SPECIAL REPORT: Discoveries, undeveloped opportunities persist as offshore Europe oil output falls

Aug. 4, 2008
Despite the growth of other regions, Europe remains one of the world’s largest offshore producing theaters.

Despite the growth of other regions, Europe remains one of the world’s largest offshore producing theaters.

Nearly 600 offshore fields have been developed off Europe, involving a similar number of platforms plus some 380 subsea wells, over 200 subsea templates, and nearly 1,000 pipelines.

However, the corporate scene has changed dramatically as declining production and high costs have forced the original developers, the oil majors, off to other regions. This has opened the way for a new breed of smaller players better geared to economically extracting the remaining reserves from a multitude of small fields and squeezing the last drops out of massively depleted existing ones.

Across the supply chain the European offshore contractors are winning business worldwide and so are the European stock markets. London has hosted the initial public offering of a number of international oil field services companies.

This article is an annual summary of the status of plays and prospects and highlights some challenges ahead.

Europe’s production

Douglas-Westwood expects global offshore oil and gas production to average 45.7 million b/d of oil equivalent, and it forecasts that by 2012 production will have grown 21% to 56.7 million boe/d.1

Growth will occur to varying degrees in all regions, led by the Middle East 4.3 million boe/d, Africa 2.4 million boe/d, and Asia-Pacific 2.3 million boe/d (Fig. 1).

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The single exception to that growth will be offshore Europe, where we expect production to decline by a nearly 1 million boe/d from its 2008 forecast level of 8.6 million boe/d. Of the main European offshore producers and products, only Norwegian gas is on the increase (Fig. 2).

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Natural gas is an issue of growing concern due to Western Europe’s increasing dependence on supplies from Russia, where OAO Gazprom is growing into one of the world’s most important energy companies, and with ambitions in Algeria, Libya, and Nigeria, it is spearheading a second Russian revolution.

In common with most other shallow-water offshore producing areas such as the Gulf of Mexico, the North Sea is postmature and now suffering severe production decline—recent analysis suggests the UK decline rate was 7.5% in 2007.

However, the North Sea, unlike the Gulf of Mexico, does not have the major deepwater reserves as an offset. The region’s only current deepwater development is Ormen Lange in Norway, which began producing in 2007. No other big deepwater developments are planned.

What Western Europe does have is considerable remaining reserves, albeit in small reservoirs with numbers of small undeveloped prospects that have been variously reported as being in the hundreds.

Geography matters

Generally referred to as “the North Sea,” the offshore play is more correctly the Northwest Europe Continental Shelf (NWECS), which includes the waters of six countries.

The prospective region off Denmark, Germany, Ireland, the Netherlands, Norway, and the UK spans a vast area from the Arctic to the warmer climes of Spain. Environmental conditions range from difficult to severe. However, it is Norway and the UK that claim most of the action.

The Norwegian and the far-north Barents seas cover a large area of the shelf and continental slope of Norway, while the UK also has production from the Irish Sea and the Atlantic shelf west of Shetland. Ireland has gas production off its southeast coast and developments happening off its environmentally challenging west coast.

This Atlantic basin is underexplored and contains a number of proven and emerging play types with potential for field developments in 500-2,500 m of water.

UK sector

With the decline in production and in common with the rest of the world, costs have been rising.

The overall outcome is that we expect combined capital and operating expenditure off Northwest Europe to be the world’s highest in 2008 at near $51 billion of a global total of $275 billion and to be at a similar level in 2012. However, as global spending grows to reach $361 billion by 2012 we expect Northwest Europe’s share to decline to 14%.

Despite decline being severe in UK waters, production is still significant. In 2007 the UK was the world’s 13th largest overall oil and gas producer. And looking to the future, according to government the UK will rely on oil and gas to provide around 80% of primary energy needs in 2020, and the UKCS has the potential to provide 20-25% of UK gas demand and 60-65% of UK oil demand.

West Sole (1965), the first gas discovery in the UK North Sea, went on production in 1967. Since then, the UK has produced 37.5 billion boe and has the potential to deliver another 25 billion boe or more over time, according to the industry body Oil & Gas UK.

