Special Report: Smaller players sustaining Europe's maturing offshore

Growth will occur in varying degrees in all regions, led by the Middle East at 3.5 million boe/d, Africa 2.9 million boe/d, and Asia-Pacific 2.7 million boe/d (Fig. 1). The single exception will be offshore Europe, where we expect production to decline by just under 1 million boe/d from its 2009 forecast level of 8.3 million boe/d. Of the significant European offshore producers and products only Norwegian gas is on the increase.

Natural gas is an issue of growing concern in Europe due to its increasing dependence on supplies from Russia, where Gazprom is growing into one of the world's most important energy companies, with ambitions in Algeria, Libya, and Nigeria.

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 average decline rate is running at 6%. However, the North Sea, unlike the Gulf of Mexico, does not have the major deepwater reserves to offset this. What it does have is considerable remaining reserves, albeit in small reservoirs with numbers of small undeveloped prospects variously reported as being in the hundreds.

Nearly $13 billion was spent on drilling off western Europe in 2008, and we expect this to decline slightly to $11.8 billion in 2013.²

National sectors

Although generally referred to as "the North Sea," the offshore play is more correctly the North Western Europe Continental Shelf (NWECS), which includes the waters of five countries (Denmark, Germany, Ireland, the Netherlands, Norway, and the UK).

Environmental conditions range from difficult to severe. However, it is Norway and the UK where most of the action has been.

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

In June, Serica Energy PLC made the first oil discovery in nearly 30 years in the Slyne basin off Ireland's west coast (Fig. 2). Commerciality of the Bandon oil discovery is yet to be established, but the 600 sq km license area is said to contain several prospects that are to be evaluated as potential drilling targets. In the words of the Serica Energy CEO, "this could mark the beginning of an exciting phase of Irish exploration."

Oil production has been declining and, in common with the rest of the world, costs were rising up to mid-2008—the overall outcome is that in 2009 we expect combined capital and operating expenditure offshore Northwest Europe to still be the world's highest at near $38 billion, out of a global total of $233 billion.

Since it is expected to have declined sharply in 2009 it is projected to be slightly higher in 2013. However, as global spend grows to reach $335 billion by 2013 we expect the Northwest Europe share to decline to 12% from 13%.

Turning to drilling, which consumes so much of offshore spend, again the UK and Norway dominate activity in the region. As we show in the 2009-13 forecast, a total of 2,648 wells were drilled off western Europe from 2004 to 2008 with the bulk in these two countries, primarily in the North Sea. A total of 2,290 exploratory and development wells is forecast over the next 5 years for the region with few expected to be located in deep water.

During the last 5 years western Europe attracted the third highest volume of offshore drilling spending in the world behind Asia and North America—almost all in Northwest Europe, primarily in the UK and Norway—but the region will fall to fourth over the next 5 years, surpassed by Africa for the first time.

UK's ‘quadruple whammy'

In the words of the House of Commons Energy and Climate Change Committee report on Offshore Oil & Gas of June 17, "the UKCS currently faces a quadruple whammy of high costs, low prices, lack of affordable credit, and a global recession…fiscal and regulatory changes needed to maximize reserve recovery. Ministers need to articulate a strategy setting out how production levels are to be maintained."

And Oil & Gas UK claims that 50,000 jobs could be at risk.

Behind the rhetoric, what is certain is that the UK is past its production peak in both oil (1999) and gas (2000)—the major fields of the 1970s are now in decline, and the newer, smaller fields that utilize modern extraction technologies are unable to offset this decline.

Offshore oil production is set to decline from 1.6 million b/d in 2008 to less than 1.1 million b/d by 2013—a decline of around 35%. Likewise, offshore gas production is expected to decline from 83 bcm/year in 2008 to 65 bcm in 2013.

However, despite decline being severe in UK waters, production is still significant—in 2008 the UK was still the world's 18th largest oil producer and 8th largest gas producer. The high oil prices seen in 2006-08 resulted in drilling activity being the highest since 1997. But some expect that despite the new incentives and tax changes in 2009 drilling may fall by half and drop again in 2010.

