OGJ Newsletter

Jan. 7, 2008
General Interest - Quick Takes

MMS proposes OCS royalty relief amendments

The US Minerals Management Service proposed changes to its Outer Continental Shelf deepwater royalty relief regulations on Dec. 21 to conform to a 2004 federal court decision.

A US Court of Appeals for the Fifth Circuit in a case involving Santa Fe Snyder Corp. found provisions of the US Department of the Interior agency’s interpreting Section 304 of the 1995 Deepwater Royalty Relief Act were contrary to the statute’s requirements, MMS said.

MMS said that the court found that a lease issued under that section could not be excluded from royalty relief if it was part of a field that already was in production before the deepwater royalty relief legislation became law.

The court also found that royalty suspension volumes prescribed in Section 304 should apply to each lease and not jointly to all leases in a particular field, MMS said.

It issued an information bulletin on Aug. 8, 2005, to alert affected lessees that MMS would respect the court decision and would revise its regulations accordingly.

MMS announced a proposal on Dec. 21, and the agency will accept comments on the proposal for 60 days following publication by the federal government.

Cosco Busan faces $61 million in bay cleanup

The cost of cleaning up the San Francisco Bay oil spill is expected to reach $61 million and may rise even higher, according to Admiral Thad Allen, Commander of the US Coast Guard.

Allen told Congress that figure is significant because it’s what the owner of the Cosco Busan is required to pay under federal law for spilling 58,000 gal of fuel after striking the Bay Bridge Nov. 7. However he said the costs likely will rise beyond that amount to cover costs of completing cleanup and restoring coastal areas hit by the spillage.

Those liability limits can be increased if the US Justice Department determines a spill was caused by gross negligence. Allen said the USCG is discussing an increase of those limits with the companies involved in the spill.

The Coast Guard said $54.7 million had been spent on cleanup as of Dec. 14, an average of about $770,000/day.

To recover their costs, federal, state, and local authorities have filed civil suits against the ship’s owner, Regal Stone Ltd.; its insurer, Shipowners’ Insurance & Guaranty; and the bar pilot who was at the helm, Capt. John Cota.

A spokesman for the Hong Kong-based Regal Stone said the company is already paying for private cleanup crews who have been skimming oil and cleaning beaches.

He said the firm will meet its legal responsibility, but declined to say if it would pay any bill exceeding the $61.8 million.

The Cosco Busan was allowed to leave San Francisco to sail to South Korea for repairs after its owners agreed to post a $79 million bond as a guarantee the firm would pay its share of the cleanup costs.

PTT privatization OK’d; pipeline assets ceded

A top Thai court has ruled against a Thai consumer group’s petition to nullify the 2001 partial privatization of the former Petroleum Authority of Thailand (PTT), now PTT PLC.

However, the Supreme Administrative Court also ordered PTT to cede back to the state its 3,000-km of natural gas pipelines and the land appropriated to build it, which are valued at about 100 billion baht ($2.94 billion).

The verdict saved the Thai state-controlled energy giant from delisting from the Thai stock market, which prevented a blow to the country’s economy.

However, the court on Dec. 14 ruled that, while the privatization of PTT was lawful, PTT had no right to transfer its (state-owned) assets to a privatized entity and would need to return them to the state.

Had the court ruled against PTT, which accounts for 15% of total capitalization on the Stock Exchange of Thailand, it would have been forced to remove the listing of its stock shares from the Thai capital market.

PTT has a market capitalization of about 800 billion baht. The court recognized that forced removal from the Thai stock market would jeopardize the country’s financial and social state, and even its security.

Analysts said the transfer of PTT’s pipeline assets could have a negative impact on the firm and the broader stock market, depending on how it is handled.

But PTT MDNM Pres. Prasert Bunsumpun downplayed the impact, saying the pipeline assets represent just over 10% of PTT’s combined group assets and generated around 20 billion baht/year in revenue, a small portion of the estimated 1.4 trillion baht in revenues projected by the energy conglomerate this year.

Furthermore, Prasert said, PTT is expected to be compensated for the transfer and will remain the pipelines’ operator.

