Industry wins $1 billion in California OCS leases suit
The US Court of Appeals upheld the 2006 ruling by the Court of Federal Claims awarding over $1 billion to 11 oil and gas companies that sued the government for its breach of nearly three dozen oil and gas leases off California.
The award by the Court of Federal Claims was likely the largest in that court’s 150-year history. In issuing its decision, the Federal Circuit wrote that the government had breached the leases when it, in effect, changed their terms after the leases had been issued.
The leases were sold in the early 1980s by the US Department of the Interior as part of an effort to identify new sources of energy. Through their exploration, the companies had discovered new oil fields on federal lands off California, estimated by the federal government to contain over 1 billion bbl of oil. Under terms of their contracts, the companies were given the right to “explore, develop, and produce” oil and gas in the leased areas. However, production drilling never commenced because subsequent changes in federal law materially interfered with the companies’ efforts to develop the reserves.
Covington & Burling LLP represented the 11 oil companies. Partner Steven Rosenbaum, who delivered the oral argument before the Federal Circuit, said, “When any person, company or organization enters into a contractual agreement in this country, they must fulfill the terms or pay damages, even if that entity is the US government.”
In 2006, Rosenbaum successfully represented the American Petroleum Institute in a defense against a lawsuit seeking a preliminary injunction to prevent an OCS lease sale in the Western Gulf of Mexico. He currently is representing API in defending a pending challenge to the Department of the Interior’s 5-year OCS leasing program.
IPAMS, IER energy ads target voters, conventions
As the US Democratic and Republican national conventions take place, the Independent Petroleum Association of Mountain States in Denver and the Institute for Energy Research (IER) in Washington, DC, are running energy-themed advertising campaigns stressing the need for more US oil and gas production. The ads, targeting officials, delegates, and voters, seek to educate Americans on the role increased domestic production can play in creating jobs and improving the US economy.
“Liberal activists have treated American energy like a four-letter word for decades, even though it’s the key to our prosperity and our high standards of living,” said IER Pres. Thomas Pyle. “They would have American citizens believe that their country is running out of oil and natural gas, that what does remain cannot be produced safely, and that development would only have a negligible effect on price. These assertions are patently false,” Pyle declared. “To meet America’s future energy demands, we will need all forms of energy. Natural gas, the cleanest fossil fuel, needs to be a critical component of any national energy policy.”
IPAMS is running its ads in Denver during the Democratic National Convention, while IER’s radio commercials and newspaper advertisements will run in Arkansas, Minnesota, Montana, Nevada, and North Dakota.
Exploration & Development Quick TakesQueensland bans oil shale projects for 2 years
The Queensland government has placed a 2-year moratorium on oil shale projects, paralyzing the proposed Queensland Energy Resources Ltd. (QER) project in the McFarlane deposit about 15 km south of Proserpine on the state’s central east coast.
The project would entail bulk sampling and open-cut exploration of about 400,000 tonnes of oil shale material in the area.
Queensland Premier Anna Bligh flew to north Queensland recently to formally block the $14 billion (Aus.) project.
She cited concerns of community and environmental groups who maintain that the Whitsunday region tourism industry and the Great Barrier Reef are at risk if the project proceeded.
The premier widened the ban by imposing the moratorium on all new oil shale projects while it investigates the environmental impacts of shale oil mining.
Only one lease—around the Stuart deposit near Gladstone—is current, and that was granted by the previous government in the 1980s. Bligh declared, “No new shale oil mines will be permitted in the state.”
The move has created an outcry by the mining industry, with Queensland Resources Council CEO Michael Roche accusing the government of protecting the marginal Labor Party seat of Whitsunday at an election due later this year.
He added that exploration companies already rank Queensland as the least attractive jurisdiction in Australia, and the latest decision will simply reinforce that view.
“Sovereign risk is a key consideration with billions of dollars at stake,” he added.
For its part QER says the government’s move is premature. A company statement said: “The company remains convinced that developing the state’s strategically important oil shale resources is in the best long-term interest of both Queensland and Australia.”