Although a steady number of fixed platform installations will be maintained throughout the next 5 years, expenditure relating to the utilization of subsea development techniques will contribute greatly to capital expenditure through to 2013, with annual expenditure relating to the fabrication and installation of subsea hardware forecast to continue recent growth.

Offshore maintenance, modifications, and operations (MMO) is a major area of expenditure. Trends in the UKCS MMO market show that year on year expenditure grew to a peak in 2008 of $8.2 billion. We expect that operational expenditure will fall year on year, reaching a low of $6.6 billion in 2012 before showing signs of growth during 2013.

We expect the next 5 years to see the emergence of a sustained market for the decommissioning of fixed platforms, including Northwest Hutton, Miller, Don, Indefatigable, and Total's initiation of removal activity at Frigg. Costs of this activity are likely to exceed $1 billion in the period to 2013.

The overall decline in total offshore activity and spending has considerable potential impact on the UK government's tax take as oil and gas contributed 28% of corporate tax in 2008-09. Although this is expected to almost halve in 2009-10, it is still predicted by Deloitte to contribute one fifth of UK corporate tax revenues.

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 UK continental shelf has the potential to provide 20-25% of UK gas demand and 60-65% of UK oil demand.

UKCS projects

The UKCS floating production system (FPS) market is expected to show strong growth to 2009, reaching a peak of just under $1.2 billion, with a number of high-profile FPSO projects reaching peak construction phases. Forthcoming FPS projects include:

Kraken (2011). Nautical Petroleum, in partnership with South Korea's SK Corp. and UK's Canamens Energy, owns 50 million bbl Kraken field on Block 9/2b in the North Sea. Plans for development of the field include the construction of either a regular FPSO or a Sevan SSP300 (an innovative circular FPSO) which is expected to be completed in 2011. If the Sevan SSP300 is chosen, the expected cost will approximate $250 million.

Cheviot (2012). ATP plans to deploy its Octabuoy floating production vessel on Cheviot field in 2012. The unit is designed by Saipem subsidiary Mos Maritime and is expected to cost around $600 million when completed.

Other fields likely to be tied into a West of Shetland gas export system include Torridon, Tobermory, and Victory. Although FEED contracts have not been issued, Total plans to have the development producing by 2013.

FLNG. The UK currently has one operational floating import terminal, Excelerate Energy's 4 million tpy Teesside GasPort, which came on stream in 2007. Another floating terminal, being developed by Höegh LNG, is planned for the Irish Sea—the Port Meridian project, off Barrow-in-Furness. This project, which is similar to Höegh LNG's Port Dolphin project in the US, will comprise two submerged offloading buoys.

The UK's capital expenditure on fixed platforms totaled $1.4 billion in 2004-08. Our 2009-13 forecast for expenditure totals just over $1 billion, and is expected to remain relatively level year on year at around $200 million.

Buzzard (2010). Heerema has been awarded the contracts to build both the deck and jacket for a $925 million fourth platform on Nexen Inc.'s Buzzard oil field. Installation of the platform is likely to take place in the third quarter of 2010, with start-up forecast by the end of that year.

Jasmine (2011). A significant gas-condensate discovery in the Judy area of the central North Sea, Jasmine was previously known as Shoei. Operator ConocoPhillips did not release a reserve estimate, but partner BG suggested the field could contain 100-275 million boe. Development could well take the form of a wellhead platform tied back to Judy. But if Jasmine is large enough, a standalone solution could be justified, perhaps with export through the Judy infrastructure.

LNG fixed platforms. Canatxx plans to build a 3 bcfd terminal in Amlwch on Anglesey, Wales, at the former Great Lakes chemical site. LNG tankers will offload the LNG onto a fixed platform 3 km from the port. The gas will be piped along a 113 km subsea pipeline to Nateby, Lancashire, where it will join the National Grid system. This plant has been criticized by locals who feel that, despite the creation of 60 full time jobs and 300 construction jobs, the project is too much of a safety and environmental risk.

Norway—the long view

Several new fields have begun production off Norway, including Alvheim, Varg, Vilje, Volve, and Tyrihans and the number of exploration wells being drilled has doubled compared with 2005.

