OGJ Newsletter

Dec. 20, 2010

IHS CERA indexes show upstream cost hikes

Upstream capital and operating costs rose in the 6 months ending in the third quarter of 2010, according to indexes compiled by IHS CERA.

The IHS CERA Upstream Capital Cost Index rose 3% to 207 between the first and third quarters of the year on a scale in which costs of the year 2000 are assigned the value 100. The index had fallen since 2008.

The IHS CERA Upstream Operating Cost Index, against as similar scale, rose 1% to an index score of 173.

The firm said the index shows the federal moratorium on offshore drilling imposed after the Macondo blowout in the Gulf of Mexico in April "had a significant impact in the gulf."

A press release noted six departures of deepwater rigs from the gulf and a sharp reduction in the number of new wells drilled in shallow water.

"The subsequent lifting of the moratorium does not mean a return to business as usual, however," it said. "The return to drilling will be slow as operators and rig owners move to meet newly enacted certification processes."

Although deepwater activity elsewhere hasn't shown a similar decline, said IHS CERA Chairman Daniel Yergin, "increased certification regulations will likely push up total project costs globally in the future."

The capital cost index assessment included increases in 6 of the 10 markets it tracks. But only steel had an increase above 2%. Its increase was 7%.

The increase in the operating cost index "was driven by higher onshore well service (2% increase) and material costs (3% increase), though both remain below 2008 levels," IHS CERA said. Other markets tracked in the calculation were mostly unchanged.

Chevron plans $26 billion budget for 2011

Chevron Corp. plans a $26 billion capital spending budget for 2011, of which $22.6 billion is targeted for oil and gas exploration and production projects worldwide with $5.4 billion going to US projects and $17.2 billion going to projects elsewhere.

For 2010, Chevron had a $21.6 billion capital and exploration spending program (OGJ Online, Mar. 1, 2010).

Major 2011 upstream investments include development of natural gas resources in Western Australia and development of assets in the Gulf of Mexico, West Africa, and the Gulf of Thailand.

George Kirkland, Chevron vice-chairman, said the company's 2011 capital budget involves "sizeable investment in our LNG megaprojects," including development of Gorgon and Wheatstone gas resources and LNG operations in Western Australia and an LNG development in Angola.

In Nigeria, Chevron plans to develop Usan and Agbami deepwater oil fields. Downstream, meanwhile, Chevron plans to spend $2.9 billion during 2011, including outlays for its refineries in Mississippi and California. Chevron has the 269,000-b/cd refinery in El Segundo, Calif., the 243,000-b/cd refinery in Richmond, Calif., and the 330,000-b/cd refinery in Pascagoula, Miss.

"The company's 50%-owned GS Caltex affiliate is also expected to continue to upgrade the Yeosu refining complex in South Korea," Chevron said. "Additional projects associated with the company's chemicals operations in Saudi Arabia and Qatar are managed through the 50%-owned Chevron Phillips Chemical Co. LLC." The Yeosu refinery has a 750,000-b/cd capacity.

The 2011 budget includes $2 billion of expenditures by affiliates, which will not require cash outlays by Chevron. Acquisition costs associated with the recently announced purchase of Atlas Energy Inc. also are not included in the 2011 budget.

UEG to buy BP's upstream assets in Pakistan

United Energy Group Ltd. (UEG) agreed to pay $775 million to BP PLC for its upstream assets in Pakistan, which include nine producing and exploration blocks in Sindh province and four exploration blocks in the Arabian Sea.

The deal is expected to close by July 2011, pending the necessary governmental and regulatory approvals. BP Pakistan Exploration & Production Inc., BP Pakistan (Badin) Inc., and BP Exploration Alpha Ltd. own the assets being sold.

BP Pakistan's current net production is about 35,000 boe/d. Gross oil production is around 10,000 b/d while gas production is 200 MMscfd. As of Dec. 31, 2009, proved reserves attributable to BP's share in these assets were 43.1 million boe, BP said.

UEG agreed to pay BP a cash deposit of $100 million with the balance due on completion of the sale. The acquisition marks an entry into Pakistan for UEG, which primarily has upstream operations and provides patented service technologies in China and Indonesia.

The pending transaction excludes BP's nonoperating interests on some other Pakistan assets. BP is a partner with Pakistan Exploration Ltd. on three offshore exploration blocks in Pakistan and with Oil & Gas Development Co. on another block.

BP said the sale of the Pakistan assets is part of its ongoing plan, announced in July, to divest as much as $30 billion of assets by yearend 2011. Previously, BP already had sales agreements totaling $21 billion.

The company said it continues to identify additional divestiture assets.

