INDUSTRY DESCRIES SHARP DECLINE IN U.S. OFFSHORE ACTIVITY

Roadblocks to offshore activity in the U.S. drew much of the spotlight at the 24th Offshore Technology Conference last week in Houston.

Among OTC highlights:

Two panels reviewed how federal leasing moratoriums and regulatory restrictions are reining U.S. offshore development.
Conoco Inc.'s manager of exploration and development in Russia detailed the allure of giant and supergiant fields in the Commonwealth of Independent States and reviewed the status of the company's efforts to negotiate E&D deals with Russian partners.
Minerals Management Service officials reviewed environmental challenges facing operators on the U.S. Outer Continental Shelf and new MMS inspection strategies in the Gulf of Mexico.
The 1992 OTC Distinguished Achievement Award for companies went to Brazil's Petroleo Brasileiro SA for deepwater development records set with the 3 Marlim well in the Campos basin off Brazil.
Petrobras disclosed production sharing deals for onshore and offshore acreage in Cuba.
Newfoundland's Minister of Development Charles J. Furey expressed cautious optimism that a new partner will be found to rescue the $5.2 billion (Canadian) Hiberia project following the pullout by Gulf Canada Resources Ltd.

UNNECESSARY BURDENS

Declining oil and gas activity in the U.S. was contrasted with growing non-U.S. activity by a panel made up of Ray Galvin, president and chief executive officer of Chevron U.S.A. Production Co.; Russ Luigs, chairman and chief executive officer of Global Marine Inc.; and Greg Colletti, international sales manager of Drilling Specialties Inc.

Panelists said U.S. oil and gas producers-in the name of some good causes-are being burdened with unnecessary risks and costs.

Luigs said, "Oil companies in the U.S. are exposed to unlimited pollution liability, oil executives are subject to criminal prosecution for accidents beyond their control, harmless drilling and production wastes have been declared toxic, drilling rigs are banned to protect the environment from fantasized risks, lawsuits prohibit drilling on drillable leases and production on producible leases - the list goes on and on."

As a result, major and independent producers are fleeing the U.S. for better prospects in other countries.

While the U.S. is discouraging oil and gas activity under the guise of achieving environmental and economic goals, "the rest of the world is scrambling to lure oil investment to achieve precisely the same objectives," Luigs said.

At the same time, demand for energy is growing rapidly in developing countries.

To maintain current consumption rates for a world population growing by about 100 million/year, Luigs said, world oil production would have to increase by almost 1 million b/d/year.

U.S. E&P OBSTACLES

At a time when exploration and development technologies are lowering oil and gas finding and production costs, Luigs said, obstacles to exploration and production based on exaggerated environmental claims are keeping costs high in U.S. areas where drilling is allowed. At the same time, U.S. gas prices are depressed because the transition to deregulation of gas markets has created a temporary surplus.

Luigs maintained there has been no significant pollution as a result of an offshore drilling blowout for more than 20 years. In that time, more than 20,000 wells have been drilled on state and federal waters, mostly in the Gulf of Mexico.

Luigs cited a survey that found seven times as many U.S. adults believe environmentalists' claims as believe oil industry claims.

"With that kind of credibility gap, facts don't matter," he said. "By popular demand, almost the entire OCS is off limits to drilling.

"Not long ago, one in three offshore rigs was working in the U.S.. Now it's one in six and getting worse every day.,,

Global Marine is no exception to the trend. The company recently has moved three rigs and sold another into international markets.

"The U.S. market is so diminished, we lose money here whether we're working or stacked," Luigs said. "We'll continue taking them out until we can see the possibility of a healthy domestic market in the relatively near future."

Luigs said oil and gas production causes such a small part of U.S. environmental problems there would be no noticeable decrease in pollution if all offshore drilling were prohibited.

"Indeed, the opposite would occur, because tankers spill more than 10 times as much oil as offshore rigs," he said.

MOTHER SAYS NO

Conoco's Charles L. Bare told an OTC luncheon nothing in recent experience rivals the petroleum potential of the C.I.S.

"And perhaps nothing rivals the challenges faced by western and Russian companies attempting to gain mutual benefit from this opportunity," Bare said.

Still, conditions exist in the C.I.S. petroleum sector that should provide long term incentives for partnering with foreign supply, service, and integrated petroleum companies.

"It is important that we exercise considerable patience in efforts to solidify lasting relationships," Bare said.

He likened C.I.S. oil and gas potential and the frustrating, protracted negotiations resulting from efforts to set up oil and gas deals there to a Russian proverb, which loosely translates to, "I love it so, but mother says no."