Only 2 weeks ago the company announced it had abandoned the Alberta-Taciuk Processor (ATP) revolving kiln oil-shale processing technology in favor of the Paraho II technology to develop its vast oil shale deposits along the east coast of Queensland (OGJ Online, Aug. 14, 2008).
Paraho II technology has already been tested with more than 8,000 tonnes of Queensland oil shale samples.
QER says the deposits have the potential to produce 1.6 billion bbl of shale oil over the next 40 years.
StatoilHydro makes gas find in Barents Sea
StatoilHydro AS discovered natural gas within the Arenaria prospect on Block 7224/6 in the Barents Sea but said it’s too early to tell if the gas can be produced because it’s from poor quality reservoir rocks of middle Triassic age.
StatoilHydro drilled the exploration well with the Polar Pioneer drilling rig to prove hydrocarbons in sandstone of early Jurassic to late Triassic age. After reaching a vertical depth of 2,315 m below sea level, it did not find any hydrocarbons in its primary target despite there being good reservoir sands.
The gas discovery was its secondary goal. It will now permanently plug and abandon the well.
This well was compulsory under its work program and the first on Exploration License 394, which was awarded in 2006.
“Drilling of exploration well 7224/6-1 was completed by the Polar Pioneer drilling unit at a water depth of 265 m. Polar Pioneer will now start drilling exploration well 7222/11-1 in the StatoilHydro-operated Exploration License 228,” the company said.
Dong makes oil find on Ipswich prospect
Dong E&P Norge AS has discovered oil on the Ipswich prospect in the southern Norwegian North Sea about 290 km southwest of Stavanger.
If the prospect is commercial, it could be tied back to nearby Oselvar gas-condensate field. Dong plans to submit a development and operation plan to the Norwegian government in first-quarter 2009. Wildcat exploration well 1/3-11 and sidetrack 1/3-11 T2 discovered oil in Paleocene rocks. The oil column is at least 60 m oil with reservoir properties comparable to Oselvar.
Dong and its partners did not test the well, which was drilled by the Maersk Guardian jack up rig in 72 m of water. The main well was drilled to 3,232 m and the sidetrack to 3,465 m subsea, and both finished early Paleocene rocks.
The well will be permanently plugged and abandoned. The Maersk Guardian rig will then move to Production License 289 and drill exploration well 3/7-7 for Dong on the Marsvin prospect.
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Drilling & Production Quick TakesChevron to develop Hebron heavy oil off Canada
Chevron Canada Ltd. and its coventurers have this summer finalized legal agreements with Newfoundland and Labrador to develop the Hebron heavy oil fields off northeastern Canada.
The complex consists of Hebron, Ben Nevis, and West Ben Nevis fields, which lie in the Jeanne d’Arc basin between the Hibernia and Terra Nova production areas on the Grand Banks (see map, OGJ, Feb. 14, 2005, p. 32). The complex is 210 miles off Newfoundland and Labrador in 300 ft of water. Hebron was discovered in 1981, but the project was put on hold in 2006 when the operator could not reach an agreement with Newfoundland and Labrador.
Recovering 19-21° gravity heavy oil in the area’s harsh conditions presents a challenge, and the reservoir characteristics are technically complex and demanding. Chevron Canada, operator of the complex, said the field is “expected to be developed using a gravity-based structure with integrated drilling and production topsides.”
The Canada-Newfoundland and Labrador Offshore Petroleum Board (C-NLOPB) in 2006 estimated that the Hebron complex contains 731 million bbl of proved and probable oil resources, about 30 million bbl of natural gas liquids, and 429 bcf of natural gas, based on geologic, petrophysical, and reservoir simulation studies and drilling results (OGJ, June 19, 2006, p. 29) and (July 3, 2006, p. 52). Chevron estimates recoverable oil to be in the 400-700 million bbl range.
