OGJ Newsletter

March 3, 2014
International News for oil and gas professionals

GENERAL INTERESTQuick Takes

BOEM proposes increase in oil spill liability limit

The US Bureau of Ocean Energy Management proposed a 78% increase in the offshore oil spill liability limit under the 1990 Oil Pollution Act to $133.65 million from $75 million. The proposed change was the first since the law was enacted and matches the increase in inflation since then, said BOEM Director Tommy P. Beaudreau.

The proposal, which appears in the Feb. 24 Federal Register, also would establish adjustments every 3 years to cover changes in inflation under the US Bureau of Labor Statistics' Consumer Price Index.

The liability limit had not been changed since OPA 90 became law. "This adjustment helps to preserve the deterrent effect and the ‘polluter pays' principle embodied in the law," Beaudreau said.

Beaudreau said it would apply to offshore oil facilities in federal and state waters, and is consistent with recommendations from the National Commission on the BP Deepwater Horizon Oil Spill and other studies that called for a statutory increase in the limit of liability. It also is the maximum increase BOEM can implement without legislation, Beaudreau added.

BOEM will accept comments on the proposed increase until Mar. 26. Interior limited comments to 30 days because it did not anticipate opposition to the proposed increase.

A spokesman for US Sen. Bill Nelson (D-Fla.) called the proposal "a good signal that they are adjusting for inflation," but added that the senator has introduced legislation to eliminate the offshore oil spill liability limit.

"Liability is protection, not a deterrent," the spokesman said, adding, "Just ask yourself whether $134 million is enough for a mess like the BP spill."

Shell to sell operations in Australia to Vitol

Royal Dutch Shell PLC has reached a binding deal to sell its Australian downstream business, excluding aviation fuel and its lube oil blending and grease plants in Brisbane.

The company's 870 service stations, its 118,000-b/d Geelong refinery near Melbourne, its bulk fuels, bitumen and chemical businesses, and part of its lubricants business will be sold to international fuels company Vitol Group for $2.9 billion (Aus.).

Shell and Vitol expect the deal—which still is awaiting regulatory approvals—to close this year, the companies said.

Shell's sell-off of its Australian downstream assets follows the shuttering its 79,000-b/d Clyde refinery at Sydney in 2012 (OGJ Online, June 7, 2012).

Subsequently, the company said that if it could not negotiate a sale of the Geelong plant by 2014, it would consider converting the refinery into an import terminal, as it did with the Clyde refinery (OGJ Online, Apr. 4, 2013).

The deal is part of Shell's global shift away from downstream operations. It has already sold off refineries in the UK and some mainland European countries as well as made other divestments in Egypt, Spain, Greece, Finland, and Sweden.

Ben van Beurden, Shell's chief executive officer, said the company is trying to focus on the most profitable opportunities worldwide.

The majority of staff at the Geelong refinery will be retained by Vitol. Part of the deal is a brand agreement whereby the Shell name will continue to be displayed across the country's downstream network and customers will still have access to Shell fuels and lubricants.

The lube oil and grease plants in Brisbane will be turned into bulk storage and distribution facilities.

Shell has been involved in Australia's downstream industry for 113 years.

Despite Shell's withdrawal from the Chevron Corp.-operated Wheatstone LNG project in Western Australia in January, the Vitol deal has not affected Shell's other upstream businesses, which include participation in the North West Shelf joint venture, the Prelude floating LNG project, and the Greater Sunrise fields. Shell also has a 23% shareholding in Woodside Petroleum and in the wake of the deal Woodside Chief Executive Officer Peter Coleman has publicly asked Shell for clarification of its intentions on the Woodside register.

Chesapeake mulls spinoff, sale of services division

Chesapeake Energy Corp. reported it is considering a potential spin-off to Chesapeake shareholders or an outright sale of Chesapeake Oilfield Services (COS).

COS in 2013 reported revenues of $2.2 billion, offering services that include drilling, hydraulic fracturing, oil field rentals, rig relocation, and fluid handling and disposal.

