The offshore oil and gas industry’s elaborate technology stood up to last year’s Gulf of Mexico hurricanes and shows no sign that the storms slowed its development.
Equipment and know-how were on massive display at the 2006 Offshore Technology Conference in Houston, where presentations and press conferences covered a wide range of issues and participants heard updates on technologies, equipment, and projects.
Hurricanes Katrina and Rita, however, peppered many discussions.
At a press conference, Charles Davidson, Noble Energy chief executive officer and chairman of the Independent Petroleum Association of America Offshore Committee, said oil and gas facilities performed well during the storms.
The 165 platforms damaged or destroyed by the storms represented a small share of the 4,000 such facilities in the gulf, Davidson pointed out. There were no significant spills from offshore wells.
“All subsea wellhead safety valves held,” he said, noting that the amount of oil introduced into US waters by natural seeps is 150 times that of oil and gas operations.
Advancing technology, Davidson added, steadily improves the industry’s environmental and safety performance. OTC officials, as they have done each year since 2004, recognized several new technologies for innovation and value to the industry (see following story). They expected this year’s event to be the largest in 20 years.
Access issues
The IPAA press conference at which Davidson spoke addressed a political issue that has shown progress for industry interests in the past year: oil and gas leasing of federal waters.
Contributing to that progress has been Virginia, several commonwealth and federal lawmakers from which have suggested that states be allowed to approve oil and gas leasing of federal water off their coasts. One of many states off which federal leasing is prohibited, Virginia has industries hurt by recent spurts in the price of natural gas. But military operations off Virginia are a concern.
Industry representatives at IPAA’s press conference at OTC said drilling could coexist off Virginia with the military’s weapons testing and training exercises.
“We understand the importance of making sure the military training and weapons testing is done,” said Dan Naatz, IPAA vice-president of government affairs.
In April, the Defense Department wrote a letter to the Minerals Management Service saying the Navy and other service branches require “unencumbered access” to portions of an area east of Virginia Beach.
The area is used to test-fire missiles, aircraft guns, and some 5-in. guns on ships. Navy pilots also practice aircraft carrier landings and takeoffs in that area. Virginia’s economy relies on military installations and tourism.
State Sen. Frank W. Wagner, a Republican from Virginia Beach, acknowledged that the Navy’s needs are a priority to Virginia state and federal lawmakers but said he believes arrangements could be made between energy and defense interests.
Wagner introduced a comprehensive energy plan encouraging Virginia’s congressional delegation and federal agencies to support lifting a moratorium on gas leasing and development on the Outer Continental Shelf from 2007 through 2012.
The commonwealth’s general assembly passed that bill, but Gov. Timothy M. Kaine responded with plans to call only for an assessment of gas potential 50 or more miles off the coast (OGJ, Apr. 17, 2006, p. 24).
Virginia energy plan
The energy industry needs to ease the military’s concerns, Wagner said in Houston. “My constituents are sailors, who are struggling to pay their gasoline bills and utility bills just like everybody else.”
Noble Energy’s Davidson agreed that industry could find ways to operate drilling rigs and production platforms without disrupting military exercises.
“Industry has shown, for a number of years, the ability to work around shipping fairways in the Gulf of Mexico,” Davidson said. “It takes some planning ahead of time to define the areas that are critical.”
Naatz called Wagner’s efforts to promote drilling off Virginia “a dynamic piece of a very complicated puzzle that is happening nationally.”
Congress is showing increasing interest in oil and gas development because of rising energy demand and robust commodity prices, Naatz said, adding that both Republicans and Democrats are introducing energy legislation in the House of Representatives and the Senate.
“Industrial users and agricultural producers all want to try to find ways to increase domestic energy production,” Naatz said. “People are looking to the offshore.”
Industry’s challenges
In an OTC general session, Mark Pease, Anadarko Petroleum Corp. senior vice-president, exploration and production, said the oil and gas industry must better inform the public about the challenges it faces in providing adequate, affordable energy.
“The industry as a whole is running very close to capacity” in its ability to secure materials and services, Pease said. He also said industry needs access to more US oil and gas opportunities.
WesternGeco Schlumberger Pres. Dalton Boutte agreed that access to oil and gas remains a problem, adding, “The restrictions that we faced 10 years ago are the same that we face today.”
Oil and gas investment levels are too low to keep up with expected increases in energy demand, Boutte said. “There are still a lot of investors outside looking in.
Mohammed Hamel, director of energy studies for the Organization of Petroleum Exporting Countries, said energy policy-makers face the challenge of providing energy, particularly electricity, to more people worldwide.
He sees investment levels and environmental concerns as major challenges and said the industry “needs to take a proactive stand on the climate change debate.”