PTT’s 2001 initial public offering was marred by complaints about the allocation of shares to those with strong political connections to the administration of Thaksin Shinawatra, the ousted former prime minister.

Thai consumer groups filed a legal challenge in August 2006 after successfully derailing the partial privatization of the Electricity Generating Authority of Thailand, the state power utility, in March 2006 on legal grounds similar to those filed against PTT.

Indonesia to cut taxes to boost production

Indonesian government, in an effort to boost the country’s oil output, said it will abolish import duty, value added tax, and income tax on imports of capital goods used for oil, natural gas, and geothermal exploration and development.

Vice-President Jusuf Kalla said the incentives are expected to boost the country’s oil production to 1.4 million b/d in 2009. He said Indonesia needs to regain the productivity it had in 1985 when production averaged 1.7 million b/d.

“We had a very large surplus at the time. We could have become a large oil producer. But why were we not able? Therefore, we will increase the target further,” Kalla said.

Indonesia’s upstream oil and gas regulator BP Migas said the country’s daily oil production would continue to fall unless new fields were developed. Currently, oil production stands at 1.1 million b/d, while demand is at 1.3 million b/d.

BP Migas Deputy Head Trijana Kartoatmodjo said the country’s oil production is falling by 1.2% a year, while domestic oil demand is rising by 1.5%.

He said oil production is expected to fall to 982,000 b/d in 2008 and to 971,000 b/d in 2009 from 995,000 b/d in 2007, while domestic consumption is projected at 1.365 million b/d in 2007, 1.443 million b/d in 2008, and 1.505 million b/d in 2009. The Economic Research Center of the Indonesian Science Institute (LIPI) expressed pessimism about the government’s oil output target of 1.034 million b/d for 2008.

The target on which the government calculated the 2008 state budget is overly optimistic, said Latif Adam, coordinator of the center’s research team. LIPI’s estimate puts output at 950,000 b/d.

Adam described the government’s crude oil production target, and the oil price assumption of $60/bbl used for the 2008 state budget, as “unrealistic.”

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Exploration & Development - Quick Takes

Iceland to license Atlantic area in 2009

Iceland has approved its industry minister’s proposal to offer in January 2009 oil and gas exploration and production licenses in the Dreki area northeast of Iceland on the Jan Mayen Ridge.

The area lies between Iceland and Norway’s Jan Mayen Island. Norway’s InSeis shot seismic in a 42,000 sq-km-area in Iceland waters south of Jan Mayen Island in 2001. Industry has expressed interest in the area, the ministry said Dec. 18.

The area lies 400 miles northwest of Norwegian continental shelf oil fields and north of the Faroe Islands, where several fields have been discovered (see map, OGJ, Aug. 20, 2007, p. 38).

The government said exploratory drilling is necessary to verify whether oil and gas exist in the Dreki area and that its approval is based on the findings of a detailed strategic environmental assessment.

Saying considerable discoveries could have a “vigorous impact” on Iceland’s economy, it promised to place stringent requirements on work safety and environmental protection.

Discovery of producible quantities of oil and gas at Dreki would be a major addition to the hydropower and geothermal energy already produced in Iceland, the government said.

Kazakhstan nonstate gas field flow starts

Tethys Petroleum Ltd., Guernsey, Channel Islands, UK, started gas production on Dec. 19 from Kyzyloi gas field in Kazakhstan northwest of the Aral Sea.

Average contract quantity for the first two months is 21.2 MMcfd from six wells in what Tethys called the country’s first nonstate, dedicated dry gas development. Gas flows via a 35-mile pipeline to the Bukhara-Urals export trunk line. Gas buyer is Kazakhstani petrochemical firm Kemikal LLP.

Meanwhile, Tethys has discovered more gas in the Akkulka exploration area that surrounds Kyzyloi field, having flow-tested more than 40 MMcfd from seven shallow exploration wells. Incorporating these wells into the greater Kyzyloi development could boost production to more than 44 MMcfd by late 2008.