Chevron Canada holds a 26.63% working interest in the project. Other partners are ExxonMobil Canada Properties 36.04%, Petro-Canada 22.73%, StatoilHydro Canada Oil & Gas Inc. 9.7%, and Oil & Gas Corp. of Newfoundland and Labrador 4.9%.
Chevron Canada holds an ongoing financial interest also in the Hibernia and Terra Nova offshore oil projects, and in exploration in the Orphan basin.
Vanco, Lukoil lease drillship for Ghana deep water
Vanco Ghana Ltd. and partner Lukoil Overseas Ghana Ltd. have completed contractual arrangements with Aban Loyd for use of its Aban Abraham dynamic positioning drillship to drill the Dzata-1 wildcat on deepwater Cape Three Points Block off Ghana. The drillship can drill down to about 19,350 ft.
The vessel is in Sembawang Shipyard in Singapore being retrofitted to enable the unit to drill in as much as 2,000 m of water. When shipyard activities are complete, the Aban Abraham will mobilize to West Africa and drill the Dzata-1 in the fourth quarter.
Cape Three Points Block encompasses 1.25 million acres in 200-3,000 m of water. The Dzata prospect lies 70 miles southeast of Jubilee field, which has estimates of 500 million-1.8 billion bbl of recoverable oil, “confirming an active petroleum system in the Tano basin and heightening the exploration activity in the region,” Vanco said. Jubilee is expected to produce about 20,000 b/d of oil (OGJ Online, July 16, 2008). In addition to the Vanco-Lukoil partnership, other companies working off Ghana are Devon Energy, Amerada Hess Corp., Anadarko, Tullow Oil, and Kosmos Energy. The industry plans to drill several wells in the area in the next few months.
On Cape Three Points, Vanco had 2D and 3D seismic surveys shot, which revealed large compressional folds in a newly recognized subbasin. The Dzata (Lion) prospect represents one of nine major structural and stratigraphic prospects on the block.
“Situated in 1,869 m of water, the Dzata prospect is a large anticlinal structure with numerous Lower and Upper Cretaceous potential reservoir horizons and distinct direct hydrocarbon indicators, including flat spots and a gas ‘chimney,’” said Vanco. The well will be drilled to 4,900 m TD—3,031 m below the mud line.
Vanco Pres. Gene Van Dyke said the companies had worked for more than a year to secure the Aban Abraham drilling slot in a tightening deepwater rig market, and they intend to secure additional slots for other planned wells in West Africa.
Vanco, which is serving as operator of Cape Three Points Block, holds a 28.34% interest in the property, with Lukoil holding a 56.66% stake. State oil company Ghana National Petroleum Corp. holds a 15% carried interest.
Pemex annual oil output slides 10%; Cantarell 36%
Production from Mexico’s Cantarell oil field fell 36% over the past year, reducing the country’s overall oil production and creating a sharp decline in its exports.
“New fields aren’t coming on line fast enough to replace Cantarell,” said Jesus Reyes Heroles, general director of Petroleos Mexicanos (Pemex).
Reyes’ remarks coincided with an announcement by Pemex that in the first 7 months of 2008 the state firm produced an average of 2.84 million b/d of oil, down 10% from the same period in 2007.
Pemex confirmed that the decline in production is due mainly to the fall-off in production from Cantarell. It said the giant field produced 1.12 million b/d, a figure 472,000 b/d less than during the same period a year before.
Between January and July of 2008, Pemex exported an average of 1.44 million b/d, or 16.3% less than the same period in 2007. But income from crude exports during January-July totaled $30.08 billion, or 51.8% higher than in 2007, due to the surge in global prices.
Mexico’s production of natural gas stood at 6.75 bcfd during the first half, representing a 13% increase compared with the same period in 2007.
The Pemex refinery system produced 1.5 million b/d of gasoline, diesel, and other fuels during the same period, while imports of gasoline averaged 342,500 b/d, up 17.6% over the January-July 2007 period.
Pemex said the total volume of petroleum product imports in January-July rose to 555,100 b/d, on average, or 22.2% greater than such purchases during the January-July 2007 period, at a total cost of $14.08 billion.
