OGJ Newsletter

Dec. 7, 2009

General InterestQuick Takes

Utility groups urge derivatives-reform caution

Three trade associations representing natural gas and electric utilities urged leaders of two US Senate committees considering over-the-counter derivatives reform to not unwittingly cut utilities off from critical financial markets.

American Gas Association Pres. David N. Parker, Edison Electric Institute Pres. Thomas R. Kuhn, and Electric Power Supply Association Pres. John E. Shelk said in a Nov. 23 letter to leaders of the Senate Agriculture and Banking committees that utilities use OTC derivatives to hedge against price volatility.

Seventy of the associations' member companies also signed the letter to Christopher J. Dodd (D-Conn.), who chairs the Banking Committee, and Richard C. Shelby (R-Ala.), its ranking minority member; and Blanche L. Lincoln (D-Ark.), who chairs the Agriculture Committee, and Saxby Chambliss (R-Ga.), its ranking minority member.

The trade associations said their members do not contribute to overall systemic risk and should not be considered swap dealers or major system participants, which some members of Congress believe need to be more closely regulated. Independent oil and gas producers have made a similar argument to federal lawmakers considering commodities reforms.

AGA, EEI, and EPSA member companies rely on OTC derivatives to hedge prices and keep retail prices affordable, the association executives said in their letter. "When discussing any increased regulation of exchange and OTC derivatives markets, it is important to note that these transactions are not the source of systemic risk in the broader economy," they said. "In fact, the entire commodity market is less than 1% of the global OTC derivative market, and the energy commodity portion is yet a fraction of that 1%." The associations support the clearing of standardized derivatives between large financial dealers, where appropriate, through regulated central counterparties. But they oppose mandates that would require all or most OTC transactions be centrally cleared or executed on exchanges.

The associations also said they support increased authority of the Commodity Futures Trading Commission to prevent market manipulation. But they said this could be accomplished more effectively and at a lower cost through mechanisms such as a central data repository than through mandatory clearing.

Russia, EU sign warning pact on disruptions

Russia's Energy Minister Sergei Shmatko and European Union Energy Commissioner Andris Piebalgs have signed an agreement for an early warning of future disruptions of Russian gas supplies to the EU.

Under the agreement, Russia must notify the EU of any supply interruption whether due to maintenance, accidents, or commercial disputes. It covers gas, oil, and electricity. Third parties would be allowed to take part in the early-warning arrangement.

Shmatko said the agreement is not directed against Ukraine or any other transit countries and does not involve sanctions against them. He also said Russia would be signing a new agreement with Ukraine for bilateral cooperation and also indicated Russia would take part in upgrading Ukraine's pipelines.

Group pushes electric vehicles to cut oil use

A group of corporate chief executives has formed to promote cuts in US oil use through expansion of the electric-powered vehicle fleet.

The Electrification Coalition, Washington, DC, has published a plan to reduce oil consumption in the light-duty vehicle fleet to 2 million b/d in 2040 from 8.6 million b/d currently.

Its goal: that 75% of light-duty vehicle-miles traveled in that year be powered by electricity. "So long as the cars and trucks that power our economy are dependent on a single-fuel source, the majority of which is produced in hostile nations and unstable regions of the world and the price of which is increasingly volatile, our economy is at the mercy of events and actors largely beyond our control," the report's executive summary says.

At the center of the group's strategy is "an ambitious federal initiative to establish electrification ecosystems in a number of American cities" to support deployment of grid-enabled vehicles (GEVs), which are hybrids or fully electric vehicles able to recharge directly from the power grid. The group seeks deployment of 700,000 GEVs in 6-8 cities during 2010-13 and 7 million GEVs in those and 20-25 other cities by 2018.

The 180-page report assumes a large role for the federal government. Among its policy recommendations are new or expanded tax breaks for electric-vehicle purchases, public charging equipment, and investments by utilities and power aggregators in information-technology upgrades.