The AKK13 exploration well is drilling, AKK14 is to evaluate two shallow stratigraphic gas intervals on a separate prospect, and deep Triassic and Jurassic targets have been identified in the Akkulka and Kul-Bas areas that might be reached by reentering old wells.

EnCore to appraise Cobra gas find in early 2008

Operator EnCore Oil PLC will drill an appraisal well using the Ensco 80 rig on the Cobra discovery in the UK North Sea in first-quarter 2008.

Cobra, on Block 48/2c, tested gas at a flow rate of 2.7 MMcfd in 1984 when Amoco initially drilled it.

The company will team with Challenger Minerals (North Sea) Ltd. in a farmin agreement under which Challenger will receive a 5% share from EnCore in southern North Sea Blocks 48/1b and 48/2c where Cobra is located.

Under terms of the farmout agreement, together with the previously announced farmout agreement with Tata Petrodyne and Bharat Petroleum, EnCore will pay for 3% of the appraisal well cost (subject to an overall well cost cap) and will retain a 20% interest in the license, EnCore said. EnCore also will remain the license operator.

Alan Booth, chief executive officer of EnCore, said Cobra would represent its first operated well. “Cobra lies close to existing infrastructure and offers a relatively low risk appraisal project some 300 ft updip from the existing discovery well, with significant upside potential.”

Sonatrach, QP to farm into Mauritania blocks

Sonatrach and Qatar Petroleum International are about to farm into Total SA’s two blocks in Mauritania, according to Total Chief Executive Christophe de Margerie.

Total acquired the onshore blocks in January 2005 under two production-sharing contracts. The blocks, which lie at Taoudenni in southeastern Mauritania, cover a total 58,000 sq km. At the time, three exploration phases were planned, each for 3 years.

Total acquired seismic data last year and is planning to drill a well in the area in 2009. Sonatrach and QP will take part in the exploration as they are on the point of acquiring a 20% stake each in the PSC. Negotiations are currently being finalized, de Margerie said.

Huntington Forties delineation completed

Oilexco Inc., Calgary, completed appraisal of the Paleocene Forties reservoir at its mid-2007 Huntington two-zone oil and gas discovery on Block 22/14b in the UK North Sea.

Having drilled nine penetrations of the Forties reservoir, the company on Dec. 20 spudded a single appraisal wellbore to target the oil/water contact in the Jurassic Fulmar sands. The Fulmar appraisal wellbore is on the flank of the structure 250-350 ft below the elevation tested by the discovery well, which did not observe an oil/water contact.

The last Forties appraisal well, near the structure’s crest, was drillstem tested at 9,982-10,002 ft and 9,870-9,945 ft measured depth. The combined rate was 7,940 b/d, compared with the 6,143 b/d rate from Forties in the vertical discovery well (OGJ Online, June 6, 2007).

The Huntington 22/14b-5 discovery well went to TD 13,325 ft. Fulmar sand at 12,750 ft flowed at a maximum 4,624 b/d of 39° gravity oil and 1.6 MMcfd of gas, restricted by equipment capacity. Forties sand flowed at a top rate of 5,577 b/d of 41° gravity oil and an estimated 3.4 MMcfd of gas, severely restricted by test equipment capacity.

The appraisal drilling is designed to define reservoir properties in preparation to apply for the 2009 field development.

Oilexco has 40% interest in Huntington, E.On Ruhrgas UK Exploration & Production Ltd. has 25%, and Altinex Oil (UK) Ltd. has 20%. Carrizo Oil & Gas Inc., Houston, which generated the prospect, has a 15% cost-bearing share and 17% beneficial interest in all depths.

Oilexco, which set a $707 million budget for 2008, is participating in the drilling of the Mallory prospect on Block 22/14a, northeast of Huntington. Mallory is either on an analogous structure on trend with, or an extension to, the Huntington Fulmar oil discovery.

Drilling & Production - Quick Takes

BP lets Skarv FPSO installation to Aker Kvaerner

BP Norway has let a 300 million kroner contract to Aker Kvaerner to tow and install a floating production, storage, and offloading system (FPSO) at Skarv field in the Norwegian Sea.