COS's operations are currently conducted through Chesapeake Oilfield Operating LLC, a wholly owned Chesapeake subsidiary.

Jerry Winchester, currently COS chief executive officer, previously served in the same position at publicly traded oil field services company Boots & Coots Inc.

As of Dec. 31, 2013, COS owned or leased 115 land drilling rigs. It also owned 9 hydraulic fracturing fleets with an aggregate of 360,000 horsepower; a diversified oil field rentals business; an oil field trucking fleet consisting of 260 rig relocation trucks; 67 cranes and forklifts used to move drilling rigs and other heavy equipment; and 246 fluid hauling trucks.

In addition to services performed for Chesapeake, 35% of COS's marketable drilling rigs are currently working for third-party operators and COS intends to grow its third-party customer base as an independent provider of oil field services.

Doug Lawler, Chesapeake chief executive officer, commented on COS: "It has provided, and will continue to provide, superior service to Chesapeake's upstream business, and we look forward to maintaining our close and valuable relationship with Jerry and his team as they pursue COS's ventures outside of Chesapeake. A separation of COS is aligned with our strategies of financial discipline and profitable and efficient growth from captured resources."

Chesapeake in 2012 made multiple agreements to sell most of its Permian properties, all of its midstream assets, and certain noncore leasehold for total net proceeds of $6.9 billion as it intended to pay down debt (OGJ Online, Sept. 17, 2012).

The following year, the company reported the sale of 50% stake in its Mississippi Lime oil and natural gas acreage in northern Oklahoma to Sinopec International Petroleum Exploration & Production Corp. for $1.02 billion (OGJ Online, Feb. 25, 2013).

Exploration & DevelopmentQuick Takes

Lundin spuds Edvard Grieg appraisal well

Lundin Norway AS, a wholly owned subsidiary of Lundin Petroleum AB, has started drilling appraisal well 16/1-18 on PL338 in the southeastern part of the Edvard Grieg field in the North Sea sector of the Norwegian Continental Shelf.

Lundin said the well is being drilled to confirm the geological model on that part of the field to optimize drainage strategy and the placement of development wells.

The well also will seek to identify potential increases to the company's current 2P reserves volume estimates. The well is 2.4 km east of the Edvard Grieg platform.

The well will be drilled using the Island Innovator semisubmersible drilling rig at a planned total depth 2,300 m below mean sea level over 55 days. Lundin Norway received final approval for its plan for development and operation of Edvard Grieg from the Norwegian Parliament in 2012 (OGJ Online, June, 12, 2012). Lundin Norway is operator with 50% interest. Partners are OMV Norge AS 20%, Statoil Petroleum AS 15%, and Wintershall Norge AS 15%.

Stone provides update on deepwater Cardona well

Stone Energy Corp., Lafayette, La., has reported an update on the progress of its deepwater Cardona well on Mississippi Canyon Block 29 in the Gulf of Mexico. The well, MC 29 No. 4, encountered 84 ft of net oil pay in its development section, and the company is currently running casing to protect the zone while drilling the exploration section of the well.

Cardona's success extends the productive zone of the MC 29 TB-9 well to the adjacent fault block to the north.

Stone plans to flow the Cardona well to the company's owned and operated Pompano platform, which it contracted from Ensco PLC last April, with production slated to begin in early 2015 (OGJ Online, Apr. 9, 2013). The current well is expected to complete drilling operations in March.

After drilling the Cardona well, the rig is scheduled to move to the Cardona South prospect (MC 29 No. 5), which currently has surface pipe set at 4,903 ft. The well will test the same development interval in the adjacent fault block to the south of the MC 29 TB-9 well.

Current plans for the Cardona South prospect do not include the drilling of an exploration tail. If successful, the Cardona South prospect would also flow to the Pompano platform. The Cardona South prospect is expected to reach total depth in the second quarter. Stone is operator of the well with 65% working interest.