Industry Scoreboard

Exploration & Development— Quick Takes

Petrobras to drill presalt strat test near Iara

Brazil's National Petroleum Agency (ANP) has authorized Petroleo Brasileiro SA (Petrobras) to drill a 21,000-ft stratigraphic test in what Petrobras describes as the "northern area of the Santos basin's presalt, contiguous to the Iara oil discovery."

The SS-53 semisubmersible is to spud the well in mid-December outside the boundaries of blocks already bid, and Petrobras is to deliver well data to ANP after operations are concluded (see map, OGJ, June 16, 2008, p. 38).

"The region is eligible to compose the areas that will be the object of the Transfer of Rights with Compensation, once the Bill No. 5941/09 has been approved," the Petrobras announcement said. "The intention is to get stratigraphic information to create a better geologic knowledge of the area and the basis to the future development of the area."

A Petrobras-operated group drilled the 2008 Iara oil discovery in 7,314 ft of water 143 miles south of Rio de Janeiro and detected 30° gravity oil on a wire line test at 18,368 ft. The company has attributed 3-4 billion bbl recoverable to the Iara find, in which BG Group and Portugal's Galp Energia were partners.

Iara lies just northeast of Tupi, largest of the Santos presalt discoveries, to which Petrobras attributes 5-8 billion boe recoverable.

Hess gauges gas-condensate find off Libya

Hess Corp.'s Libyan subsidiary has drillstem-tested gas and condensate at a discovery well it drilled in 2008 in the Mediterranean east of Tripoli, Libya.

The A1-54/01 discovery well on the Arous Al-Bahar prospect encountered hydrocarbons in several intervals with a combined gross section of 500 ft in 2008 (OGJ Online, Dec. 17, 2008). Hess reentered the well and perforated a 300-ft carbonate interval.

The well, in the nonproducing offshore extension of the Sirte basin, flowed at a rate of 27 MMscfd of good quality gas and 533 b/d of condensate on a 52⁄64-in. choke on a drillstem test.

After completing tests, the Stena Forth sixth-generation dynamically positioned drillship is slated to return to finish drilling the A2-54/01 appraisal well 7 miles northwest of the discovery well.

Well A1-54/01 is in 2,807 ft of water 35 miles off Libya. Hess Libya Exploration Ltd. holds 100% working interest in Area 54, operated under an exploration and production-sharing agreement with Libya's National Oil Corp.

Origin Energy confirms extension off Tasmania

Origin Energy Ltd., Sydney, has confirmed an extension to the Trefoil gas discovery in the Bass basin permit T/18P off northern Tasmania with success at Trefoil-2 appraisal.

The company says several gas-bearing sands were intersected within the Eastern View Coal Measures and these will be analyzed more fully over the next few weeks using cores, wireline logs, reservoir pressure readings, and well samples.

The well has confirmed the continuity of the reservoir sands between the Trefoil-1 discovery and the Trefoil-2 well. The size of the resource will be determined when all the new data has been evaluated.

The Kan Tan IV semisubmersible rig is now moving to drill the Rockhopper-1 wildcat about 12 km to the north.

Both Trefoil and Rockhopper are close to the company's producing Yolla gas-condensate field.

Origin is operator with 39%. AWE Ltd., Sydney, has 47.5% and Innamincka Petroleum Ltd., Brisbane, has 5%.

Repsol YPF may join search effort off Guinea

Repsol YPF SA signed agreements with Hyperdynamics Corp., Sugar Land, Tex., under which the Spanish company may become operator with 37% interest in an exploration concession held by Hyperdynamics off Guinea, West Africa.

A letter of intent (LOI) gives Repsol YPF exclusive negotiating rights to take the 37% stake for $31.5 million. Becoming operator is subject to government and third-party approvals and consents. The two companies will work to sign definitive documents by Jan. 31, 2010, or the letter of intent terminates unless extended by both parties.

Before signing definitive documents, Repsol YPF has the right to participate with Hyperdynamics in evaluating geological and geophysical data, subject to licensing obligations with various seismic contractors. It also has the right to participate in the preparation for negotiations with Guinea's Ministry of Mines, Energy and Hydraulics regarding the terms of the clarification of the production sharing contract.