Forest Oil plans Canadian subsidiary spinoff

Forest Oil Corp. plans to sell 19.9% of its subsidiary, Lone Pine Resources Inc., in an initial public offering to be followed by a spinoff of Forest's remaining shares in Lone Pine to Forest's shareholders. The IPO is estimated at $375 million.

A Denver company, Forest Oil said Lone Pine filed a registration statement with the US Securities and Exchange Commission regarding the proposed IPO. Along with the IPO, Forest Oil intends to contribute its ownership of Canadian Forest Ltd. to Lone Pine. Forest Oil believes separation of the Canadian assets from the rest of its assets will enhance Lone Pine's valuation. Forest Oil also expects that its own overall valuation will improve as a result.

The IPO is expected to be completed by July 2011. Forest Oil plans a spinoff of its remaining ownership in Lone Pine about 4 months after the IPO, although Forest Oil retains the right to decide the timing.

Forest Oil said it intends to focus on growth through horizontal drilling on its remaining liquids-rich development inventory. Lone Pine intends to use net proceeds from the offering to repay debt it owes Forest Oil, and Lone Pine will use any remaining funds for general corporate purposes.

"Lone Pine intends to focus on growing its estimated proved reserves and production," Forest Oil said, adding the IPO is intended to be done in a manner to preserve Forest Oil's ability to complete a tax-free spin off of its remaining stake in Lone Pine.

Forest Oil's principal reserves and producing properties are in Arkansas, Louisiana, Oklahoma, Texas, Utah, Wyoming, and Canada.

Canadian Forest Oil, the current owner of Forest Oil's Canadian assets, has estimated proved reserves of 322 bcf of gas equivalent through holdings in Alberta, British Columbia, Quebec, and the Northwest Territories.

UBS analyst David Deckelbaum issued a research note suggesting Forest will use the transaction to finance "greater activity in Forest's core 103,000 net acres in the Granite Wash," a liquids play primarily in Texas.

Exploration & DevelopmentQuick Takes

Colombia's Rio Ariari has next oil discovery

An exploratory well testing a new play concept on Colombia's Rio Ariari block in the Llanos basin has tested heavy oil at the rate of more than 600 b/d.

The Mochelo-1 vertical well flowed the 10° gravity oil with 80-90% water cut on a 7-hr test of Eocene Mirador sand, in which logs indicated 69 ft of potential net pay, said Petrominerales Ltd., Bogota.

The company expressed extreme encouragement at the flow rate, said the thick Mirador is expected to be conducive to horizontal penetration, and said it is considering a horizontal sidetrack of Mochelo-1 to optimize production characteristics.

Petrominerales will shoot a further 372 sq km of 3D seismic on the western part of the block to delineate Mochelo and plan commercial development.

The company has spudded Borugo-1, the fifth exploratory well of a planned nine-well program on the block. Borugo also targets a new play concept distinct from the Mochelo-1 and Rio Ariari-1 discoveries.

Abu Dhabi, Yemen move toward E&D cooperation

State-owned oil and gas companies of Abu Dhabi and Yemen are moving toward cooperative exploration and development in Yemen.

Representatives of Mubadala Oil & Gas of Abu Dhabi and Yemen Co. for Investments in Oil & Minerals signed a memorandum of understanding calling for an exchange of technical information and joint assessment of opportunities "to work together on new investments, field redevelopment, and expansion projects and other oil and gas operations in Yemen," according to a press statement.

Drilling & ProductionQuick Takes

Jubilee field off Ghana starts production

Production from Jubilee oil and gas field off Ghana has started, and partners expect output to reach 55,000 b/d of oil by yearend and 120,000 b/d during the first half of 2011 when additional wells are completed, operator Tullow Oil PLC and partners said Dec. 15.

The first tanker of oil from Jubilee field is expected to leave in January 2011, Tullow said. The field in the Gulf of Guinea came on stream 42 months after the 2007 discovery (OGJ, Nov. 22, 2010, p. 24).

Tullow said Ghana officials celebrated with Dec. 15 events both offshore and onshore. Oil flowed into the floating production, storage, and offloading vessel on Nov. 28. That oil was used to commission facilities, Tullow said.

Kosmos Energy LLC, a private company based in Dallas and the project's technical operator for development, said the "accelerated timetable represents one of the shortest cycles for any deepwater FPSO-based oil project of this scale in ultradeep water."

The next phase of development likely will include infill wells, which will not require installation of other subsea facilities. Jubilee field is on the deepwater Tano Block and extends into the West Cape Three Points Block (OGJ, July 27, 2009, p. 35). Plans are under way for the appraisal and development of additional discoveries on those blocks, Kosmos said.