Ithaca makes North Sea oil discovery

Ithaca Energy Inc. reported the discovery of oil in its Trell prospect in PL102 F/G in the Norwegian North Sea.

The 25/5-9 exploration well was drilled to 2,240 m and discovered a 21-m oil column in the Paleocene Heimdal formation. The well is located in a mature area of the Norwegian North Sea about 10 km from the Heimdal production hub.

Ithaca placed primary estimates for the discovery in a range of 3.1-12.5 million bbl of recoverable oil.

The firm signed an agreement to acquire 10% working interest in PL102 F/G from Total SA (40% as operator) in December 2013. Additional licensees for the PL102 F/G include Petoro 30%, Lotos Exploration & Production Norge 10%, and DNO 10%.

Drilling & ProductionQuick Takes

BP starts production from Na Kika Phase 3

BP PLC's Na Kika Phase 3 project in the deepwater Gulf of Mexico started oil production on Feb. 19. The first well was drilled from a semisubmersible platform 140 miles southeast of New Orleans in 6,000 ft of water, BP said.

A second well is slated to be drilled and completed by this year's second quarter. Phase 3 also will include the addition of subsea infrastructure to tie back to the platform and equipment to increase production from an existing well on the site, said BP.

BP is operator of Na Kika and holds a 50% working interest. Royal Dutch Shell PLC holds the remaining stake.

Lukoil starts drilling in Imilorskoye-Istochnoye

OAO Lukoil has begun production drilling in the Imilorskoye-Istochnoye license area in West Siberia. The company said it originally planned to start drilling this September.

Lukoil was awarded a 20-year license at an auction in December 2012. The license area is in the Khanty-Mansi Autonomous Okrug (OGJ Online, Feb. 25, 2013).

Imilorskoye field lies near Tevlinksko-Russkinskoye field "and may be viewed as its sibling in terms of geological properties," Lukoil said.

Lukoil said it will develop four well pads. It has collected 3D seismic data, built 23 km of 426-mm oil pipelines, 42 km of roads, and a 74-m bridge across the Enti-Imiyagun River.

Lukoil plans additional seismic surveys in the license area, 11 wildcat wells, and retesting of 20 "historic" wildcat wells.

Central Petroleum granted Surprise production license

Central Petroleum Ltd., Brisbane, was granted a production license (PL 6) for its Surprise oil field in the Amadeus basin of the Northern Territory west of Alice Springs.

The award comes hard on the heels of last week's acquisition of Magellan Petroleum Australia's interests in the Palm Valley and Dingo gas fields and catapults Central into the ranks of Australia's onshore producers.

Surprise is the first production license to be granted in the onshore Northern Territory since the passing of the Native Title Act 1993 and is seen as an important milestone for the company as well as for the traditional owners.

Central expects all facilities required for the long-term oil production at Surprise field to be operational by mid-March.

Surprise-1 first found oil in 2010, but mechanical problems with the rig prevented testing. A redrill in 2011-12 flowed oil to surface and an extended production test the same year flowed at rates of 200-400 b/d.

The field lies on both sides of a prominent fault. So far efforts have concentrated on the western side where 1P reserves are put at 600,000 bbl, 2P reserves at 1.1 million bbl, and 3P reserves of 2.1 million bbl.

Central believes the reservoir on the eastern side has contingent reserves of 5.85 million bbl and is working to confirm the figure. The field will be brought on stream with the Surprise West development that entails a reentry of Surprise-1 to install pumping equipment, construction of a production facility and storage for 5,000 bbl of oil. Production is expected to be 400 b/d.

Future plans include the drilling of Surprise East-1 to investigate reserves on the east side of the fault.

PROCESSINGQuick Takes

Calumet completes Texas refinery expansion

Calumet Specialty Products Partners LP has completed a 3,000-b/d expansion of the crude unit at its San Antonio, Tex., refinery (OGJ Online, Nov. 6, 2013).

The expansion, which boosted crude processing capacity at the refinery to 17,500 b/d from 14,500 b/d, was completed during December 2013, the company said.