However, oil production passed its peak in 2001 and is expected to continue to decline as a result of markedly reduced output from the giant fields. Although the Norwegian Sea, and to a lesser extent the Barents Sea, has some excellent prospects and natural gas liquids output is increasing, we believe that these will be unable to reverse overall oil production decline. It is forecast that Norway will be producing around 1.6 million b/d by 2013.

Conversely to oil, gas production continues to increase. The country is forecast to be producing over 158 bcm/year by 2013, up from around 111 bcm/year currently. The main increases will come from the Norwegian Sea, primarily Ormen Lange, and from the Barents Sea, mainly Snohvit.

MMO in the Norwegian sector has experienced relatively steady growth to date, however, operational expenditure is expected to decline during 2009 and 2010 before recovering towards the end of the forecast. Despite this dip, total opex for 2009-13 is expected to be $59 billion, 16% higher than the $49.1 billion spent during the previous 5 years.

Norway is expected to see an increase in decommissioning expenditure during 2009-13. Total expenditure is expected to be just over $1 billion, a growth of 40%, compared with the 2004-08 period. Two of the most important decommissioning projects are Ekofisk and Frigg.

Norway has been able to manage the wealth that has been generated by its oil and gas sector in such a way as to prevent 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. The Government Pension Fund is the largest pension fund in Europe and the second largest in the world. At the end of 2008 its total value was 2.275 trillion kroner ($325 billion).

Norway projects

New field developments using floating production systems in the next few years will include:

Gjoa (2010). StatoilHydro's Gjoa lies on Blocks 35/9 and 36/7, about 60 km northeast of Troll C, in 360-380 m of water. Reserves are estimated to be 60 million bbl of oil and 35 bcf of gas. Gjoa field will be developed with an FPSS built by Aker Solutions in a $1.6 billion contract. Gas from the field will be delivered to the UK Flags pipeline, ending at St. Fergus in Scotland, with oil being delivered down the Troll II pipeline to the Mongstad refinery north of Bergen.

Skarv (2011). The field will be developed by BP in conjunction with adjoining Idun gas field using an FPSO that will pump oil and export gas via an 80-km pipeline to the Aasgard transport system and onward to the Kaarsto terminal. Aker Solutions won a $359 million contract for detailed engineering of the vessel with Samsung Heavy Industries winning the $750 million contract to construct the newbuild vessel. The 40,000-tonne vessel itself will be capable of handling 80,000 b/d of oil and 15 million cu m/day of gas and will be moored in 350-450 m of water.

Goliath (2013). Eni's field will be developed with a Sevan Marine circular FPSO, however construction has been delayed in order to take advantage of reduced construction costs. The entire development is expected to total around $4.4 billion with contracts for the subsea equipment, flowlines, and pipelines expected to be awarded at the end of 2009.

Douglas-Westwood expects some $1.7 billion to be spent on new fixed platforms in the Norwegian sector over the next 5 years.

Valhall (2010). BP's Valhall field came on stream in 1982 and existing facilities include five separate bridge-connected steel platforms. In addition the field has two unmanned flank platforms, one in the south and one in the north. A new production and accommodation platform will be installed in 2010, with the field expected to produce until 2050. Power for the new platform and existing infrastructure will be supplied from shore via a $140 million, 292-km cable supplied by Nexans.

Ekofisk 2/4-L NOR (2012). ConocoPhillips Norway and Master Marine ASA have entered into a 3-year contract starting in 2010 to provide a jack up accommodation unit located at Ekofisk field. The unit, to provide 450 beds, is under construction at the DryDock's World Graha shipyard in Indonesia. ConocoPhillips has also called for a FEED contract for possible Greater Ekofisk Area developments that would include a permanent accommodation platform as well as a new wellhead platform with water injection facilities.

Froey (2012). Det Norske Oljeselskap, as Pertra has renamed itself following its merger with former DNO's Norwegian assets, was due to submit a PDO for redeveloping Froey in late February 2009. Approval from the government should come through by midyear. Start-up is now scheduled for the beginning of 2012.