Industry constraints
WesternGeco’s Boutte said the service sector is constrained by people and materials. Schlumberger, WesternGeco’s parent, plans to hire more than 3,000 engineers this year.
Boutte urged industry to better manage its human resources on a global basis and also to make a better commitment to training personnel worldwide.
Fisoye Delano, general manager of Nigerian National Petroleum Corp., noted that inexperienced but trained individuals are available to work in the oil industry.
“In Nigeria, we have a large pool of engineering graduates available to work in the Gulf of Mexico and other parts of the world,” Delano said.
Transocean Inc. Pres. and Chief Executive Officer Robert L. Long agreed with the other speakers about the difficulty of finding skilled employees.
“The scarcest resource today is trained, experienced people,” Long said. Another challenge is drilling wells faster and at lower cost. He hopes for the development of nontraditional drilling equipment suppliers and better opportunities for equipment repairs.
“We need equipment with better capacity and better reliability,” Long said, adding that Transocean loses millions of dollars in revenue annually because of equipment downtime.
Price expectations
Labor force worries also surfaced during an OTC panel discussion on the role of independent producers in the offshore industry, at which an electronic survey system tested audience expectations about the price of crude oil.
Of attendees responding, 42% said they expect crude prices to remain high for 3-5 years. Another 26% said they expect high crude prices to last for 1-2 years, while 30% said prices would drop back to $40-60/bbl “soon.” The rest of the 69 respondents said crude prices would fall back to $30-40/bbl in the near future.
Representatives of the six independent oil companies appearing on the panel generally were more bullish in their outlook for crude prices.
Earl Reynolds, vice-president and general manager of the international division of Devon Energy Corp., Oklahoma City, said he expects high crude prices to be sustained “for quite some time.” But when it comes to budgeting long-term exploration and development projects, he said, “We don’t invest that way.”
Another panelist, Brian Reinsborough, vice-president of exploration for Nexen Inc., Calgary, said crude prices in excess of $70/bbl are likely too high to sustain and will probably fall back closer to $50/bbl in 4 years. However, the development of huge oil sands deposits in Canada-in which Nexen is active-eventually could make North America “independent” of crude supplies from other countries, he said.
Development of oil sands and other energy sources that “used to be considered nonconventional” will increase crude supplies and bring down prices, said John Simon, vice- president of development at Amerada Hess Corp., New York.
But a proposed “windfall profit tax” on oil company earnings in reaction to high crude prices would likely reduce industry investment in the development of unconventional resources, said Cory Loegering, vice-president of deepwater operations for Mariner Energy Inc., Houston.
In a later survey question on global supply and demand, 55% of the respondents said high energy prices eventually will increase production and encourage conservation. Another 14% said alternative energy sources will emerge to reduce demand for petroleum. However, 12% said crude production has already peaked, while another 12% said production not only will increase but will outpace demand. The remaining 8% said conservation will reduce demand below production.
Workers wanted
Echoing a concern heard at many OTC technical sessions this year, 86% of 74 respondents at the independent producers’ panel discussion predicted the industry will remain chronically understaffed for many years.
When asked to name the offshore industry’s greatest challenge in 3-5 years, 49% of 64 respondents to the question picked access to workers, compared with 34% who said access to resources, 9% who picked volatility of commodity prices, and 8% who pointed to access to equipment and supplies. “All of these are creating a perfect storm” that is “pushing companies toward nonconventional resources and riskier areas of the world,” said Reinsborough.
US colleges are not graduating enough petroleum engineers and geologists to replace the personnel losses from the industry’s aging workforce, said Simon.
Equipment worries
Offshore operators also are concerned about the short supply of marine rigs and other equipment that is pushing up day rates and encouraging oil companies to obtain long-term commitments from drilling contractors whenever possible. Independents must be prepared to take on short notice the “surplus slot” for a drilling rig, should one develop, said Gene Van Dyke, chairman and chief executive of privately held Vanco Energy Co., Houston.
In a poll of the audience, 45% of respondents said they expected the shortage of drilling equipment and supplies to continue for 3 years. Another 28% predicted a 5-year shortage, while 26% said the shortage should ease in 2 years.
Simon of Amerada Hess said rigs now under construction will be coming into the market in 2 years and will help moderate day rates.
“But the other challenge is who is going to man these rigs?” asked Mariner Energy’s Loegering. With the industry’s continued shortage of both white-collar and blue-collar employees, he said, “The challenge will remain.”