The company also confirmed it has completed a gasoline blending project at the San Antonio plant that will allow the refinery to blend up to 5,000 b/d of finished gasoline.

The expansion at San Antonio comes as part of a three-part, $500-$550 million set of organic growth projects that the company began in 2013, including the expansion of its 9,500-b/d Great Falls, Mont., refinery and a 20,000-b/d grassroots diesel refinery in North Dakota, Calumet said.

The $400-million Montana refinery project, which includes the installation of a new 20,000 b/d-crude unit and a 25,000 b/d-hydrocracker, will double the plant's capacity and should be completed during first-quarter 2016, according to Calumet.

The company expects its Dakota Prairie refinery project in Dickinson, ND—a 50-50 joint venture with partner MDU Resources Inc.—to be commissioned during fourth-quarter 2014. The refinery, which Calumet and MDU Resources estimated would cost $300 million total, will be completely supplied with locally sourced Bakken crude oil (OGJ Online, Mar. 27, 2013).

Iraq breaks ground on Karbala refinery

Iraq has started construction on a long-planned refinery in southern Karbala Province, 100 km south of Baghdad (OGJ Online, Aug. 1, 2011).

In a recent groundbreaking ceremony, Iraq's Prime Minister Noori Al-Maliki laid the first cornerstone for the refinery, which is being built by a four-company consortium of South Korean companies led by Hyundai Engineering & Construction (OGJ Online, Jan. 9, 2014), according to a Feb. 25 release from the Iraqi Ministry of Oil.

Delayed construction on the $6.04 billion refinery resulted from political circumstances facing Iraq, particularly Baath regime policies of sabotage, Al-Maliki said during the ceremony.

The planned 140,000-b/d Karbala refinery, which will contain more than 20 processing units to produce liquefied gas, gasoline, gas oil, fuel oil, jet fuel, and asphalt meeting international standards equivalent to European production, will serve growing domestic Iraqi demand, Iraq's Minister of Oil Abdulkareem Liaybi said.

The refinery's production capacity of about 104,000 b/d, combined with the high-quality specifications of its product output, means that a single year's production can cover the cost of the entire project, ministry spokesman Assim Jihad said.

The Iraqi Ministry of Oil also plans to complete other projects designed to transition the country to a net exporter from a net importer of oil products, according to Jihad, including the possibility of investing in refineries outside of Iraq.

The Karbala project is part of Iraq's longer-term plan to construct four refineries in an effort to add 750,000 b/d of refining capacity. The additional planned projects include a 300,000-b/d Nassiriya refinery as well as two additional refineries in Maysan and Kirkuk, each with a capacity of 150,000 b/d (OGJ Online, June 4, 2013).

USW blasts Tesoro over lack of safety

The United Steelworkers (USW) has demanded that Tesoro Corp. develop a comprehensive, cohesive safety program after a sulfuric acid release at the alkylation unit of its 161,000-b/d Golden Eagle refinery near Martinez, Calif., in early February seriously injured two workers.

"Tesoro management trivialized the extent of the workers' injuries to establish jurisdictional defense specifically to avoid the scrutiny of US Chemical Safety Board (CSB) and other agencies," USW Vice-Pres. Gary Beevers said in a Feb. 24 release.

USW also applauded the California Division of Occupational Safety and Health (Cal/OSHA) for prohibiting Tesoro from restarting Golden Eagle's alkylation unit following the Feb. 12 incident until management meets certain conditions.

According to USW, refinery operators told Cal/OSHA investigators that they were afraid to operate the alkylation unit at the Martinez refinery and signed "green sheets" with the notation "signed under duress" for procedure changes.

Operators also informed investigators assigned to the case that Tesoro failed to conduct required management of organizational changes when they decided to reduce staffing for start-up and shutdown of the alkylation unit, USW said.

