DEMAND SURGE LIFTS NATURAL GAS OUTLOOK IN NORTH SEA SECTORS

Roger Vielvoye
International Editor

Prospects for gas producers in the British, Norwegian, Dutch, and Danish portions of the North Sea continue to improve.

European demand for gas in the 1990s will be higher than first estimated. Despite competition from Soviet and African supplies, North Sea producers look set to corner much of the increased business.

In continental Europe, gas is benefiting from its relatively clean burning features at a time when government and consumers are looking for ways to reduce discharge of gases that might contribute to global warming.

The opening of eastern Europe's gas market, previously the unchallenged domain of Soviet supplies, will provide opportunities for North Sea producers as state gas companies try to diversify supply sources.

Poland's state gas authorities have sounded out Norway's Den norske stats oljelskap AS about the possibility of developing a supply network through the Baltic Sea to meet future Polish demand, which is expected to increase as pressure grows for environmental cleanup.

But North Sea gas could first go to East Germany. West German companies are planning to link their country's distribution network with that of their eastern neighbor.

In the U.K., demand is growing for gas to burn in a new generation of power plants. The advent of competition in industrial markets also will stimulate offshore development.

U.K. COGENERATION

Sale of the state owned U.K. electrical power industry to private concerns allows new generating companies to enter the business.

Almost all the newcomers to power generation plan gas fired cogeneration plants. Detailed negotiations in progress with many offshore producers aim to bring the first batch of new generating capacity on stream in 1993-94.

The power station fuel market is big enough for North Sea operators to develop new fields tied exclusively to electricity generating projects. ARCO British will sell all production from its Pickerill field in the southern North Sea to a large cogeneration unit on the east coast of England.

The most ambitious project is by the Amoco-Gas Council combine, which plans to develop two fields in the Central North Sea and build the first pipeline from that area into Northeast England to service a proposed power station at Teesside.

The industrial gas market also has been opened to competition.

British Gas plc has been forced to open its nationwide transmission system to third party customers. It is allowed to buy only 90% of the gas from any new source of supply. A producer may sell the remaining 10% to another buyer.

Currently, there is a shortage of gas for sale by the new breed of gas marketing companies. The first supply of new gas from a 90-10 deal will become available when ARCO starts up Welland field toward the end of this year.

Although British Gas is no longer the monopoly buyer of all new supplies, it will remain the major force in the market. Offshore operators are concerned that the desire of British Gas to import supplies-probably from Norway-could restrict development of gas/condensate resources in the central North Sea.

While British Gas looks for cheap supplies outside the U.K., Norway is investigating the power generation market in Britain. Statoil reports that after talking to many of the proposed power station operators, it has started negotiations to sell gas to several projects.

THE TROLL SHOCK

Norway, with estimated gas reserves of 82 tcf, was previously considered the most likely candidate to meet most new European gas demand through the 1990s.

Conventional wisdom saw 45 tcf Troll gas field as providing the base load for new contracts, with reserves on Haltenbanken off mid-Norway and in the arctic region of Tromsoflaket off the northern tip of Norway providing the basis for growth into the next century.

But the Norwegian gas industry suffered two shocks in the first half of this year:

• Statoil's decision to shelve plans for an LNG export chain to the U.S. under an outline contract with Enron Corp. because of increased gas demand in Europe and possible problems bringing South Gullfaks field on stream.

• Norsk Hydro's successful horizontal drilling into oil zones in the western lobe of Troll field.

Norsk Hydro said Troll oil can be developed with a program of horizontal wells, which would preclude development of western lobe gas before 2005.

That leaves Statoil as operator of a huge volume of reserves in the eastern lobe but without the flexibility to take on new large supply contracts that existed when the only constraint was time required to develop reserves on the western lobe.

The upturn in demand could lead to earlier than expected development of gas from the Haltenbanken area. The decision to press ahead with a methanol plant using associated gas from Heidrun field will create a gas gathering infrastructure offshore.

If prices remain buoyant, a pipeline link between the Heidrun landfall and the gas infrastructure in the North Sea could emerge before the end of the decade.

Norwegian producers also are involved in long negotiations to sell gas to Sweden. Swedegas has agreed to buy an average 250 MMcfd, which Statoil claims would be enough to warrant laying a pipeline to Sweden from the North Sea. The two sides are negotiating prices.

ENTHUSIASM FOR GAS

An indication of European enthusiasm for North Sea gas came from the decision of three West German purchasers, Ruhrgas, BEB Erdgas und Erdol GmbH, and Thyssengas, to exercise an option to boost deliveries under their Troll gas purchase contract.

The first option will allow the German companies to increase the annual average to 996 MMcfd from 803 MMcfd.

The companies exercised the first option after surveys showed that gas demand in the second half of the 1990s and the early part of the next century could be much higher than expected.