Independents offshore
In the last 10 years, offshore independent producers have replaced production at a record ratio of 135%, compared with an industry norm of 80%, said Sandeep Khurana, subsea systems project manager for JP Kenny Inc., moderator of the independent panel discussion. Independents have capitalized on their smaller size and greater flexibility to compete internationally in deep and ultradeep waters, including marginal developments. Half of the deepwater fields brought on stream around the globe in 2005 were owned and operated by independents. If that trend continues through this year, independents will likely develop more deepwater fields than the major integrated companies.
With easy access to capital as a result of high oil prices, the differentials between independents, majors and national oil companies (NOCs) are “minimal” now, said Reynolds of Devon Energy. As a result, he said, privatized NOCs are competing strongly with majors and independents for opportunities internationally, with NOCs sometimes working together to their mutual advantage. So it’s to the independents’ advantage to build networks with NOCs.
Meanwhile, government-to-government deals have locked out international oil companies from access to some resources. Devon has chosen not to participate in the Middle East because of “potential access problems,” Reynolds said.
Van Dyke described his Vanco Energy as “probably the only privately owned independent that is active internationally,” with offshore operations in areas such as Madagascar and the Black Sea, as well as Ivory Coast, Equatorial Guinea, Gabon, Ghana, and Morocco. In 2001, it identified a previously unknown salt basin, now known as the Majunga basin, off the northwest coast of Madagascar. It plans to begin exploratory drilling this year if it can get a rig.
Meanwhile, the Houston independent in late April won a competitive tender for the right to conclude a production sharing agreement with Ukraine for the Prykerchenska tender area in the Black Sea, which Van Dyke describes as a virgin area comparable to the Caspian. “This will be Ukraine’s first deepwater license award and Ukraine’s first production sharing,” he said. JNR Eastern Investments Ltd., London, an investment company representing the interests of the Rothschild family, is an equal partner in Vanco’s application.
Offshore spending
Total worldwide offshore oil and gas spending is expected to rise to $247.5 billion in 2010 from $192.9 billion expected in 2006, the UK research firm Douglas-Westwood Ltd. said in a study presented at OTC.
Douglas-Westwood Managing Director John Westwood said the operational sector of the industry will be “the real star of the show.”
Douglas-Westwood forecasts operational expenditures of $127 billion in 2010, compared with $83 billion in 2006. Capital expenditures are expected to reach $120 billion/year in 2010 from $110 billion/year in 2006.
Offshore oil and gas production is forecast to rise to 53 million boe/d in 2010 from 43 million boe/d in 2006, said the study, “The World Offshore Oil and Gas Production & Spend Forecast.”
The researchers expect oil and gas prices to remain high, saying that only a world-scale economic or political crisis capable of interrupting demand growth could trigger an oil price collapse.
The offshore exploration and production industry is expected to become increasingly vulnerable to outside economic and political influences beyond 2010, the study said.
Regional focus
The anticipated surge in world offshore investment will vary from region to region, said Michael R. Smith, director of Energyfiles, a Douglas-Westwood research partner.
Smith noted increasing shortages of lower-cost prospects everywhere but in the Persian Gulf. He also sees limited availability of potential deepwater areas outside Brazil, the Gulf of Mexico, and West Africa.
“Nevertheless, all markets will retain ever-higher levels of operating expenditure,” Smith said. “Overall, we expect West Africa to show the greatest growth.”
Existing and new small oil companies increasingly will dominate new activity in mature offshore regions, the study concluded, adding such companies will specialize in marginal field developments and production.
Low-cost plays
Except for assets already held by a few NOCs operating in the Persian Gulf, low-cost oil plays virtually have disappeared, Smith said. By 2010, new large-scale opportunities are expected to be found only in ultradeep water and in arctic regions.
“Conversely, offshore gas still has opportunities related to the advent of new gas production and conversion technologies, the growth of gas markets in the developing world, and pressures by all governments to eradicate gas flaring,” Smith said.
LNG projects and the beginning of a gas-to-liquids industry “are kick-starting the development of stranded gas fields that have been lying fallow for many years and are encouraging new exploration drilling in gas-prone areas,” Smith said.
The study forecasts growth in all types of deepwater production facilities, but especially in floating production systems as well as in subsea production and processing hardware. Subsea systems also are expected to attract a growing portion of shallow-water expenditures in coming years with an expected acceleration of marginal development programs.
Russian growth
A country for which offshore production probably will grow impressively in the future is Russia.
Sakhalin Island currently is the oil and gas growth engine for the country, which will heavily rely on offshore regions for new production after 2010, Julia Nanay, senior director, PFC Energy, said at an OTC breakfast.
By 2020, offshore fields could account for 20% of Russia’s total oil and gas output, Nanay said, citing a draft strategy from the Russia Ministry of Natural Resources. A ministry representative was on the agenda but was not at the conference.