Current business plans outline the potential for the delivery of 10 billion boe from existing fields and new projects. However, they also note that further progress will require exploration to be sustained at current rates for decades, matched by improvements to the investment climate to encourage the maximum recovery of oil and gas from existing fields.

It has been reported that in 2007 around 40% of the region’s exploration wells were successful, discovering 300-400 million boe. However, these were typically less than 20 million boe, and such accumulations bring to the fore the issue of costs.

Through mid-July 2008, five offshore fields have been approved for development; Maersk’s BOA, Petrofac’s Don South West and West Don, Venture’s Grouse, and Oilexco’s Shelley. Discoveries are still being made. In late June Oilexco reported an important dual oil and gas-condensate discovery at Moth in Block 23/21 in the UK Central North Sea (OGJ Online, July 1, 2008).

Big spenders

UK offshore operating costs rose almost 30% from 2006 to 2007 with the average technical cost of new developments (capex and opex combined) having reached $29/boe for projects coming on stream over the next 3 years, a level some 70% higher than in 2005.

UK Prime Minister Gordon Brown and the Chancellor of the Exchequer Alistair Darling ventured north on May 28 to meet with oil industry executives in Aberdeen. The meeting was to discuss the global oil supplies situation, but the minister was undoubtedly made aware of the fact that even at current oil and gas prices it is difficult for the North Sea to attract investment in marginal field developments and that the players need an improved fiscal package.

Turning to drilling, which consumes so much of offshore outlays, activity in the region is again dominated by the UK and Norway. A Douglas-Westwood study found that 83% of the 2,624 wells drilled off Western Europe in 2003 to 2007 were in these two countries, and the bulk was in the North Sea. A total of 2,349 exploratory and development wells is forecast over the next 5 years, and few are expected to be drilled in deep water.

During the last 5 years Western Europe attracted the third highest volume of offshore drilling spending in the world, almost all of it ventured in Northwest Europe, mainly the UK and Norway. The region will fall to fourth over the next 5 years, surpassed by Africa for the first time.

Deepwater spending is modest due to a lack of significant deepwater basins outside Norway. Outlays on drilling off Europe are expected to fall slightly to $10.3 billion in 2012 from $11 billion in 2007.2

Norway

Norway probably holds about 50% of Western Europe’s oil and gas reserves, and at the end of 2007 there were 56 discoveries yet to be approved for development.

Oil production peaked at 3.5 million b/d in 2000, and in 2008 total liquids production is likely to be some 2.5 million b/d.

Norway retained its status in 2007 as the largest gas exporter in Western Europe, at 89 billion standard cu m, up from 87 billion in 2006. Furthermore, gas production is forecast to increase to around 99 bcm in 2008 and in the words of the oil minister “expected to stay at today’s level for the next 10 years.” Douglas-Westwood’s view is that the gas potential may still be understated.

During the course of 2007, eight plans for development and operation (PDO) were approved for nine new deposits. Around 10 PDOs are expected to be submitted to the authorities in 2008.

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The largest discovery for which a plan is expected towards the end of 2008 is 7122/7-1 Goliat, operated by Eni (Fig. 3). However, the Norwegian Petroleum Directorate observed, “There are many problems that must be studied in connection with development of Goliat, which could lead to a postponement of the PDO.”

Several of these plans call for large investments in new production facilities (Gjoa and BP’s Skarv, and its Valhall redevelopment. StatoilHydro is Gjoa operator in the development phase, while Gaz de France takes over when the field starts up).

Talisman received PDO approval for two developments in 2007: Yme is a re-opening of a field that was shut down in 2001. The field previously produced for 5 years with Statoil as operator. Talisman is responsible for development of Rev field.

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Norway has been able to manage the wealth that has been generated in such a way as to forestall offshore oil and gas—the country’s largest industry—from overheating the economy. In addition to a policy of carefully managed reserve development, it has invested its national oil and gas profits to fund the pensions of this, and perhaps the next, generation. At the end of June 2008 the Norwegian central bank stated that the value of the government oil fund was 1.991 trillion kroner ($373 billion).

The Far North

The region’s Arctic frontier has generated much interest of late.

The Barents Sea is an area above the Arctic Circle whose border between Norway and Russia has been the subject of continual disagreement. Around 80 wells have been drilled in the Norwegian sector, of which around 20 have been small discoveries, mostly gas-condensate.