The letter of intent with Repsol YPF satisfies the clause in Hyperdynamics' existing LOI with Dana Petroleum PLC that envisioned Dana's option right to take up to an additional 27% of the concession if Hyperdynamics did not secure the participation of a major oil company by Nov. 30.

Hyperdynamics noted that Dana has made discoveries off Morocco and Mauritania. Repsol YPF is a partner with Anadarko Petroleum Corp. in the Upper Cretaceous Venus discovery off Sierra Leone.

Drilling & Production— Quick Takes

Three Transocean deepwater units start up

Transocean Ltd. has started up three new ultradeepwater drilling units in the Gulf of Mexico and off Angola.

Transocean Ltd. has started up three new ultradeepwater drilling units in the Gulf of Mexico and off Angola. Photo from Transocean.

Most recently, Transocean said the Development Driller III semisubmersible had begun operations in the Gulf of Mexico under a 7-year contract with BP PLC (OGJ, Mar. 20, 2006, Newsletter).

The dual-activity rig can drill to 35,000 ft in 7,500 ft of water. The capacities can be upgraded to 37,500 ft in 10,000 ft of water.

Also in the Gulf of Mexico, the Transocean Discoverer Americas drillship began work for Statoil Gulf of Mexico under a 4-year contract (OGJ Online, Aug. 14, 2009).

The dual-activity drillship can drill to 40,000 ft in 12,000 ft of water.

Off Angola, the Transocean Petrobras 10000 drillship began operating under a 10-year contract with a unit of Petroleo Brasileiro SA (Petrobras). Transocean acquired the ship under a 20-year capital lease contract with P&M Drilling International BV, a joint venture of Petrobras and Mitsui.

The dual-activity ship has a water-depth capacity exceeding 10,000 ft (OGJ, Nov. 23, 2009, p. 41).

New Brunswick gets first Frederick Brook flow

Corridor Resources Inc., Halifax, reported the first significant flow of natural gas from the Mississippian Frederick Brook shale formation in New Brunswick and said the results are encouraging for future horizontal drilling and multistage fracturing.

Corridor Resources ran propane fracs in two intervals in the upper part of the Frederick Brook at the vertical Green Road G-41 well 4 km north of Elgin, NB.

The first frac resulted in placement of 46 tonnes of proppant in a black shale interval at 2,000-2,050 m. The second frac resulted in placement of 68 tonnes of proppant in a silty interval containing thin interbeds of sandstone at 1,850-1,900 m.

Commingled clean-up flow at the end of a 57-hr flow period was at a restricted rate of 4.1 MMscfd consisting of 85% natural gas and 15% propane frac fluid at a flowing wellhead pressure of 2,083 psi. A temperature log confirmed that both intervals were contributing to the flow.

Beach on target for oil production in Egypt

Beach Petroleum NL, Adelaide, is on target to produce first oil from Egypt following a successful test of a development well in its North Shadwan block in the Gulf of Suez off the Sinai Peninsula.

The company said its NS377-3 well flowed as much as 1,400 b/d of oil, which indicates a likely production rate of 1,500-2,000 b/d when the field is slated to be brought on stream in June 2010.

NS377-3 is the first development well of four planned for the NS377 and NS385 fields in the permit in which Beach has a 20% interest. Beach is operator, while others in the joint venture are Tri-Ocean Energy and Egyptian General Petroleum Co.

Beach aims to grow its reserves position to at least 20 million boe in Egypt during the next 5 years, predominantly focusing on the shallow waters of the Gulf of Suez. The company acquired its North Shadwan interest in 2008.

The concession contains three existing undeveloped oil discoveries and several prospective exploration targets. The fields were discovered by Saudi Amoco in the 1980s and lie in 20-40 m of water 2-4 km off Sinai.

The shallow water enables development via deviated drilling from onshore where all the production facilities are located. Oil will be delivered to the processing plant via an 11-km pipeline.

The next well in NS377 field will be exploration well Teen-1 followed by another development well, NS377-5. A different rig will be used to drill NS285-2 in NS385.