Two thirds of Russia’s future offshore production is expected to come from the Barents Sea and Kara Sea, Nanay said.
Russia must implement regulations and taxes before its offshore oil and gas assets can be developed, she noted, adding that offshore royalty issues remain largely unaddressed.
Russian law
The Russian Duma is working on the Mineral Extraction Law and on a new subsoil law, she said. The Russian government’s once-expected shift to holding auctions for oil and gas blocks instead of tenders now appears unlikely.
International oil and gas companies operating in Russia probably will be prevented from taking more than 49% interest in offshore fields, Nanay said. Two-stage tender offers are expected by 2010, involving 32 blocks in the Barents, Okhotsk, and Pechora seas.
“Foreign companies will have to enter into joint ventures with Russian companies having more than 50% interest,” Nanay said.
Jonathan Russin, managing partner of Russin & Vecchi’s Russian Practice Group in the law firm’s Moscow office, noted that contractors should realize that the Sakhalin production-sharing agreements are unique to Sakhalin.
“PSAs are unlikely in future projects,” Russin said of Russia. He provides advice to the PSA operators and their contractors working on Sakhalin projects.
“Russia is an exciting legal environment for me as a lawyer,” Russin said. “It is sometimes a frustrating environment for my clients. It will be an adventure for you in Russia.”
Shtokman field
OAO Gazprom plans to liquefy gas in Russia from Shtokman gas and condensate field, awaiting development in the Barents Sea. Partners for Shtokman have yet to be announced.
Regarding Shtokman, Nanay declined to speculate as to whether it might be on stream during 2011-15.
“The lesson of Sakhalin II is what is going to happen in Shtokman,” Nanay said. “The timing is always going to be later, and the costs are always going to be more” than initial estimates.
Royal Dutch Shell PLC, parent of Sakhalin Energy Investment Co. Ltd.’s lead partner, has said costs for the Sakhalin II Phase 2 might reach $20 billion, twice the original estimate for the entire Sakhalin II project (OGJ, July 25, 2005, p. 26). The project also has encountered delays related to environmental issues (OGJ, Aug. 8, 2005, p. 30).
Shell plans to start year-round oil production, which depends on pipeline construction, in late 2007 and LNG sales in the summer of 2008. Sakhalin II produces about 80,000 b/d during summer, with oil moving to Japan via tanker.
Nanay said the involvement of international oil companies and service companies will be essential for development off Russia, adding that Russian companies lack extensive offshore experience.
“Nothing has moved very quickly for foreign companies in Russia,” Nanay noted.
Oooguruk update
In a project update at an OTC press conference, Pioneer Natural Resources Alaska Inc. reported preparations to install the Nabors Industries Ltd. 19E rig on a 6-acre gravel island it has built in 4½ ft of water as part of the Oooguruk development project in the Beaufort Sea off Alaska.
Oooguruk development, expected to cost $500 million, has become the parent company’s single largest project worldwide, according to Joey Hall, Pioneer Natural Resources Alaska operations manager.
Oooguruk has 50-90 million boe of reserves, from which Pioneer expects peak production of 15,000-20,000 b/d of about 21º gravity oil, Hall said.
The Oooguruk gravel island is about 6 miles off the coast, near the Colville River delta. After modification and installation this summer, the Nabors rig will drill 60-80 wells as deep as 6,000 ft on 7½-ft centers over 3 years. Pioneer is targeting two tight reservoirs from undulating wells with electric submersible pump completions.
Oil and gas will flow to shore in a three-phase, pipe-in-pipe subsea flowline being designed by Intec Engineering, Houston. The design will allow for leak detection and containment. Production will be processed at existing facilities owned by ConocoPhillips.
Glenn Lanan of Intec noted that the only subsea arctic pipeline now in use is at BP PLC’s Northstar development, installed in 2000 in the Beaufort Sea off Alaska on an island BP built in 1982. Northstar production began in 2001.
Lanan said challenges facing offshore arctic projects worldwide include short construction and installation seasons, which are limited by sea ice movement and open water access, and the sensitive thermal environment of the permafrost, which subsides when melted and buckles when frozen.
Subsea installations also are subject to strudel-scour in shallow water and ice-gouging in deeper water.
An extra arctic challenge in the US, Lanan said, is the Jones Act, which precludes use of non-US-flag vessels between US ports. He said there are no US-flag vessels capable of operating in ice-infested environments.
New technology is always on display at OTC. Shown here is an electronic actuation system for subsea valves by FMC Technologies, one of 13 new technologies recognized in the OTC Spotlight on Technology (see following story).
