OGJ Newsletter

May 12, 2008
General Interest — Quick Takes

OTC: Roundtable notes NOCs, IOCs lack trust

Business with national oil companies (NOCs) is certain to grow over the next 5 years with 64% of delegates voting that this would happen at the Offshore Technology Conference’s Energy Roundtable May 7 in Houston. But this new dynamic is threatened by a lack of trust between international oil companies (IOCs) and NOCs, which could hinder oil and gas investment according to 64% of the attendees at the panel.

Global energy demand is expected to rise by 1.2%/year until 2030 with NOCs and IOCs committed to meeting those needs: hydrocarbons will have an important role in doing so.

Oil executives on the panel agreed that there was a new energy equation with constrained supplies, steep growth in the world’s energy demand, geopolitical tensions, and new challenging energy resources such as oil sands.

Patrick Poyanne, senior vice-president of strategy, business development, and research and development at Total SA, said IOCs and NOCs should cooperate because IOCs have operational excellence and offer a diversified experience in handling large and complex developments. However, Poyanne also acknowledged that IOCs need to address the socioeconomic needs of producing countries and boost the intellectual capacity of its people.

“There is a lack of trust now between NOCs and IOCs. NOCs feel that IOCs benefit from excessive profits. We accept that contracts can be revised in today’s market, but it needs to be on a win-win basis,” he said.

Increased competition between NOCs, IOCs, and independent exploration and production companies for acreage necessitates a focused and disciplined strategy, said Jean Claude Gandur, president and chief executive of Addax Petroleum. “Resource pressures include personnel, service providers, and capital.”

OTC: Oil-producing nations balance supply, demand

Tensions are developing in some oil-producing nations with citizenship demanding an improved standard of living and economic growth rather than a government with its focus on export markets, Energy Roundtable panelists said May 7 at OTC in Houston.

Emmanuel Egbogah, special advisor to Nigeria’s president on petroleum affairs, said that security of demand and supply are complimentary and it was necessary to strike the right balance between local demand and high values in the export markets. Nigeria is changing its stance by aggressively monetizing its gas resources under its Gas Master Plan for the domestic market.

“The domestic market’s demand is expected to be at 10-11 bcfd by 2010 but supply will be at 4 bcfd and export demand at 25 bcfd. This unprecedented growth is due to the power and LNG export capacity,” he said.

Robert Ryan, vice-president of global upstream exploration at Chevron Corp., was optimistic that oil companies can meet growing global demand provided it can find new ways to enhance recovery from mature fields, deliver technological breakthroughs in the deep water and ultradeep water, and turn to unconventional resources.

“We have always had limited access, remote locations, technological challenges, and escalating costs. These are all relative because one of these factors has always been a problem at some point, but we have found ways to overcome them.”

OTC: Industry looks to solve personnel shortage

Thierry Pilenko, chairman and chief executive of Technip SA, warned that oil and gas megaprojects will take longer to implement because of a shortage of experienced management. Speaking May 7 at OTC’s Energy Roundtable, Pilenko said there were 190 major projects worldwide in 2008 that have an average size of 1.6 billion boe and require investments of $8.7 billion, according to a report by Goldman Sachs. Most of the reserves will come from deep and ultradeep water, which poses significant technological challenges.

“As the complexity of project rises, soft skills and attitudes will make the difference as well as the finance and technical skills,” Pilenko said.

Greater societal and governmental pressure on oil companies to reduce emissions and stem climate change means that they must become more transparent in their practices, predicted Mark Lee, chief executive of industry think tank SustainAbility. Oil and gas prices are likely to be volatile with export quotas and resource nationalism all having an impact on energy supplies. “Leadership from the industry needs to become more sophisticated and I think there will be a massive technological acceleration until 2050, particularly in alternative energy.”

Holly settles Woods Cross refinery pollution charges

Holly Refining & Marketing Co. settled federal air pollution charges involving its Woods Cross, Utah, refinery by agreeing to spend more than $17 million on new and upgraded pollution controls, the US Department of Justice and Environmental Protection Agency said on Apr. 21.