The turret-moored FPSO, the Kwame Nkrumah, was created by converting a very large crude carrier in Singapore's Jurong shipyard. The FPSO is capable of processing 120,000 b/d and 160 MMscfd of gas and storing up to 1.6 million bbl of crude. It's also capable of treating and injecting 232,000 b/d of water for reservoir pressure maintenance, and it can offload or reinject 160 MMscfd of gas.

Tullow operates Jubilee with 34.7%. Partners are Kosmos and Anadarko Petroleum, 23.49% each, Ghana National Petroleum Corp., 13.75%, Sabre Oil & Gas, 2.81%, and EO Group, 1.75%.

ExxonMobil finishes Shute Creek expansion

ExxonMobil Corp. completed its $86 million expansion of the carbon dioxide capture plant near La Barge, Wyo.

The Shute Creek natural gas processing plant in Lincoln County, Wyo., receives gas from La Barge field in Sublette County, Wyo. Composition of the gas from La Barge is 66% CO2, 21% methane, 7% nitrogen, 5% hydrogen sulfide, and 0.6% helium.

The plant expansion included installation of compressors to capture 50% more CO2 for use in enhanced oil recovery projects and other industrial uses.

The plant now has the capacity to capture 365 MMcfd of CO2 from gas streams. ExxonMobil sells CO2 to other oil companies for EOR projects (OGJ, Dec. 7, 2009, p. 41).

Pride International to build drillship

Pride International Inc. plans to build another ultradeepwater drillship, which is the fifth that the drilling contractor has ordered since 2007.

Estimated construction cost, including commissioning and system integrated-testing and project management, is $600 million. Samsung Heavy Industries Ltd. will construct the drillship at its shipyard in Geoje, South Korea. Delivery is expected during 2013. The drillship, to be named later, is based on an SHI proprietary hull design measuring 750 ft by 140 ft.

The rig's design and capabilities, including a dual derrick, allow for numerous well construction and field development activities that can be performed in parallel.

Designed for 12,000 ft of water, the drillship initially will be capable of drilling in 10,000 ft. It will feature dynamic positioning and provide housing for 200 people.

Pride International of Houston operates a fleet of 25 rigs, including 4 deepwater drillships, 12 semisubmersible rigs, 7 independent-leg jack ups, and 2 managed deepwater rigs. The company's fleet operates primarily off Brazil and West Africa.


Valero ready to restart Aruba refinery

Valero Energy Corp. said its Aruba refining subsidiary is ready to restart the 235,000-b/d refinery it idled in July 2009 because of poor economics (OGJ Online, June 8, 2010).

Valero Aruba Refinery, which began moving toward a restart in June, announced completion of a plantwide turnaround while reporting the signing of a memorandum of understanding with the Aruba government on delivery of LNG to the island nation.

The parties offered no details on their LNG plans.

Valero said it had spent more than $90 million preparing the refinery to resume operations. It began planning the move after reaching agreement with the government in a tax dispute.

Turkey JV hires manager for refinery construction

A joint venture of State Oil Co. of Azerbaijan Republic (SOCAR) and TURCAS Rafineri AS, collectively STRAS, has awarded Fluor Corp. a project management consultancy for a refinery to be built in Aliaga, Turkey. TURCAS itself is a JV of SOCAR and Petrol AS.

The planned refinery will be integrated into the Petkim petrochemicals complex on the Aegean coast. Fluor will act as PMC for the SOCAR and TURCAS Aegean Refinery (STAR) project and will assist STRAS in selecting and managing the engineering, procurement, and construction contractor and provide overall project and construction management.

Project work is under way, Fluor said, with site preparation and engineering, procurement, and construction work estimated to be in mid-2011 and construction start-up sometime in first-quarter 2012.

STRAS is a 100% subsidiary of SOCAR and Turcas Enerji AS, which also owns 51% of Turkey's only petrochemicals producer, Petkim.

Petrobras awards refinery design contracts

Petroleo Brasileiro SA (Petrobras) let a basic engineering design and front-end engineering design contract to Foster Wheeler's Global Engineering & Construction Group for two grassroots refineries in Brazil.

The state-owned company plans a two-train, 600,000-b/sd refinery called Premium I in Maranhao State and a single-train, 300,000-b/sd refinery called Premium II in Ceara State (OGJ Online, Nov. 10, 2010).

The contract covers the main process units and auxiliary units.

Each train will have a crude vacuum distillation unit, a four-drum delayed coker using Foster Wheeler technology, a hydrocracker, a distillate hydrotreater, a naphtha hydrotreater using UOP technology, a hydrogen unit using Foster Wheeler technology, a sour-water stripper, and amine regeneration and sulfur-recovery unit.