Aker Marine Contractors, a subsidiary, will use the offshore construction vessel BOA SUB C for 2010 preinstallation of the 15-leg mooring system in water as deep as 3,000 m. “The vessel is equipped with diesel-electric propulsion, dynamic positioning class, 3,400 tonnes active heave compensated crane, and 600 tonnes anchor handling winch,” Aker Kvaerner said. Planning and engineering will start in January, and transportation and installation of the complete FPSO will be executed in 2011. BP wants to develop Skarv and nearby Idun gas field simultaneously, using the FPSO, which will lie in the Norwegian Sea 200 km west of Sandnessjoen, Norway. It will be installed between Norne field, 35 km to the north, and Heidrun, 45 km to the south (OGJ Online, Sept. 21, 2007).

Joint venture to supply nitrogen to Mexico

Air Products said a joint venture company with its Grupo Infra partner will supply 90 MMscfd of nitrogen to Petroleos Mexicanos Exploracion y Produccion (PEP).

Nitrogen from the gas turbine and steam-driven facility is supplied for injection and enhanced oil and gas recovery from PEP’s Jujo-Tecominoacan oil fields near Villahermosa in Tabasco, Mexico. The nitrogen plant project, announced in 2006, began its supply of nitrogen during November as scheduled.

In 2006, state-owned Petroleos Mexicanos said it planned to invest 13 billion pesos during 2007-21 in Jujo-Tecominoacan oil field, its second-largest hydrocarbon reservoir in southern Mexico. The investment is to include completing 11 development wells and repairing 34 wells as well as the construction of 6 km of oil-gas pipelines, 25 km of oil pipelines, and 15 km of gas pipelines.

The announcement concerning nitrogen injection coincides with a report issued by Mexico’s ministry of energy detailing the country’s oil outlook for 2006-16, as well as key recommendations for the development of Pemex (OGJ Online, Dec. 14, 2007).

Broom field production to start in first quarter

Operator Lundin Petroleum AB expects to start oil production in first-quarter 2008 from its development well 2/5-25 in Broom field on Block 2/5 on the UK continental shelf.

Lundin is using the GSF Arctic II semisubmersible rig to drill the well under the field development’s Phase 3. Drilling is under way on the sidetrack to one of three production wells on the West Heather structure. It will be tied-back to the existing Heather platform. “The well will receive pressure support from the existing injection wells,” Lundin said.

Broom field has 30.9 million boe of proved plus probable gross reserves remaining, with gross total recoverables of 54.7 million boe. Formerly called West Heather and discovered in 1977, Broom has oil in Middle and Upper Jurassic reservoirs (OGJ Online, Aug. 7, 2005). Lundin Petroleum holds a 55% interest, and it is working with Challenger Minerals (North Sea) Ltd., Palace Exploration Co. (E&P Ltd.), and Dyas UK Ltd.

Transportation - Quick Takes

Russia, others sign Caspian gas pipeline deal

Russia, Kazakhstan, and Turkmenistan signed an agreement to build a natural gas pipeline along the Caspian Sea coast. The line would have an initial capacity of 20 billion cu m/year.

Russian President Vladimir Putin said the pipeline will ensure long-term gas deliveries to Russia’s foreign partners, adding that it would be a “major contribution by our countries to the energy security of Eurasia and the world at large.”

Russian Minister of Industry and Energy Viktor Khristenko said the new pipeline, which will carry gas from Turkmenistan for delivery to Russia’s gas transportation system, will be built before yearend 2010.

The pipeline deal will likely disappoint the US and the European Union, which have been lobbying for a rival pipeline to be built under the Caspian Sea, bypassing Russia.

In September, Turkmenistan President Gurbanguli Berdymukhamedov said his country was ready to bypass Russia and begin selling some of its gas directly to Europe (OGJ Online, Sept. 21, 2007).

In December, however, Russia and Turkmenistan agreed to accelerate development of the proposed Caspian Gas Pipeline project following talks between OAO Gazprom Chief Executive Officer Alexei Miller, President Berdymukhamedov, and Deputy Prime Minister Tachberdy Tagyyev.