Combined ultimate recovery from these fields is expected to be 10-15 million bbl of oil. Full development is expected to cost as much as $60 million.

Processing — Quick Takes

Valero to close Delaware City refinery

Valero Energy Corp., San Antonio, will permanently close its 210,000-b/d Delaware City, Del., refinery, citing financial losses caused by "very poor economic conditions, significant capital spending requirements, and high operating costs."

The announcement continued, "A safe and orderly shutdown of the refinery will commence immediately."

The shutdown will affect about 550 refinery employees. Valero notified employees Nov. 20 and said it will begin negotiating immediately with refinery unions regarding the effects of the plant closure and the employees' severance packages.

In the fourth quarter, the company will report a pretax charge of $1.7-1.8 billion, related primarily to "asset impairment," employee severance, and other shutdown costs.

Valero estimates the shutdown will reduce pretax operating expenses by about $450 million in 2010, including $125 million of noncash costs, and will reduce capital spending and turnaround costs by about $200 million through 2010.

In addition, the company expects to receive aftertax cash flows in 2010 of $600-700 million from inventory sales, "assuming current prices and other cash benefits from discontinued operations."

Valero Chairman and Chief Executive Officer Bill Klesse said the decision to close the refinery was "very difficult," adding, "…We have spent the last year diligently trying to avoid this situation."

Klesse noted that earlier this fall, Valero shut down the refinery's gasifier and coking operations to improve reliability and financial performance (OGJ, Sept. 14, 2009, p. 10). But "the refinery's profitability did not improve enough," he said.

In addition, Valero sought a buyer for the refinery, but "feasible opportunities have not materialized," adding, "At this point, we have exhausted all viable options."

The announcement said, "Valero remains committed to its marketing businesses in the Northeast and will continue to reliably supply its customers, partially through higher throughput rates at the company's other refineries."

Silver Eagle shutters Utah refinery

Silver Eagle Refining Inc. has shut down its 12,500 b/cd Woods Cross refinery in Utah on the suggestion of the US Chemical Safety Board and state officials.

CSB investigators found widespread safety problems at the refinery following a Nov. 4 in the plant's diesel unit. No one was injured and the fire was quickly contained.

CSB Chairman John S. Bresland said he asked on Nov. 13 that the refinery be shut down, and Silver Eagle executives "responded rapidly and positively" to the suggestion.

"The CSB team has developed a number of serious concerns about the integrity of the piping and equipment at various locations in the plant," Bresland said.

Bresland said he asked for the refinery to be shut down temporarily to correct potentially serious safety problems.

"This decision will obviously cost Silver Eagle some revenue in the short run, but I believe it is the right action to protect the long term interests of the company, its workforce, and the community which gives it license to operate," Bresland said.

The Nov. 4 accident was the second accident at the plant to be investigated this year. CSB already investigated a Jan. 12 fire in an atmospheric storage tank that seriously burned two employees and two contract workers.

ExxonMobil starts Rotterdam aromatics unit

ExxonMobil Chemical has started up an expansion of its Rotterdam aromatics plant (OGJ, Oct. 1, 2007, Newsletter).

The project boosted paraxylene capacity by 25% to 700,000 tonnes/year and benezene capacity by 20% to 830,000 tonnes/year.

The plant, owned and operated by ExxonMobil Chemical Holland BV, is now ExxonMobil's largest paraxylene production facility. The new unit uses proprietary ExxonMobil technology called PxMax.

Transportation — Quick Takes

Haynesville operator to expand gathering

Regency Energy Partners LP, Dallas, will build Phase 2 in its expansion of the Logansport gathering system in North Louisiana, the company announced last week. Construction will begin early next month and target second-quarter 2010 for completion.

The $40 million expansion will move gas gathered from production in DeSoto Parish, La., to Regency's gathering system. The project also includes construction of an associated amine treating plant.