Spanning 11 time zones and covering about one-sixth of the earth's land surface, the C.I.S. holds about 3,000 oil and gas fields, "at least 100 considered giant and many supergiant."

In terms of proved and probable petroleum reserves, he said, C.I.S. ranks fifth behind most major members of the Organization of Petroleum Exporting Countries. C.I.S. undiscovered oil reserves are estimated at nearly three times the estimated potential of Iran.

C.I.S. known gas reserves are more than twice those of the closest producing nation and nearly eight times the gas reserves of the U.S., Bare said. The picture is similar for C.I.S. estimated undiscovered gas reserves.

NEED FOR TECHNOLOGY

Bare said the need is great in the C.I.S.'s petroleum industry for large infusions of western technology.

In Russia, an estimated 22,000 wells are idled-perhaps as many as one in five wells in western Siberia-deferring estimated production of 800,000 b/d. The shut-ins mostly are due to equipment shortages, equipment failure, and downhole complications.

In western Siberia, Bare said, one field was developed in 1991, compared with 22 fields in 1988. Average well depths increased to nearly 7,677 ft in 1990 from about 6,571 ft in 1988. Production rates declined to 74 b/d/well in 1990 from 104 b/d/well in 1986.

Despite that rosy reserve estimate, recent oil and gas production declines are placing increasing pressure on C.I.S. needs for hard currency generated by exports. Bare said an acute shortage of capital and equipment restricts efforts to slow the petroleum sector decline.

Economic slowdown and restructuring has helped offset lower foreign currency earnings. But he said, "Larger than forecast delines in petroleum production or a moderate increase in Russia's demand could move this major producing region to importer status, providing additional impetus for our involvement."

All of those factors, Bare said, should combine to provide adequate incentive for C.I.S. leaders to approve foreign participation in developing the petroleum industry.

CONOCO PROJECTS

Conoco is negotiating three full cycle exploration and development deals in the C. I. S.:

Timan Pechora basin along the arctic circle west of the ural Mountains, covering the Ardalin complex and Northern Area.
Shtockmanovskoye gas field in 1,100-1,200 ft of water in the Barents Sea about 375 northeast of Murmansk.
Western Siberian areas surrounding Kharampur and Sugmut fields.

In the Timan Pechora basin, Conoco and the Russian organization Arkhangelskgeologia (AAG) last January registered their Polar Lights joint venture with the Russian Ministry of Finance for exploration and development of the Ardalin complex including Ardalin, Kolva, and Dyusushev fields.

Plans call for Polar Lights to drill as many as 24 wells in Ardalin field, where reserves are estimated at more than 100 million bbl of oil. A central processing facility will be built and a 60 km pipeline connection laid to an existing trunk line for export to world markets.

Work is to begin this year, with production expected in 12-18 months.

Conoco and AAG later this year expect to complete a feasibility study of fields in the Northern Area, including Khilchuyu, Yuzhno-Khilchuyu, Yareyusk, and Inzerei, where recoverable reserves are estimated at I billion bbl.

Partners are studying two offload options for the northern fields: laying a pipeline south for export through the Black Sea or installing an offshore export platform to the north.

SHTOCKMANOVSKOYE FIELD

The project in Shtockmanovskoye gas field is being undertaken by a group of western companies, the Russian organization Arcticmorneftegas, and Russia's fuel and energy ministry and committee on geology and use of subsurface resources. Partners estimate field reserves at about 80 tcf.

The field likely will be developed with either a tension leg platform or a gravity base structure. Bare said as many as 32 wells will be drilled in the primary development phase with production estimated at as much as 2.5 bcfd. Topside facilities will be designed to handle about 2.8 bcfd.

Shtockmanovskoye gas will be transported by two pipelines to an onshore processing plant near Murmansk.

Prior to start of the project, a preliminary engineering plan must be completed, financial and marketing arrangements wrapped up, and an environmental management plan developed.

Bare said Shtockmanovskoye production is expected to start by the end of the 1990s.

In western Siberia, Sugmut and Kharampur fields each hold estimated recoverable reserves of about 1 billion bbl of oil, and the latter has gas and gas liquid reserves as well.

Bare said Conoco's negotiations to jointly develop Sugmut field have reached a stalemate, while efforts are progressing slowly in Kharampur to work out a joint exploration and development deal.

He blamed the slow going on unrealistic expectations of available funding for field development among Russian oil and gas associations.

"Local associations have great difficulty determining appropriate values for their fields and recognizing that what has been done in the past does not necessarily represent current market value for their assets," Bare said. "Economic return is vital to project development. To maintain financial stability, western companies cannot overpay for new investment opportunities."