The Holly Corp. subsidiary also agreed to pay a $120,000 civil penalty that EPA and the state of Utah will share. It also will spend $130,000 on a supplemental environmental project to help fund the purchase of new emergency response equipment for the South Davis Metro Fire Agency, DOJ and EPA jointly announced.

They said that the settlement requires Holly to install pollution controls which will reduce sulfur dioxide emissions by 315 tons/year and nitrogen oxides by more than 105 tons/year. The new controls also will further reduce emissions of volatile organic compounds and particulate matter, the federal agencies said.

The consent decree, which was lodged in US District Court for Utah, is subject to a 30-day comment period and final approval by the federal court, DOJ and EPA said.

Holly acquired the refinery north of Salt Lake City from ConocoPhillips Co. in 2003 and increased its capacity in early 2005 to 26,000 b/d from 25,000 b/d, according to information at the company’s web site.

Nigerian refinery legislation to be passed soon

Nigeria is aiming to pass legislation that will require international oil companies working in the country to refine a percentage of their crude oil production there.

“Everybody producing in the country will be mandated to refine a percentage in Nigeria,” said Sola Alabi, group general manager for refinery projects at Nigeria National Petroleum Corp.

Alabi told a refinery conference in Barcelona that the legislation had been under discussion for 2 years and was due for approval soon. He said Nigeria is proposing the move as a way to reduce its dependence on imported fuel.

Nigeria can produce only 445,000 b/d of oil products, while demand is currently around 600,000 b/d, Alabi said. Nigeria has four state-owned refineries and NNPC hopes to build two refineries with 200,000-300,000 b/d of capacity each.

NNPC plans to take a 30-49% stake in each refinery, Alabi said, and it hopes oil majors will take 21-30% stakes, given the proper incentives. One of the fiscal incentives to be offered will be pricing crude at international market levels, Alabi said.

Industry Scoreboard
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Exploration & Development — Quick Takes

Eni, partners find oil off Angola with Sangos-1 well

Eni Angola SPA and its partners made an oil discovery on deepwater Block 15/06 off Angola—the first well to be drilled on the block—reported 5% block partner StatoilHydro.

The Sangos-1 discovery well, which was drilled in 1,349 m of water to a total vertical depth of 3,343 m, found a 127-m oil column in high-permeability Miocene sands. The well tested for high-quality oil in excess of 30º gravity and at higher than forecasted rates, StatoilHydro reported.

The Sangos discovery well was drilled 350 km from Luanda and will soon be followed by other exploration wells in nearby structures “with significant potential with the aim of achieving synergic development of the western area of the block,” StatoilHydro said.

Block 15/06 lies within the Lower Congo basin and covers 2,984 sq km in 300-1,600 m of water.

Indonesia approves deepwater block for Chevron

Indonesia has approved a proposal by Chevron Corp. to develop natural gas fields on the deepwater Galan Block off East Kalimantan.

“The current price of oil has reduced the risks of developing deepsea gas blocks,” said Energy and Mineral Resources Minister Purnomo Yusgiantoro. He said the price of natural gas is expected to increase in line with the price of oil.

According to ministry documents, Chevron committed to spend $311.6 million to develop the block, which is believed to have the potential to produce an average of 800 MMcfd. Chevron holds an 80% stake in the block, while Eni SPA holds the remaining 20%.

Chile awards eight exploration blocks

Chile has signed contracts with four international oil companies for exploration of eight blocks in the southern Magallanes region.

Apache Corp., Pan American Energy LLC, Greymouth Petroleum Holding Ltd., and IPR-Manas collectively will invest some $222 million for seismic surveys and exploratory drilling over a 3-7 year period. Work is due to begin within 6 months.

IPR-Manas won the Tranquilo Block and will invest $33.2 million. Apache won the Russfin and Lenga blocks, where it will invest $23.4 million and $24.9 million respectively.

Greymouth won the Porvenir, Brotula, Isla Magdalena, and Caupolican blocks and will invest a total of $107 million, while Pan American Energy won the Coiron Block, where it will invest $34 million. Brotula and Isla Magdalena are offshore, while Otway is onshore and offshore. The remaining blocks are onshore.