One of the more recent is the StatoilHydro group’s Ververis 7226/2-1 well in 347 m of water, which found gas in mid-Jurassic sandstones. It bottomed at 2,992 m in the Lower Triassic Havert formation (Fig. 3).

The first discovery, Askeladd, was made with the fourth well in 1981 in the Hammerfest basin near the coast, where most of the discoveries are located. The largest field is Statoil’s Snohvit, which began delivering gas to Europe’s first LNG plant in 2007.

But at the top of the world a big game is in play. Massive oil and gas resources (estimates range from 160 billion to 300 billion boe) may exist, and once the international posturing is over Russia may control over 60% of these. Developing them is another matter, and Russia will need many years, very capable technology partners, and huge investments.

Floating production

The waters off Western Europe have seen the deployment of more floating production systems than any other part of the world.

The region has 68 installations to date, including three tension leg platforms, 33 floating production, storage, and offloading vessels, and 32 floating production semisubmersibles (FPSS), 34 of which remain in operation.

Western Europe saw the world’s first application of floating production technology. The UK’s first offshore oil was produced at the Transworld 58 FPSS on Hamilton Brothers’ Argyll field in 1975.

By and large, the regional environment is harsh and, in the northern North Sea and the Atlantic Margin in particular, weather can severely test these vessels. Wave damage has been reported on a number of FPSOs operating in these areas, including BP’s Schiehallion which suffered cracks in its bow in the winter of 1999-2000.

However, European waters have seen relatively few floating production systems installed in recent times, just three in the past 5 years. But looking ahead, in the period to 2012 we expect a surge of activity with 18 units to be deployed of which 14 will be FPSOs.3

Offshore wind

A number of European offshore contractors are now beginning to deploy their skills in the development of a “new North Sea”—offshore wind power.

Douglas-Westwood forecasts that 1,157 offshore wind turbines will be installed worldwide in 2008-12, of which the great majority will be off Europe.

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Annual capital expenditure totaled about $1 billion in 2007, but this is set to grow to near $6.5 billion by 2012 (Fig. 4). Of a total $20 billion in offshore business over the next 5 years, 94% of the spending will be off Europe.

Offshore wind power is not without problems familiar to oil sector players of hardware and installation vessel and skilled personnel shortages, all driving massive cost inflation. The fundamental problem is that all offshore industries are drawing from the same well of limited resources.

The future

Offshore Europe has changed dramatically in 40 years and is now a very different place where even the names of many of the field operators would have been unrecognized only a decade ago.

And the changes will continue as the region’s governments increasingly recognize the need to attract new players and put in place better deals for existing ones in order to suck the North Sea dry.

In the service and supply sector home-grown contractors now operate worldwide, designing, manufacturing, and operating technology developed in one of the world’s most unforgiving oil patches.

And a relatively unsung activity has grown strongly. Many of the shiny new luxury vehicles clogging the streets of Aberdeen are a result of the strongly growing oil industry financial services business that is focused mainly on doing deals in the service and supply industry.

Most significantly, much of the revenue comes from outside the UK where the London market has even hosted the IPOs of several Russian oil field service companies.

A few years ago frequent questions to our firm were from companies seeking sources of finance, whereas nowadays they are from private equity firms looking for deals to buy into. In these days of subprime financial collapses, investors increasingly recognize oil and gas as being driven by strong fundamentals of supply and demand and these show no signs of changing.

References

  1. “The World Offshore Oil & Gas Forecast 2008,” Douglas-Westwood/Energyfiles.
  2. “The World Offshore Drilling Forecast 2008-2012,” Douglas-Westwood/Energyfiles.
  3. “The World Floating Production Report 2008-2012,” Douglas-Westwood.

The author

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John Westwood ([email protected]) is the founder of energy analysts Douglas-Westwood Ltd. With a technical background, he worked in the North Sea contracting industry, then worldwide, and has formed three energy-sector companies and sold two. He has spent the past 18 years heading Douglas-Westwood, which has completed over 500 projects since its formation in 1990 and provided services to clients in 37 countries. The firm has advised several governments and worked for energy majors and their contractors, but it primarily provides services to investment houses. In the past year it has advised on supply sector merger, acquisition, and financing deals across four continents totaling nearly $10 billion.