The Ruhrgas and BEB link with the East German distribution network could increase volumes required even in the short term.

The Germans also are concerned that upheavals 'in the Soviet Union could have repercussions in the gas business.

The Soviets have always been reliable suppliers. Supply problems have been caused mainly by weather induced delays or technical problems rather than by political disinclination to meet full contract volumes.

Statoil is boosting gas sales to the Spanish state gas organization Enagas. The Spaniards were latecomers to Troll gas but were quick to exercise an option to start taking gas from Sleipner field in 1993 instead of waiting for Troll deliveries beginning in 1996. By exercising the option, Enagas will increase the plateau sales level to an average 205 MMcfd from 175 MMcfd. Total deliveries also will increase to 1.76 tcf from 1.34 tcf.

NEW PHILLIPS DEAL

Phillips Petroleum Co. Norway, on behalf of the Ekofisk group, negotiated a new contract that will extend deliveries of gas from Ekofisk field to continental Europe from the original 1999 expiration date until 2011.

The new contract ends a disagreement between the Ekofisk group and its customers-Ruhrgas AG of West Germany, Gasunie of Netherlands, Gaz de France, and Distrigaz of Belgium-over terms of the two original contracts of 1973 and 1974.

After major investments and upgrade projects, Phillips estimates there are at least 4.5 tcf of reserves remaining from the original 8.9 tcf. The Ekofisk partners felt the annual average offtake of about 1.2 bcfd was inadequate. Purchasers were unhappy with pricing.

Under the new contract, the gas price will continue to lag oil product prices at Wiesbaden, West Germany, by 1 year. But they will take into account tax anomalies in West German product pricing that will benefit the French, Belgian, and Dutch buyers.

County Natwest Woodmac, Edinburgh, Scotland, estimated the new gas price for Ruhrgas will be about $2.70/Mcf after taking into account the 12 month lag. On this basis, Ekofisk gas prices will remain significantly higher than Troll prices. The Ekofisk price can be renegotiated in 1999.

On the supply side, the contract is considerably more flexible. The old system of allocation of gas field by field is replaced by an annual contract volume covering existing and future development on the Ekofisk license.

Woodmac estimated gas sales from Ekofisk will remain at an average of about 1.1 bcfd in the early to mid-1980s, then decline gradually to 675-775 MMcfd in 1999.

Industry sources say there is an excellent chance of increasing the Ekofisk reserve base. Phillips is working on development proposals for South Eldfisk field, and other prospects may be drilled in the next few years.

Statoil also has broken new ground by buying 38 bcf of associated gas from four partners in Veslefrikk field, raising its share of reserves to 91%. Norsk Hydro owns the other 9%.

The gas originally was sold for power generation, but the power station project was canceled, leaving as much as 25 MMcfd gas without a buyer when Veslefrikk reaches plateau production.

Veslefrikk gas will be stored in Statfjord or Heimdal field until a sales contract is arranged. Statoil's action could set a trend for other small parcels of gas that may become available.

DANISH, DUTCH GAS

Danish offshore gas production, currently controlled exclusively by Dansk Undergrunds Consortium (DUC), could benefit from plans by the administration in Copenhagen to promote gas use in an effort to reduce pollution.

Unlike its neighbors in Netherlands and Norway, Denmark does not have access to massive untapped gas reserves. Remaining reserves at the beginning of this year were 4.45 tcf, all under the control of DUC.

Production from Tyra gas field and of associated gas from DUC's offshore oil fields has averaged about 265 MMcfd the last 12 months. All is sold to the state monopoly Dangas.

DUC has medium term plans to develop Harald and Roar fields under a new flexible gas contract that could help meet future requirements of a more environmentally oriented Danish energy policy.

Denmark is a relative newcomer to the use of gas. Outlets have been established in the industrial and domestic markets and for district heating projects. Only about 7.5% of total supply goes into power generation. Demand this year is expected to be about 215 MMcfd.

To absorb its contract volumes from DUC, Dangas signed four export contracts with Swedegas and Ruhrgas.

The contracts expire in 2003-06. Dangas is exporting a little less than 100 MMcfd, but the contracts have a plateau level of 145 MMcfd. With sustained domestic growth and the export contracts, Dangas's requirements might rise to 375 MMcfd in 1995 from 310-315 MMcfd in 1990.

Dutch North Sea gas production averages about 1.7 bcfd. All gas is sold to Gasunie, which uses a price formula that allows very small discoveries to be linked into the extensive gas transportation system.

The Dutch government's policy is to maintain those favorable terms and keep a steady stream of new development proposals coming forward so reserves from giant onshore Groningen gas field can be conserved.

Copyright 1990 Oil & Gas Journal. All Rights Reserved.