Chile’s state-run oil company Empresa Nacional del Petroleos (Enap) holds a 50% stake in the Coiron, Caupolican, and Lenga blocks, with the remaining 50% in each block held respectively by Pan American Energy, Greymouth, and Apache. The other blocks will be 100%-held by the winning companies.

For reasons that remain unclear, Total SA, which last October won the Otway Block where it was expected to invest some $44.5 million, did not attend the contract-signing ceremony.

Chile’s Mining Minister Santiago Gonzalez said the government was surprised at Total’s absence and that negotiations would start with the next company on the list—a consortium comprised of Wintershall, GeoPark Holdings Ltd., and Methanex Corp.

Analyst BMI said it is still possible that a deal might be worked out with Total before the contact is awarded to another company.

Drilling & Production — Quick Takes

EXCO presses Vernon gas field development

Gas production from Vernon field in Jackson Parish, La., has stabilized at a net 130 MMcfd of gas equivalent for the past 8 months since EXCO Resources Inc., Dallas, acquired the field from Anadarko Petroleum Corp. in March 2007 for $1.5 billion.

EXCO said it has 280 drilling locations at Vernon compared with 15 identified at the time of the acquisition. The field produces from the Jurassic Lower Cotton Valley formation.

One recent completion flowed 10.3 MMcfd of gas equivalent, the highest initial production rate from a new well since the acquisition, EXCO said. Six wells drilled and completed in the quarter ended Mar. 31 averaged initial production rates of 6.5 MMcfd of gas equavalent.

EXCO is adding a fourth rig at Vernon and plans to drill 31 wells there in 2008. It has expanded the field’s southern and western limits and is reprocessing seismic as it evaluates another 65,000 net prospective acres.

Reliance contracts for new Transocean drillship

Reliance Industries Ltd., India’s largest private sector conglomerate, signed a 5-year drilling contract with Transocean Inc. for a newbuild enhanced Enterprise-class design drillship.

A Transocean subsidiary executed a shipyard contract with Daewoo Shipbuilding & Marine Engineering Co. Ltd. for construction of the dynamically positioned, double-hull drillship in Okpo, South Korea, where four of Transocean’s previously announced enhanced Enterprise-class drillships are being built. Total capital costs for the drillship are estimated at $730 million, excluding capitalized interest.

The 5-year drilling contract is expected to commence during fourth quarter 2010, following shipyard construction, sea trials, mobilization, and customer acceptance. The term of the contract may be extended to 7-10 years at the client’s election up to a week after mobilization. The 5-year contract provides for day rates of $537,000 for the first 6 months, escalating to $557,000/day for the next 4 1⁄2 years. The 7 and 10 year contract terms would be $1.35 billion and $1.85 billion, respectively if Reliance Industries elects to keep the operating day rate fixed for the full 10 years and does not terminate the contract early.

If Reliance Industries extends the contract to 10 years, then it may have the operating day rate for the second 5 years fluctuate based on crude prices. The operating day rate for the second 5 years would not be adjusted if crude is priced at $75/bbl but would be raised on a straightline basis if crude is then priced between $75-100/bbl, with a maximum 10% increase if crude is at or above $100/bbl. It would be lowered on a straightline basis if crude is selling at $50-75/bbl, with a maximum 10% reduction if crude is priced below $50/bbl at that time.

Reliance Industries retains the right to terminate the contract for convenience. But the termination mechanism is designed to keep Transocean economically whole for the remaining term of the contract.

The proposed rig will feature Transocean’s patented dual-activity drilling technology, allowing for parallel drilling operations designed to save time and money in deepwater well construction. It will have a variable deckload of 20,000 metric tons, and the capability of drilling in 10,000 ft of water depth, up to a water depth of 12,000 ft, and a total drilling depth of 40,000 ft with additional equipment.

Processing — Quick Takes

Iran starts $1.2 billion Sri Lanka refinery upgrade

Iranian President Mahmoud Ahmadinejad launched a $1.2 billion project to upgrade Sri Lanka’s sole refinery at Sapugaskande, outside Colombo, the island nation’s capital.