Regency will install 4.5 miles of 10-in. OD gathering lines, route 7.5 miles of 12-in. OD pipe through more than 17 sections of dedicated acreage in DeSoto Parish, and will add 3.2 miles of 24-in. OD pipe to connect into Regency's 24-in. Logansport Phase 1 expansion. The company will also install a gas-treating plant with inlet capacity of up to 300 MMcfd. In addition to the Phase 2 project, Regency will increase to 24 in. OD the previously announced 20-in. OD, 17-mile Logansport expansion. That project will interconnect with CenterPoint Energy Gas Transmission's Line CP.

Regency's Logansport system will then accommodate 450-485 MMcfd, said the company announcement, along the corridor that crosses the Gulf South East Texas lateral, as well as the proposed Energy Transfer Tiger Pipeline (OGJ, Nov. 2, 2009, p. 11).

Regency is also in the process of increasing the Logansport system's incremental interconnect delivery capacities to Tennessee Gas Pipeline and to Louisiana Intrastate Gas by about 100 MMcfd and 30 MMcfd, respectively. In September, Regency along with Alinda Capital Partners LLC and GE Energy Financial Services announced plans to build a $47 million pipeline extension of the Haynesville expansion North Louisiana to increase capacity on the Regency Intrastate Gas System.

The extension—called the Red River lateral—is adding about 100,000 MMbtu/day of capacity to the Haynesville expansion, bringing total project capacity to about 1.2 bcfd (OGJ Online, Oct. 28, 2009).

FERC approves Northwest's Piceance expansion

The US Federal Energy Regulatory Commission has issued a certificate to Northwest Pipeline GP, a majority owned subsidiary of Williams Cos. Inc., approving construction and operation of 15.5 miles of 30-in. OD mainline loop to bring additional natural gas from Piceance basin to the hub in Opal, Wyo.

The Sundance Trail Expansion will provide 150 MMcfd firm transportation capacity from the Greasewood and Meeker-White River hubs in Rio Blanco County, Colo., to the Opal hub area in Lincoln County, Wyo. At the Opal hub, producers have access to six interstate pipelines, including Northwest, Williams said.

The project will also replace and enhance Northwest's compression facilities at the Vernal compressor station in Uintah County, Utah. Northwest's main line is connected to the Piceance at the Greasewood hub through its Piceance lateral and the Meeker-White River hubs through Northwest's new Colorado Hub Connection pipeline and related facilities.

Williams began operations Aug. 7 at its 450-MMcfd Willow Creek gas processing plant in the Piceance basin. The Willow Creek plant is currently recovering about 20,000 b/d of natural gas liquids (OGJ, Nov. 16, 2009, p. 21).

Williams Pipeline Partners LP owns a 35% interest in Northwest.

Petrobras opens Urucu-Coari-Manaus line

Petroleo Brasileiro SA (Petrobras) began commercial operations on its Urucu-Coari-Manaus natural gas pipeline Nov. 27. The 661-km pipeline is part of Brazil's Growth Acceleration Program and includes seven branches totaling an additional 140 km, bringing gas from Brazil's Amazonian Solimoes basin to market. Branch lines extend from the trunk to Coari, Codajas, Anori, Anama, Caapiranga, Manacapuru, and Iranduba.

The Transpetro-operated pipeline's initial capacity measures 4.1 million cu m/day. Installation of two compressions stations between Urucu and Coari will increase the line's capacity to the contracted 5.5 million cu m/day by September 2010 when conversion of the associated power plants from fuel oil has occurred. Of the 5.5 million cu m/day, Petrobas says 5 million will supply the thermal market with the remaining 0.5 will go to industrial, commercial, residential, and vehicular customers.

The 196-km section between Coari and Anama encompasses the pipeline's longest course of flood areas. Some 6,000 floats and barrels helped support the line, with helicopters transporting individual section weighing 4.5 tons each, and 19 directional hiles drilled under river beds

The Urucu-Coari section uses 279 km of newbuild 10-in. OD pipeline to transport LPG, with the existing 8-in LPG line converted to natural gas transport. The 196-km Coari-Anama section includes a 20-in OD newbuild gas pipeline. The final 186-km stretch from Anama to Manaus includes the largest number of communities along the line, 135.

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