Processing Quick TakesRegulators clear parcels at Marathon refinery
Two portions of Marathon Petroleum Co.’s refinery complex at Garyville, La., have been designated ready for reuse, federal and state environmental regulators jointly announced on Aug. 20.
A 4.5-acre land farm and a 10.2-acre land treatment unit which the Marathon Oil Corp. division used for land treatment of various refinery sludges from 1989 to 1998 received the designation, the US Environmental Protection Agency and the Louisiana Department of Environmental Quality said.
Marathon’s successful completion of investigation and risk management activities have made conditions at the sites protective of human health and the environment based on their current and planned uses, officials of the two agencies said during an Aug. 20 ceremony at the plant. The properties adjoin processing and utility facilities, they noted.
“Marathon has demonstrated that a clean environment is important to them. This ceremony is a testament to fine work many people put into cleaning up this land and getting it ready to be put back into commerce,” Louisiana DEQ Assistant Secretary Lou Buatt said.
Pakistan refineries protest lower products duties
The Economic Coordination Committee (ECC) of Pakistan has rejected a claim by the country’s refineries that they face loss under the reduced “deemed duty” (ad valorem surcharge) that they now are allowed to charge. ECC asked the Ministry of Petroleum and Natural Resources to submit each refinery’s financial results separately to determine the impact of the reduced-duty formula on the refineries.
Pakistan’s five refineries have a total refining capacity of 267,000 b/d. A sixth is under construction and expected to begin products production for export, in spring 2009. Four of the refineries meet the country’s domestic market demand for petroleum products.
A report on refineries’ profit considered by ECC in one of its previous meetings contradicted the refiners’ claims of facing huge losses, despite an enormous increase in the cost of imported crude oil feedstocks. ECC indicated that each refinery’s profit had increased 15-18 times during the last 6 years. This kind of profit is only possible when a section of the economy enjoys protection such as the deemed duty, the committee said.
Following the ECC directive, the ministry will ask the refineries to submit their financial results for the first quarter of the current fiscal year. These financial results will be presented to ECC for its consideration.
The outcome also will affect the new refinery under construction. Indus Refinery Ltd. (IRL) is scheduled to start commercial production of petroleum products in March 2009 from a 100,000 b/d refinery under construction near Karachi. IRL’s foreign investors hold 86.7% of the shareholding, while local sponsors hold 13.3%.
IRL CEO Sohail Shamsi said the company’s investment was based on the existing formula and would be wasted if the refinery could not make a profit. He said Pakistan’s refineries were operating on low fixed margins, contrary to the belief that they made windfall gains.
Because in 2007 gasoline demand in Pakistan was declining, the refinery plans to export its products. The refinery would produce 1 million tonnes/year of kerosene, 1.5 million tonnes of low-sulfur diesel, and 500 tonnes/day of liquefied petroleum gas. It also will produce propane, butane, high quality unleaded gasoline, and aviation fuels.
Oil consumption in Pakistan recorded a growth of 8.3% in the first half of fiscal year 2008 as total volumes settled at 9.07 million tonnes during this period against 8.38 million tonnes registered in the same period in fiscal year 2007.
Australia’s Cityview to buy, relocate African refinery
CityView Corp. Ltd., Perth, plans to purchase a 50,000 b/sd refinery and relocate it on Africa’s west coast by first-quarter 2010.
The company will borrow most of the $320 million needed to finance the purchase and relocation. The refinery will produce 1,550 b/sd of LPG, 3,784 b/sd of naphtha, 17,370 b/sd of gasoline, 13,964 b/sd of kerosine and diesel, 4,560 b/sd of asphalt, and 8,772 b/sd of fuel oil.
Financing is being negotiated, “the details of which will be announced later,” Cityview said.
The refinery’s future location has yet to be decided; the company has operations in Cameroon and Angola. The refinery will be transported in modular form from the US, where it is undergoing refurbishment. Some minor modifications will be required to enable the refinery to treat West African oil feedstock.