Sri Lanka’s petroleum minister A.H.M. Fowzie said the 4-year upgrade will triple his country’s refinery capacity to 150,000 b/d from the current 50,000 b/d. Earlier plans had called for an increase to 100,000 b/d.

Iran, which supplies 70% of Sri Lanka’s oil needs, agreed to finance $700 million of the upgrade in the form of a 10-year loan, with a 5-year exemption period from payment of the loan’s installments. Sri Lanka will provide the remaining $500,000 for the project.

In March, Saudi Arabia expressed its willingness to assist Sri Lanka with its oil needs—including the Sapugaskande refinery—following a meeting in Riyadh between Fowsie and his Saudi counterpart, oil minister Ali al-Naimi.

“We have plans to improve our refining capacity from 50,000 b/d to 100,000 b/d and getting Saudi expertise for the proposed expansion will facilitate the successful implementation of the project,” said Fowzie.

The Sri Lankan minister added that his country also needed a cracker to convert crude oil into diesel and gasoline which would cost the government some $400 million. He asked the Saudi oil minister to request funds from the Organization of Petroleum Exporting Countries to enable Sri Lanka to purchase the facility.

The importance of the refinery upgrade was underlined in January when Sri Lanka, which has to import all of its oil needs, saw its trade deficit double to $610.8 million as higher oil import costs exceeded export gains.

Sri Lanka bought $302.1 million worth of oil in January, when the island‘s sole refinery shut down for upkeep work, compared to $54.2 million a year earlier.

In February, the Sri Lankan central bank said the country’s trade deficit widened to $3.56 billion in 2007 from $3.37 billion in 2006 due to the high cost of importing petroleum products. It said the country’s oil import bill stood at $2.49 billion for 2007, a 20.6% increase over the cost of imports in 2006.

Gulf Petroleum gets nod for Malaysian complex

Qatar’s privately held Gulf Petroleum Ltd. won regulatory approval from the Malaysian government to develop a $5 billion oil and petrochemical complex on a 1,000-hectare site in the northern state of Perak, according to state media.

Malaysia’s Bernama news agency said the International Trade and Industry Ministry approved the request by Gulf Petroleum, which seeks to build a complex encompassing a refinery, a petrochemicals plant, and storage facilities.

Gulf Petroleum, which wants the proposed facility to serve as a regional hub for Asia-Pacific, plans to invest $1.5-2 billion in the project’s first phase—a refinery with a capacity of 100,000 b/d-150,000 b/d.

The Qatar firm foresees further large investments for additional phases of the project: $1.5-2 billion for the petrochemical plant and about $1 billion for the storage facilities.

Gulf Petroleum said at least two Middle East national companies also will participate in the project, along with major energy, banking, and insurance groups from Qatar, Saudi Arabia, Kuwait, Oman, Bahrain, the UAE, and Egypt.

It is not clear if Gulf Petroleum’s proposed Perak complex would connect with the bigger transpeninsular pipeline and related refinery projects announced by Malaysia last year (OGJ Online, May 4, 2007).

The transpeninsular pipeline, intended as an alternative transport route to the busy Straits of Malacca, will cross the states of Kedah, Perak, and Kelantan to carry oil from West Asia to East Asia.

Transportation — Quick Takes

Italy gives environmental approval for LNG terminal

Italy’s environment ministry has approved plans by Compagnie Industriali Riunite SPA’s energy unit Sorgenia SPA and northwest utility Iride SPA for construction of an LNG terminal at Gioia in Calabria.

The two firms have a 70% controlling stake in the Gioia Tauro plant, which will have a regasification capacity of 12 billion cu m/year. The proposed terminal is due on stream in 2013 pending approval by other Italian government authorities.

Meanwhile, Sorgenia is considering construction of an 8-12 billion cu m/year regasification terminal at Trinitapoli in southern Italy—one of several LNG projects in the planning stages or before Italian environmental authorities.

In February, Snam Rete Gas SPA CEO Carlo Malacarne said the firm plans to build a pipeline linking the country’s transmission system to an 8 billion cu m /year LNG receiving terminal near the northeastern port of Trieste to be built by Spain’s Gas Natural SA.

