained a new floor price, which I think will remain intact throughout 2004," says Poruban.

Warren R. True, chief technology editor-pipelines/gas processing, describes the significance of LNG to one of his specialty areas like this: "Without question, the most important story in hydrocarbon transportation for the next 2-5 years will be the growth in LNG as a form of moving petroleum energy between remote production areas and markets."

Depletion, access

The surge of interest in LNG relates to another important story: maturation of conventional hydrocarbon resources.

The link is most evident in the US, where rapid depletion of conventional reserves of natural gas is opening markets for gas from other sources, including LNG.

"The most important industry trend that I hear about in talking with people is the steepening rate of depletion among natural gas wells and the general decline of natural gas production in both the US and Canada at a time when US demand for gas is growing," says Fletcher.

He acknowledges the lift that this trend gives to demand for LNG but says, "It is unlikely that new source of supply will come on stream fast enough to prevent some severe shortages—especially if the US ever again experiences a severe winter followed by an unusually hot summer that outstrips deliverability."

Problems of gas supply collide with limits on industry access to large areas of federally owned land—a problem that worries several OGJ editors.

"With the long-anticipated US natural gas supply crunch fast becoming a reality," says Poruban, "operating companies will have to do what they can to push for exploration and development in areas once considered too environmentally sensitive to drill."

Lawson says the impasse of gas supply and land access reminds him of "stories you hear of a bag lady [destitute woman] found starved to death in the alley where she has lived for years with thousands of dollars stuffed in her stockings."

Worldwide, says Clark, depletion of conventional oil encourages the industry to "create more inventive methods to enhance production in mature fields."

And Williams expects worry about depletion to merge with concern over global warming into an alarmist weapon for the oil industry's political antagonists. He expects supporters of aggressive precaution against global warming, frustrated by Russia's refusal to ratify the Kyoto Protocol on Climate Change, to turn to depletion and controversies over Iraq in order to "demonize oil."

Election campaigns this year in the US might galvanize the issue, which could haunt the industry for years.

"The pairing of oil depletion and global warming will be the battle cry of antioil forces in the coming decade," Williams says.

Prices, mergers

Other subjects likely to receive attention in news stories this year, according to Poruban, include the supply potential of methane hydrates, assessments of gas-storage data reported by the US Department of Energy, and—as always—oil and gas prices.

For oil prices, Economics Editor Marilyn Radler expects change this year.

"With continued non-OPEC supply growth, OPEC will be compelled to lower output in 2004," she says. "Most likely, a large cut will be required in the second quarter."

A strong rebound in Iraqi exports would intensify the pressure on OPEC to resist a surplus.

"Prices, which have been at the top of the $22-28/bbl price band [targeted by OPEC], could easily drop to the lower end of the price band in the second quarter," Radler says.

Dittrick expects to be reporting on the increasing complexity of industry mergers and acquisitions.

Increasingly, she says, mergers of companies and property acquisitions involve "a supporting cast of characters participating in a series of transactions."

When a major company acquires a large-capitalization independent producer, for example, it wants to sell pieces of the acquired company more quickly than has been done before.

"The initial deal could hinge upon the acquirer being confident that it could, in turn, sell specific assets through subsequent deals to other interested parties," Dittrick says.

Mergers aren't confined to oil and gas producers, notes Jeannie M. Stell, survey editor.

"The downstream surveys show a continuing trend toward organization compaction of refiners and engineering firms," she says. "This will likely continue through 2004."

Meanwhile, financial reporting in the US has been complicated by the Sarbanes-Oxley Act of 2002 on corporate governance—but hardly curtailed, says Statistics Editor Laura Bell.

"The information that I collect to do most of the financial reports that OGJ publishes will still be a requirement of all publicly traded companies," she says.

"I do not anticipate any reporting lags or filing obstruction due to the Sarbanes-Oxley Act."

More troublesome to statistical reporting, Bell says, are industry cuts.

"Over the last few years, many of our sources have not been able to collect vital industry data due to budget problems and manpower."

Election year

An "unavoidable subtext" of all US news this year, says Washington Editor Maureen Lorenzetti, will be the approach of presidential and congressional elections in November.

"That doesn't necessarily mean Congress or the White House will get nothing done," she says, pointing out that Congress passed the Energy Policy Act of 1992 in an election year.

"Still, the overwhelming consensus from lobbyists and other congressional watchers is that chances are good an omnibus energy bill, nearly 3 years in the making, will collapse under its own 1,200-page weight."

Lawmakers most supportive of comprehensive energy legislation are the ones who proposed the controversial provisions that have made passage difficult. Lorenzetti points out, too, that the Senate is more evenly balanced between the two major political parties than it was in 1992. The narrow difference makes controversial legislation easy to block with filibuster.

A few lobbyists think the bill might pass if the administration pushes the issue, Lorenzetti says, adding, "Higher gasoline prices or a residential heating fuel price spike wouldn't hurt the bill's momentum."

With or without comprehensive energy legislation, Lorenzetti expects Congress to try to pass a mandate for ethanol in gasoline.

A major regulatory story this year will be the degree to which Mike Leavitt, new administrator of the Environmental Protection Agency, balances environmental and energy interests.