MMS PRESENTATIONS

MMS's J.P. Zippin said implementing regulations sometimes complicates environmental efforts by U.S. offshore operators.

For example, stringent Clean Water Act (CWA) requirements on OCS effluents will force mud, cuttings, and produced sand from some operations to be barged to shore for disposal, possibly adding to the industry's environmental liability under the Clean Air Act. This barged waste then also might be subject to Resource Conservation and Recovery Act requirements.

Zippin said the Environmental Protection Agency expects to publish in July a final OCS air pollution rule. EPA also is under a court order to publish OCS CWA rules by June but is asking to delay the final rule until january 1993.

MMS's D.J. Bourgeois reviewed the agency's OCS inspection and enforcement program. He focused his remarks on measurement and disposal of naturally occurring radioactive material (NOx) and on the evolution of rules covering removal of platforms and other offshore structures.

MMS last December issued a letter to lessees and operators establishing interim guidelines for reporting and disposing of produced well solids. The letter also set guidelines for collecting data for future MMS promulgation of detailed regulations covering produced well solids.

He said the letter was issued as a result of concern about levels of NORM in solids on the OCS of the Gulf of Mexico.

NORM includes radium 226, radium 228, and other isotopes in the decay chains of uranium and thorium that are leached from oil bearing strata by formation brines.

In addition, temperature, pressure, and chemical changes occur as the fluids and solids are brought to the surface. Those changes can cause NORM scale to form on the interior walls of tubing and production equipment.

He said solids samples collected at surface production facilities in the gulf, as well as at a large number of other onshore and offshore producing areas, have low levels of NORM.

After collecting considerable data through the Offshore Operators Committee, various lessees, and other agencies, MMS has been able to approve some disposal requests.

Bourgeois said removal of structures from the federal OCS in 1991 increased to 145 from about 50/year until 1987. The rate at which structures are removed from the OCS is expected to remain steady for the next decade, then increase markedly after the turn of the century.

About 3,800 platforms are installed in federal waters and 1,200 in state waters.

DEEPWATER ACHIEVEMENTS

OTC officials recognized Petrobras for installing guidelineless Christmas trees and flexible pipe in water depths exceeding 2,297 ft and floating production systems (FPSs) in water more than 1,968 ft deep.

It holds records for the deepest water commercial strike (5,133 ft), subsea completion (2,562 ft), and producing well (2,467 ft). All the installations are in water more than twice as deep as similar installations in other parts of the world.

Petrobras has 14 fixed platforms and 20 FPSs in the Campos basin, where production is more than 400,000 b/d of oil and 282.5 MMcfd of gas.

Petrobras officials said the company intends to be operating in water more than 6,500 ft deep by 2000.

Petrobras chose OTC to announce that contracts will be signed this week on two 4 year exploration and production sharing agreements with Cuba.

Development is to occur onshore in Block 12, about 220 km east of Havana. Plans call for spending about $24 million to collect 1,600 km of seismic data and drill three wildcats on Block 12.

Petrobras and Cuba also agreed to a similar plan on Block 4 in shallow water along the island's northern coast. A 700 km seismic survey will be conducted on that acreage and two wildcats drilled during the primary 4 year term of the contract. Costs are estimated at $28 million. In addition, Petrobras said a third exploration and production sharing agreement is being negotiated covering an undisclosed Cuban deepwater tract.

HOPE FOR HIBERNIA?

Newfoundland's Furey said action toward development of Hibernia oil field on the Grand Banks is in a slowdown-not a shutdown-with about 1,800 workers on the job.

Costs are running about $40 million/month, with spending in March of $46 million and in April estimated at $44 million.

Furey said several of the 69 companies that originally showed interest in the project are continuing to negotiate with remaining Hibernia partners for all or portions of Gulf Canada's 25% share. A new partner could be found within the next 30-60 days, he said.

Gulf Canada commitments to the project will continue through October.

Remaining partners in the Hibernia group are Mobil Oil Canada, Petro-Canada, and Chevron Canada Resources Ltd.

Furey and another Newfoundland official said reports of technical difficulties with the project have been overblown by the Canadian press.

Fred A. Murrin, director of offshore and industrial benefits for the Newfoundland Department of Development, said an increase in calculated topside weight is still within the 40,000 metric ton limit for platform tow-out. Variable loads were always planned to be added after the platform was on location, he said.

Hibernia topsides are expected to be ready for installation by September.

Murrin said a reported problem with the soft ocean floor in the project area could be corrected by either modifying the platform skirts or setting the platform at a firmer site nearby.