StatoilHydro's Snohvit development is Europe's first LNG export facility. Gas from Snohvit, Albatross, and Askeladd fields in the Barents Sea is fed via a 143-km pipeline to a gas liquefaction plant constructed at Melkoya Island, near Hammerfest. Annual production capacity of the facility is 4.3 million tonnes of LNG, 747,000 tonnes of condensate, and 247,000 tonnes of LPG. This is the largest industrial project in North Norway's history.

Another Norwegian LNG export plant is under construction. The Stavanger-located facility is operated by Nordic LNG, a joint venture between Lyse and IM Skaugen. The 0.3 million tpy terminal is expected to come onstream in 2010 and will serve the Norwegian and Swedish market.

Floating production

Western Europe saw the world's first application of floating production technology. The UK's first offshore oil was produced by the Transworld 58 FPSS on Hamilton Bros.' Argyll field back in 1975. Since then, the region has seen a total of 69 FPS installations to date, with 3 TLPs, 33 FPSOs, and 33 FPSSs, of these, 37 are currently operational.

By and large, the regional environment is harsh and, in the northern North Sea and the Atlantic margin in particular, vessels can be severely tested by the conditions they encounter. 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 little floating production systems installed in recent times, just four in the past 5 years. But looking ahead, in the period to 2013 we expect a surge of activity with 19 units being slated for deployment of which 15 will be FPSOs³ (Fig. 3 and Table 1).

Deepwater action

Deepwater spending offshore Europe has been modest to date due to a lack of significant deepwater basins off Norway. Three deepwater projects are under consideration:

Aquila (2010). After many years, this Eni SPA development off Italy has been awarded two licenses and may get under way with an FPSO before 2011.

Laggan/Tomore (2013). This Total-operated project off the UK is at the prequalification stage. It will be a subsea tieback development to an onshore processing plant. A total of eight wells is expected to be drilled from 2011, five on Laggan and three on Tomore. Start-up is scheduled for late 2013 or early 2014.

Lochnagar/Rosebank (2013). Intec seems set to land the pre-FEED contract on this Chevron project off the UK. Use of an FPS unit is expected.

In June, A/S Norske Shell, operator of production license 326, completed the drilling of wildcat well 6603/12-1, which found potentially large quantities of recoverable gas. The discovery is located 150 km northwest of the Victoria 6506/6-1 gas discovery in the northern Norwegian Sea. The well was drilled in 1,376 m of water, the greatest water depth of any discovery made on the Norwegian shelf.

The Arctic frontier

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. The first discovery, Askeladd, was made with the fourth well in 1981 in the Hammerfest basin near the coast, and most of the discoveries are located here.

At the top of the world a big game is in play. Massive reserves estimated at 160-300 billion boe may exist. National borders are still uncertain, but 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.

The combination of deep water and the extreme environment result in major technical challenges and very high costs. We have forecast for several years that Russia will eventually work with Norway, and we note that Gazprom and StatoilHydro have recently signed a memorandum of understanding regarding a joint exploration in the region.

The future

In 40 years, offshore Europe has changed dramatically 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.

The changes will continue as the region's governments increasingly perceive 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. A recent Scottish Enterprise and Scottish Council for Development and Industry publication said international sales increased by 19.5% to £5.7 billion ($9.2 billion) and now account for more than 40% of revenues. Activity was recorded in more than 100 country markets for the first time.

Across the North Sea, Norwegian trade body INTSOK said that in 2007 Norwegian-based companies had an international turnover of 95 billion kroner ($14.6 billion), and the industry now aims at 120 billion kroner ($18.4 billion) by 2012.

Oil prices have nearly doubled since the depths of the economic winter. However, oil field service company valuations are still depressed and major business opportunities now await those with the term of vision, the cash, and the courage.

References

1. "The World Offshore Oil & Gas Production and Spend Forecast 2009-2013," Douglas-Westwood/Energyfiles.
2. "The World Offshore Drilling Spend Forecast 2009-2013," Douglas-Westwood/Energyfiles.
3. "The World Floating Production Market Report 2009-2013," Douglas-Westwood.

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