CPC pipeline to nearly double capacity

The shareholders and governing bodies of the Caspian Pipeline Consortium have unanimously approved a $5.4 billion expansion of the Caspian pipeline. The capacity of the 900-mile pipeline, which transports oil from Western Kazakhstan to a dedicated terminal in the Black Sea, will increase to 1.4 million b/d from its current capacity of 730,000 b/d.

Chevron Corp. describes the expansion as a critical step toward enabling expanded development of Tengiz oil field, one of the world's largest with estimated recoverable reserves of 6-9 billion bbl. CPC will carry Tengiz crude oil and also transport oil from other Kazakh and Russian fields.

CPC will implement the expansion in three phases with capacity increasing between 2012 and 2015. The expansion includes refurbishment of the existing 5 pump stations, addition of 10 pumping stations, replacement of a 55-mile section of the line, 6 new storage tanks, and the addition of a third offshore mooring point at the Black Sea terminal, 6 miles north of the Port of Novorossiysk.

The three largest CPC shareholders, Transneft, KazMunaiGaz, and Chevron, will provide project management services and are in the final stages negotiating construction contracts with awards expected first-quarter 2011.

The 1.2 million b/d Baku-Tbilisi-Ceyhan pipeline, though used primarily to transport Azeri production, also has agreements to carry oil from Tengiz. State Oil Co. of the Azerbaijan Republic (SOCAR) announced plans to begin a major expansion of its oil export terminal at Kulevi on Georgia's Black Sea coastline in April, doubling capacity to 20 million tonnes/year possibly by yearend 2011, at least in part to transport Tengiz crude (OGJ Online, Apr. 30, 2010).

Chevron, Shell okay Jack-St. Malo deepwater line

Amberjack Pipeline Co. LLC, a joint venture of Chevron Pipe Line Co. and Shell Pipeline Co. LP, approved installation of a 136-mile, 24-in. OD crude oil pipeline from Jack and St. Malo fields in the deepwater US Gulf of Mexico to a Shell-owned and operated platform on Green Canyon Block 19.

The pipeline will originate about 280 miles south of New Orleans in 7,000 ft of water and terminate at GC Block 19. From there, Jack-St. Malo owners will be able to access most major trading hubs and refineries in the Gulf Coast region.

Operators expect the Jack-St. Malo hub facility to have an initial production capacity of 170,000 b/d, with startup anticipated in 2014. International Maritime Associates Inc. describes a contract for a production semisubmersible on Jack-St. Malo as imminent (OGJ Online, Nov. 18, 2010).

Chevron Pipe Line Co. will construct and operate this pipeline for Amberjack.

Dragon Oil starts Turkmen Caspian pipeline

Dragon Oil PLC, Dubai, has begin shipping crude oil and natural gas from Lam and Zhdanov fields in the Caspian Sea off Turkmenistan through a new 30-in., 40-km pipeline to an onshore central processing facility.

The trunk line runs from Block II to the CPF, whose capacity has been doubled to 100,000 b/d of liquids and 220 MMscfd of gas. The CPF expansion is being commissioned.

The new line will gradually replace two existing 12-in. pipelines that will be maintained in working condition.

Dragon Oil is adding an 18-in. pipeline from the Dzheitune (Lam) 28 platform to the Dzheitune (Lam) A platform and a 20-in. line from the Dzheitune (Lam) A platform to Block II. It is also completing a 14-in. pipeline from the Dzheitune (Lam) B platform to the Dzheitune (Lam) 28 platform.

The in-field pipelines will allow throughput capacity to be increased and will help accommodate future development of the western area of Cheleken field. Dragon Oil expects to commission the in-field pipelines by the end of December.

The 30-in. trunkline and the expanded CPF will enable the company to deliver unprocessed raw gas to the Turkmen gas pipeline system.

Regency announces Eagle Ford expansion

Regency Energy Partners LP announced a series of expansion projects totaling 200 MMcfd along its rich-gas gathering system in South Texas' Eagle Ford shale.

The expansions include:

• A 45-mile pipeline to loop a portion of the existing South Texas gathering system from western Webb County, Tex., to new facilities near Interstate 35.

• 20,000 hp compression.

• 200 MMcfd dehydration capacity.

• 1,500 b/d stabilizer capacity.

The capital expenditures related to these expansions are already included in Regency's previously disclosed 2010 budget and will be funded under its revolving credit facility. Regency expects the projects to be completed in May 2011.

In August, Regency acquired Houston-based field services company Zephyr Gas Services in an effort to expand its natural gas treatment operations in both the Eagle Ford and Haynesville shales (OGJ Online, Aug. 12, 2010).


In the article, "API: US crude production, inventories broke October record," US crude oil production did not set a record in October as reported (OGJ, Nov. 29, 2010, Newsletter). It averaged 5.5 million b/d in October, a 7-year peak for the month, and 0.1% higher year-to-year, according to API.

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