The project timetable depends on relevant final governmental approvals and the state of available facilities such as power and water needed to run the refinery and a suitable port nearby.
Transportation Quick TakesFitch: Kazakh lines enter 5 years of investment
Kazakhstan’s oil and gas pipeline operators, according to Fitch Ratings, are set to embark on intensive investment programs over the next 5 years to capitalize on favorable oil and gas industry fundamentals, as well as increased demand from a rapidly growing Kazakh economy.
“Whilst the credit impact of these programs will be more pronounced in the short-term, it could be limited in the long-run based on the nature of projects funding,” the ratings agency said.
KazTransGas (KTG), a national operator of gas pipelines in Kazakhstan, has increased capital expenditure plans with a view to investing more than $8 billion in the construction of three gas pipelines, including the West-South gas pipeline, the China gas pipeline and the By-Caspian gas pipeline.
In turn, Kazakhstan’s state-run oil pipeline operator KazTransOil (KTO) intends to invest more than $2 billion in the construction of two new oil pipelines.
The two new lines include the Kenkiyak-Kumkol route, which will connect western Kazakhstan to China, and a link between the Kashagan oil field and a new export terminal on the Caspian Sea.
Moreover, according to Fitch, the consortium operating the Caspian Pipeline Consortium (CPC) pipeline is considering the possibility of pipeline capacity expansion, with the costs estimated at some $2.5 billion.
Angelina Valavina, Director of Fitch’s energy, utilities, and regulation team, said that while implementation of the construction and expansion projects unveiled by Kazakh pipeline operators will put pressure on the companies’ credit metrics in the short-term, “the impact of escalating capex is likely to be subdued in the medium to long-term due to the flexibility of financing options available to operators.”
Fitch noted that nonrecourse financing is emerging as an important financing tool in the region, as demonstrated by KTO’s financing of the Kenkiyak-Kumkol route construction. KTG is also currently negotiating for financing of the China gas pipeline to be arranged by its JV counterparty—CNPC—without recourse to KTG.
Fitch also noted that some projects are expected to be partly or fully state-funded given their social and political importance such as the construction of the West-South gas pipeline by KTG.
Enbridge calls open season for Texas gas line
Enbridge Energy Partners LP, Calgary, and Atmos Pipeline & Storage LLC, Dallas, issued a solicitation of interest Aug. 25 for firm transportation service on a proposed 100-mile, 1 bcfd natural gas pipeline in Texas called the Barnett Intrastate Gas (BIG) pipeline.
The BIG pipeline would connect Atmos Energy’s Line X in Johnson County, Tex., to Enbridge’s Double D and Clarity pipelines at Bethel in Anderson County, Tex.
Bridging the two companies’ systems, BIG would provide shippers access to gas from the Waha, Barnett Shale, Bossier sands, and Anadarko basin producing regions. “Delivery points would include multiple market options at the Enbridge Carthage Hub in Panola County, Tex., and the Enbridge Southeast Texas Hub in Orange County,” Enbridge said.
Nabucco capacity attracts strong shipper interest
Potential natural gas shippers on the proposed 31 billion cu m/year Nabucco gas pipeline have booked out capacity on a nonbinding basis, suggesting a strong demand in western Europe for new gas supplies from the Caspian and the Middle East.
Nabucco, which is behind the €7.9 billion project, carried out a survey to assess market interest. “Nabucco capacities are more than 100% overbooked by potential shippers from day one in 2013 on a long term basis,” the company said.
The European Union has given support to the pipeline to reduce the EU’s reliance on Russian gas supplies.
Construction of the 3,300-km line, which will extend from the Caspian Sea to Austria via Turkey and the Balkan states, will occur in two phases: The first, which will have an initial capacity of 8 billion cu m/year, is expected to start in 2010 and complete in 2013.
The second construction phase will start in 2013 and complete at yearend 2014. It will extend from the Turkish border through Iran to Georgia. It will carry some 31 billion cu m of gas/year to the European Union from the Middle East and Central Asia (OGJ Online, July 14, 2008).