Malacarne also said Snam Rete Gas plans to boost the annual capacity of its Panigaglia LNG terminal in northwest Italy to 8 billion cu m from the current 3.5 billion cu m. Construction is due to start at yearend 2010, after receipt of necessary permits.

Also in February, however, BG Group PLC said the Italian environment ministry had requested more information regarding the group’s application for environmental clearance to build an LNG terminal at Brindisi (OGJ, Nov. 12, 2007, Newsletter).

Ministry Director General Bruno Agricola said BG’s environmental impact assessment (EIA), delivered on Jan. 15, did not contain any assessment of risk factors regarding a possible industrial accident.

Even if BG’s environmental problems are resolved, Agricola said Italy’s national gas grid operator Snam Rete Gas SPA does not have enough capacity to transport the gas from more than one LNG terminal in the area.

Last October the Italian government suspended BG’s permits to build the facility until BG completed the new EIA report. The Brindisi project was scheduled to start up in 2010 but the firm now thinks that target could be “challenging.”

Qatar, Dutch firms to jointly upgrade energy ports

State-owned Qatar Petroleum and Dutch port operator Havenbedrijf Rotterdam NV have signed a long-term agreement on strategy and development in port management.

QP said it wants to develop its port at Ras Laffan to the highest international standards, while Havenbedrijf wants to strengthen its position as Europe’s main energy port, especially for LNG and associated hydrocarbons.

The cooperation was laid out in a memorandum of understanding during a visit of Qatar’s Prime Minister Sheikh Hamad bin Jassim bin Jabr al-Thani to the Netherlands.

The sheikh’s visit followed a visit days earlier by Algerian officials who expressed interest in developing an LNG terminal at Maasvlakte, near Rotterdam, along with storage facilities for LNG.

The Dutch government said it will send a delegation to Algeria in the autumn for further discussion of the project.

The meetings underline new policy developments concerning energy in The Netherlands, which is said to be shifting its natural gas policy toward increased imports in an effort to retain its declining reserves, Europe’s second-largest after Norway’s.

In that new policy, the Dutch government put forward legislation in February to fast-track procedures for large energy infrastructure projects, including LNG installations, along the Rotterdam-Amsterdam corridor as well as around the Port of Eemshaven.

Rockies gas pipeline open season to start

Alliance Pipeline Inc. and Questar Overthrust Pipeline Co. plan to launch a binding open season May 12 to assess interest in shipping natural gas on the companies’ proposed Rockies Alliance Pipeline.

They have altered the planned route. Based on discussions with shippers, the proposed route now runs from Wamsutter, Wyo., to Ventura, Iowa. The initial route when the pipeline was announced Mar. 25, 2008, was from Wamsutter to the US-Canada border at the northwest corner of Minnesota.

As reproposed, Rockies Alliance will be a 900-mile, 42-in., 1.2 bcfd system expandable to 1.8 bcfd. The open season ends June 16.

Rockies Alliance would allow shippers to transport gas from the Greater Green River, Piceance, and Powder River basins to Midwestern and eastern markets. It would connect with Alliance Pipeline and Northern Natural Gas at Ventura.

Questar said its Overthrust pipeline can be expanded at low cost to connect multiple receipt points between Opal, Wyo., and Wamsutter. In a separate open season, Overthrust Pipeline is proposing to add as much as 1 bcfd of incremental capacity from Opal to Wamsutter and construct the proposed new White River lateral from the White River hub at Meeker, Colo., in the Piceance basin, to Wamsutter.

With minor modifications, Alliance can enhance downstream capacity on its system, which connects to the Guardian, Vector, Peoples, Nicor, ANR, NGPL, and Midwestern systems.

Rockies Alliance would compete with TransCanada’s proposed Pathfinder pipeline from Wamsutter to a connection with Northern Border in North Dakota (OGJ, Apr. 18, 2008, Newsletter).

Subject to obtaining shipper commitments and regulatory approvals, Rockies Alliance could be in service as early as third-quarter 2011.