"While the company continues to grow and its market share expands, Tesoro's corporate culture of safety has steadily diminished," Beevers said, noting that the refiner has withdrawn from USW's Triangle of Prevention program—which supports incident investigations—and stopped its quest for inclusion in OSHA's Voluntary Protection Program.

The union went on to criticize Tesoro for disputing a CSB report that cited deficient corporate-wide management culture of safety as a contributor to an explosion that killed seven workers in April 2010 at its Anacortes, Wash., refinery (OGJ Online, Apr. 5, 2010).

TRANSPORTATIONQuick Takes

TransCanada sees no delay for Keystone XL from ruling

TransCanada Corp. does not expect a Nebraska court's decision to affect the US Department of State's consideration of the proposed Keystone XL crude oil pipeline project's cross-border permit application, the Calgary company said.

It said Nebraska Atty. Gen. Jon Bruning's (R) immediate appeal effectively stayed Lancaster County, Neb., District Judge Stephanie F. Stacy's Feb. 19 decision. She ruled that 2012 legislation giving Gov. Dave Heineman (R) the power to approve a new route for the project was unconstitutional under state law.

A TransCanada spokesman said on Feb. 24: "We have dealt with many issues related to this project in the past and are confident we can overcome this latest hurdle. It is our view the current 90-day national interest determination process that is now under way should not be impacted by the Nebraska lower court ruling since the approved re-route remains valid during appeal."

Medallion to build Wolfcamp Connector

Medallion Pipeline Co. LLC, a subsidiary of Medallion Midstream LLC, reported the successful closing of the binding open season for its proposed crude oil pipeline, the Wolfcamp Connector, as well as its southward extension, the Reagan Gathering Extension, and will build both systems. The open season began in October and was supplemented Jan. 24 to reflect the modified route, configuration, and operations of the Reagan extension (OGJ Online, Oct. 30, 2013).

Medallion expects to place both lines in-service by yearend. The combined gathering system will extend roughly 112 miles through the Midland basin at an initial capacity of 65,000 b/d, connecting at the Colorado City, Tex., hub to take away pipelines—including Magellan Midstream Partner's BridgeTex pipeline—accessing both Cushing and the Gulf Coast.

Additional pump stations could increase Wolfcamp Connector's capacity to 100,000 b/d.

Magellan began building the 278,000-b/d BridgeTex line last year and expects to bring the 400-mile, 20-in. OD system into service by midyear. As part of the BridgeTex project, Magellan is expanding its Houston-area distribution system to 700,000 b/d delivery capacity from 350,000 b/d. BridgeTex will deliver both West Texas Intermediate and West Texas Sour crude grades.

Plains All American Pipeline LP last year announced four expansions to its Permian basin crude pipeline system, including an 80-mile, 20-in. OD line carrying 250,000 b/d between Midland, Tex., and Colorado City, Tex. (OGJ Online, Dec. 11, 2013).

Excelerate files FERC application for Lavaca Bay project

Excelerate Energy, The Woodlands, Tex., has filed an application with the US Federal Energy Regulatory Commission requesting authorization to construct, own, and operate a floating LNG export facility to be built south of Point Comfort, Tex.

Pending FERC's approval, the facility is expected to be operational in fourth-quarter 2018.

"We continue to make strong progress on all fronts and hope to make a final investment decision within the next 12 months," said Excelerate Pres. and CEO Rob Bryngelson.

The facility will consist of a permanently moored floating liquefaction, storage, and offloading unit (FLSO) with a production capacity of 4.4 million tonnes/year and LNG storage of 250,000 cu m, along with a fully integrated, onshore gas processing plant. The facility will interconnect to the region's existing pipeline system to obtain natural gas and liquefy it onboard the unit. The project will be designed and permitted with the potential for expansion and the addition of a second FLSO over time for a total production capacity of as much as 10 million tonnes/year, the company said.

The US Department of Energy previously granted Excelerate permission to export to free-trade agreement nations. The company filed for non-FTA approval in October 2012.

Excelerate is fourth on the list of applicants that DOE is currently processing.