FERC issues EIS for High Plains line expansion

Colorado Interstate Gas Co.’s proposed High Plains natural gas pipeline expansion project would have minimal environmental impact under recommended mitigation measures, the US Federal Energy Regulatory Commission reported.

CIG, a subsidiary of El Paso Corp., Houston, is developing the $196 million project as a joint venture with Xcel Energy to supply an additional 899 MMcfd of gas to Colorado’s Front Range system. It will link Public Service Co. of Colorado’s intrastate system with the Rockies Express, Wyoming Interstate, and Young Gas Storage Co. interstate systems.

The project would expand CIG’s existing gas pipeline system by nearly 164 miles in four separate segments of 24-in. and 30-in. pipeline and 10 measurement facilities, FERC’s staff said in a final environmental impact statement issued on Dec. 28.

CIG plans to use existing rights-of-way for nearly 84 miles, or about 51%, of the proposed route. The company plans to use project-specific erosion control, revegetation, and maintenance programs; wetland and water body construction and mitigation procedures, and hydrostatic testing, reclamation, and invasive species control plans.

FERC said it will consider the staff’s recommendation and final EIS before issuing a final decision on the project.

Petrobras funded for Amazonas pipelines

The Brazilian National Social and Economic Development Bank (BNDES) has awarded state-owned Petroleo Brasileiro SA (Petrobras) 2.49 billion reais for the construction of pipelines in Amazonas state.

The funds will be designated for use by Transportadora Urucu-Manaus SA, which will construct a 383-km, 20-in. natural gas pipeline connecting Coari and Manaus, where it will have two delivery points.

Additionally, TUM SA also will build distribution branches to supply seven municipalities located along the pipeline route and a 279-km, 10-in. LPG pipeline connecting the Arara Pole in Urucu to the Solimoes Terminal in Coari.

The gas will be used initially for thermoelectric power generation in Manaus, replacing fuel oil generators now in use. Gas will later be used to supply the region’s industrial, vehicle, commercial, and residential sectors.

The project also includes the readaptation of an existing 18-in. pipeline between Urucu and Coari, which will be interconnected to the 20-in. line, allowing for gas production outflow.

South Korea offshore oil spill investigated

South Korean authorities said the Hong Kong-based oil tanker, Hebei Spirit, spilled 12,547 kl of crude oil into the sea west of the Korean Peninsula, an increase of 19.5%, or 2,047 kl, over the earlier estimate of 10,500 kl.

The Marine Accidents Inquiry Agency said the tanker was carrying 302,641 kl of crude oil and began losing oil after it was hit Dec. 7 by a barge in the sea about 15 km off western T’aean, South Chungcheong province, South Korea.

An MAIA official said it was difficult to correctly calculate the amount of crude left in the tanker because the ship was tilted at 6-7° after the accident.

The tanker sailed to Daesan Port in Seosan.

The Hebei Spirit spill is considered South Korea’s worst. Officials have described it as being about one third of the size of the Exxon Valdez disaster, which cost a reported $9.5 billion to clean up and settle.

The Hebei Spirit tanker is registered to the Hebei Spirit Shipping Co., of Hong Kong. The firm’s manager is Hosco, (Hebei Ocean Shipping Co.), of Haigang Qu, Qinhuangdao Hebei.

Shell unit enters prepaid utility gas market

Public Energy Authority of Kentucky Inc. and Societe Generale Energie (USA) Corp. signed a 20-year, $456 million prepaid natural gas contract.

Coral Energy Resources LP, a unit of Shell Energy North America (US) LP, will supply SGE with 88.6 bcf of gas required for the transaction, which marks the Shell subsidiary’s entry into the municipal natural gas prepayment market.

SGE will deliver the gas to PEAK, a municipal joint action agency organized by the cities of Carrollton and Henderson in northern Kentucky.

PEAK will use the supply to serve base load gas requirements of its municipal members and participants in Kentucky, South Carolina, New Mexico, and Alabama.

PEAK, which financed the prepayment with the proceeds of revenue bonds, concluded two earlier prepayment deals in 1998 and 2006.

The deals secure long-term, reliable gas supplies in volatile energy markets.