Recalling that Leavitt described his philosophy to EPA employees as "more, better, faster, newer," Lorenzetti says, "How he plans to apply that slogan to clean fuel rules and air pollution standards for refineries and aging power plants will be interesting to watch."

Like many of her OGJ colleagues, Lorenzetti sees Iraq and Russia as major geopolitical stories for 2004—and in an election year major political stories as well.

"President George W. Bush's political rivals are closely watching how the administration handles Iraq's oil sector," she says. "So are key US allies like Saudi Arabia and members of the European Union."

Concerning Russia, Lorenzetti notes that the administration has been silent on the jailing of the former Yukos head, which might mean it sees the incident as isolated.

She also says that supermajor companies pursuing business deals in Russia probably won't be discouraged by the Yukos affair.

"All of these companies work in challenging places all over the world," she says. "What makes Russia that much different?"

Exploration trends

Hotspots for exploration this year, says Alan Petzet, chief editor, exploration and economics, are Africa, Russia, and Australia's North West Shelf.

While Africa's production is rising, much of the Atlantic margin remains lightly explored. And interest remains high in Algeria, Libya, and Egypt.

"Sudan and southern Egypt are under explorers' eyes, and rift basins as far west as Chad will be under more scrutiny with recent start-up of the Chad-Cameroon pipeline," Petzet says.

In Russia, although most activity is field development, exploration must increase if the country is to fulfill its export goals.

And off Western Australia, Petzet says, "discoveries are popping up regularly."

Asked about emerging plays, Petzet cites several examples of a single company performing early exploratory work, then accumulating acreage across a region.

One such company, EnCana Corp. of Calgary, is applying this approach to the Cutbank Ridge play in the Alberta-British Columbia foothills and in the Greater Sierra play of northeastern British Columbia. Both are gas plays.

Magnum Hunter Resources Inc. and partners followed a similar strategy in the southern San Juan basin and Chaco slope area of west-central New Mexico, seeking gas and oil.

The regional approach also is developing as companies enter multiple service contracts to explore and develop Mexico's Burgos basin.

Among new technologies that have attracted Petzet's attention are a truck-borne system for measuring ethane migrating to the surface from hydrocarbon-bearing reservoirs and a geophysical method of directly detecting gas in the reservoir called wavelet energy absorption.

OGJ's exploration specialist expects 2004 to yield more news about exploratory wells drilled to 30,000 ft or deeper.

Drilling technology

Movement to such depths, of course, requires improvement in drilling technology.

"Advances in any technology that enables deep drilling are significant, such as material improvements in expandable tubulars, for monobore or monodiameter systems, and slimwell drilling, all improvements over standard telescoping casing design," says Drilling Editor Nina M. Rach.

Solid expandable tubulars in expandable casing strings or nested expandable liners reduce hole size by as much as 50%, she explains. The reduction cuts volume, weight, and cost of large-diameter risers, casing, and liners.

Improvements are appearing, too, in expandable completion components, Rach says. She expects further innovation in all types of expandables, including liner hangers, isolation packers, and sand screens.

She also sees progress in continuous circulation drilling, in which a triple-ram blowout preventer called a coupler, used in conjunction with a top drive, creates a seal around the drillstring. This allows mud to keep flowing during connections, which holds pressure steady, preserves hole quality, and improves drilling efficiency.

Continuous circulation drilling is useful for managed-pressure or underbalanced, high-pressure/high-temperature, and riserless or dual-gradient drilling.

"Managed-pressure drilling will be a great area to watch for implementation and then subsequent improvements in equipment and techniques," Rach says.

In other areas, she expects real-time systems and enhanced 3D visualization to gain use in the drilling of directional wells.

Also likely are advances in geosteering and rotary steerable drilling to improve reliability.

This year, Rach looks forward to development of new steel alloys for expandables and of expanding thick-wall casing with gas-tight connectors for use in monodiameter systems.

Production technology

Guntis Moritis, production editor, counts flow assurance for offshore systems among areas of important technical progress in his specialty. Improvements in flow assurance for long subsea tiebacks increase the number and decrease the size of fields that can be brought onto production.

"Implementation of technologies such as subsea processing and boosting, downhole electronics and subsea electronics, and less costly intervention vessels and tools will further the feasibility of long subsea tiebacks," Moritis says.

But floating systems might remain competitive with tiebacks because of advances in their technologies. For example, jacking systems for installing topsides and installation of topsides at construction yards have reduced costs. Also, polyester mooring ropes and increased use of composite materials have reduced the weights of floating structures and extended the water-depth capabilities of platforms.

This year, carbon dioxide injection for enhanced recovery might begin to expand into new basins, encouraged by requirements for sequestering CO2 as a global warming precaution. CO2 injection technology, however mature, must be adapted for use in new areas.

In Canada's heavy oil areas, Moritis sees potential in technologies other than the steam-assisted gravity drainage schemes that have proliferated in recent years.

Among possible alternatives is extensive use of multilateral wells.

"The industry still needs economic technologies that can evaluate the reservoir farther away from the wellbore than conventional well logs and with more precision than seismic," Moritis says. "Crosswell tomography that uses a more powerful air gun source may hold the key."

Technologies involved in gas-to-liquids conversion "may finally see more use," Moritis adds. And fracturing technology, while mature, evolves as the industry improves its understanding of the mechanical and flow properties of different rock.

"New chemicals and techniques continue to replace older ideas about the process," Moritis says.

Refining, petrochemicals

Processes for reducing sulfur in petroleum products will remain crucial this year, says David N. Nakamura, refining/petrochemical editor.

In response to looming fuel specifications, refiners in the US and Europe are investing in desulfurization units for gasoline and diesel fuel. In Europe, many refiners are producing diesel with a sulfur content of 10 ppm, having accelerated their schedules in response to European Union tax incentives. Catalyst advances are helping refiners meet the new sulfur limits.

An area needing improvement, Nakamura says, is sulfur testing. Methods recommended by the American Society for Testing & Materials International for testing sulfur in diesel have been reported to have large margins of error.

"The testing methods or lab equipment must improve if refiners are going to consistently comply with the new specifications," Nakamura says.

A promising technology in this area is UniPure Corp.'s Advance Sulfur Removal process. In July, the company reported it had successfully produced diesel with less than 15 ppm sulfur in a 50 b/d demonstration plant at Valero Energy Corp.'s Krotz Springs, La., refinery. Nakamura thinks the process might be scaled up to commercial use this year.

Another active area of advance is processing software.

"Some of the software I've seen recently involves enterprise-wide management systems where a company can manage multiple refineries or plants with one software package and drill down to the control valve level," Nakamura says.

While refiners usually embrace new technologies as ways to reduce costs, they don't treat software the same way.

"Many see software as a cost rather than a profit generator," Nakamura says. This year he'll be watching the many desulfurization units under construction in the US and Europe.

"It will be very interesting to see what kind of impact the 10 ppm sulfur regulations will have on diesel supplies and whether or not refiners in Europe will be able to produce 10 ppm diesel consistently."

A continuing challenge in the US is the proliferation of fuel specifications. Nakamura expects refiners to respond with increasingly complex blending systems and scheduling and logistical software.

In petrochemicals, Nakamura will be watching the many projects under way in the Middle East, especially ethylene plants in Iran. There, three of the world's largest plants, with capacities totaling 3.4 million tonnes/year, will start up in 2004-05. Saudi Arabia will start up a 1 million tonne/year plant this year, and Qatar will start up a 1.3 million tonne/year facility in 2005.

China, too, is adding much ethylene capacity but will remain a net importer, mostly from the Middle East.

Transportation trends

Because of the LNG boom, True notes, proposals for new terminals and pipelines have appeared around the world. Not all of them will become actual projects.

In mid-2003, proposals for new or expanded receiving terminals in the US and Baja California, Mexico, represented sendout capacity exceeding 30 bcfd.

"Clearly, nothing like that amount will be built," True says. "But it's a measure of how anxious companies are to jump into the US import market that this sendout figure is nearly half the total projected US demand for natural gas from all sources" for 2004.

In response to opposition to terminal construction, especially in California, some proposals are for offshore terminals, connected to onshore pipelines by 30-40 mile subsea links to keep regasification facilities out of view of land.

Expectations for an increase in imported gas have led to calls for additional storage capacity on the Gulf Coast. One proposal would store LNG, a concept under active study by the US Department of Energy.

True sees a problem for US importers of LNG. The heating value of most LNG exceeds the 1,100 btu/Mcf limit of US pipelines and carries more liquids than any of the four existing terminals can handle. Only the Lake Charles, La., terminal has installed processing facilities downstream of the regasification plant to strip out liquids and make the gas suitable for transport.

"No other world market has this problem," True says. "Solutions are going to be expensive."

The options are for liquefaction plants to strip more liquids as they chill gas for shipment to US terminals or for US facilities to install blending or treatment equipment.

With LNG plans come proposals for related pipeline projects.

True notes competing proposals to carry regasified LNG 165 miles from planned LNG terminals in the Bahamas to Florida: the 26-in. Seafarer Pipeline and 24-in. Calypso Pipeline.

North America's biggest pipeline story doesn't involve LNG, however. It would move gas produced in the Alaskan and Canadian Arctic to southern Canada and the US Lower 48.

A Canadian group has begun to solicit financial support for a pipeline from the Mackenzie Delta to interconnections in Alberta.

An alternative is a line from Prudhoe Bay across Alaska to Alberta. The Alaskan line depends on market guarantees proposed in the comprehensive energy legislation Congress couldn't pass last year or the year before.

Other major North American proposals include the 775-mile, 36-in. Blue Atlantic Pipeline to carry natural gas from fields off Canada's Maritime Provinces to New York via an all-subsea route and a 630-mile crude oil line proposed by Enbridge Energy Partners LP from Superior, Wisc., to southern Illinois.

True says much pipeline technical research centers on the challenges presented by deep water.

"The seabed terrains threaten pipe with rocky, unstable conditions and problems caused by long free spans," he says. And near-freezing temperatures at great water depths complicate movement of hot hydrocarbons.