Roger Vielvoye
International Editor
Exploration and appraisal drilling off much of Northwest Europe is starting to wane as low oil prices and continuing uncertainty about the future trigger substantial cost cutting.
Exploration budgets off the U.K. have been hardest hit. Offshore operators have started to defer until 1993 or later formal commitments to exploration campaigns.
The exploration surge of the past 2-3 years off the U.K. has kept drilling activity high. However, the number of exploration and appraisal wells there this year could be as low as 120-130, compared with 173 last year and a record 224 in 1990.
Well numbers are still tentative because major operators continually adjust drilling plans. Several big companies have made two or three cuts in forecasts since 1992 drilling budgets were established last fall.
At the end of last year the British Department of Energy forecast 210 wells off the U.K. in 1992. But it now concedes that was much too optimistic. It is repolling offshore operators about their 1992 drilling plans.
The U.K. drilling slump is expected to last well into the second half of next year. Activity could be sparked then by improved cash flow and a need to deal with a backlog of deferred commitment wells.
British operators are victims of their own success. High levels of drilling and excellent discovery rates in the late 1980s kept a steady flow of new developments coming forward.
Projects under way or about to start between now and the mid-1990s will require about 15-16 billion ($26.5-28 billion) of investment capital.
While demands for capital are rising, the return from oil sales is on the decline, particularly in sterling terms. The result is weak cash flow.
Edinburgh, Scotland, analyst County Natwest Woodmac says some companies are experiencing a negative cash flow for the first time since the oil price collapse of 1986.
In this situation, cutting exploration budgets is one way companies can see almost instant cash savings. Exploration cuts have been accompanied by intensive campaigns among all operators for cost savings to ensure the viability of North Sea operations throughout the decade.
North Sea operators are assessing many ways to reduce costs. The aim is to prepare for a long period of low oil prices and declining production from mature fields.
At one end of the scale, Shell U.K. Exploration & Production has raised the possibility of cutting more than 4,000 jobs from its onshore and offshore payroll.
At the other end of the scale, operators are urging personnel to find new ways of operating more efficiently. They report a steady flow of suggestions that individually make only small improvements but collectively add up to significant savings.
OTHER AREAS
The downturn is less pronounced in other parts of the North Sea.
Exploration drilling off Norway will show only a small decline from last year's well count.
Norwegian operators expect to spud 45 wells in the North Sea, the Barents Sea, and areas off mid-Norway. That's only two fewer than the 47 wells drilled in 1991, the highest number since 50 wells were drilled in 1983.
The mobile rig count off Norway is 15, divided among nine wildcats, two appraisal wells, and four development wells. The number is almost the same as 12 months ago, when there was a greater emphasis on appraisal than on wildcatting.
Off Denmark, exploration and appraisal drilling is running at about last year's pace, although demand for rigs to drill development wells has fallen to three from five. There are five wells drilling in this sector, compared with seven at this time last year.
The number of rigs working off Netherlands has risen from 10 a year ago to 13 at present. The upturn results from a requirement for development wells. Rigs involved in exploration drilling dropped to four from seven.
Development drilling has helped to bolster the rig count off the U.K.
Forty-nine wells are being drilled, compared with 61 at this time last year. But only 20 of the rigs are on wildcats, and four more are on appraisal wells, compared with 34 wildcats and 10 appraisals last year. The number of rigs on development wells is up to 25 from 17.
RIG FLEET
The number of rigs available in the North Sea has remained steady at about 138. However, there is talk of some units leaving to find work elsewhere,
However, budget restrictions on exploration in other regions ensure that opportunities outside Europe are strictly limited.
At this time last year only 15 rigs were stacked off Northwest Europe. The number has now risen to 30 and looks set to go higher. Demand for jack ups is better than for semisubmersibles, which account for most of the stacked units.
Rig owners are facing up to the inevitable and talking about cold stacking units that have little chance of employment before mid-1993. In a final bid to prevent cold stacking, some contractors are bidding second Generation rigs at about $21,000/day, or less than operating costs.
Rig demand has been hit by operator decisions to place deep, high pressure wells at the top of the list of projects to be deferred. As a result, contract prices for more advanced rigs capable of drilling such wells has slipped to $40,000/day from $80,000/day.
Earlier in the year fourth generation rigs were in demand off Norway. But rates of more than $100,000/day stoked operator resistance, rates fell to less than $90,000/day.
While the U.K. drilling industry faces a significant downturn in activity this year, deferment of exploration plans on a large scale could set off a miniboom in 1993 an beyond.
There also are suggestions that a further decline in rig rates could encourage some operators to add a few wells to the 1992 program toward the end of this year.
Many operators have obligation wells that must be drilled before 1997. Companies that do not want to put off drilling 1997 commitment wells are likely to drill them during 1993-95. Appraisal drilling, at the discretion of operators, could see a substantial short term decline.
The poor prospects for oil prices could also affect the 14th offshore licensing round launched last month by the British Department of Energy.
While companies are unlikely to ignore the round or bid on fewer blocks, they are unlikely to be too ambitious when it comes to nominating work programs, one of the major factors taken into consideration by the government in awarding licenses.
Instead of offering to drill four or five wells per license, companies under financial restraint might end up committing to only one or two.
CASH FLOW ANALYSIS
Expectations of increased drilling activity in 1993 are based on an expected hike in cash flow next year.
County Natwest Woodmac said U.K. majors still have a positive cash flow despite heavy investment commitments.
But U.S. companies operating in the U.K. North Sea have the strongest cash flow. By 1994 this group, which accounts for about 40% of the worth of oil and gas assets off the U.K., will be generating after tax revenues of more than 2 billion ($3.5 billion).
The hardest hit group is U.K. independents, whose total cash flow is negative and a change in fortunes is not expected until 1994, said the analyst.
Cash flow problems have forced these smaller companies to lobby partners for reduced drilling programs. Often they have not had to press to hard to get wells postponed.
With oil companies underperforming the stock market by a considerable margin, the analyst said, the exploration sector is in dangerous territory trending towards price levels that promoted hostile bids for Britoil, Tricentrol, and Acre Oil in 1987-88.
However, in the mid-1990s U.K. independents may not be the takeover victims of cash flow revivals among larger operators.
Britain's shrinking independent oil sector could be saved by one important difference from the situation in 1986-87. Companies with improved cash flow will see increasing investment opportunity in areas such as West Africa and the Commonwealth of Independent States. So rather than increasing their exposure off the U.K., surplus cash flow generated in the North Sea by potential predators may be directed elsewhere.
TRENDS AT SHELL
By the end of the century the 11,700 staff and contractors working on Shell Expro North Sea projects could be reduced by 4,230.
Much of the reduced manpower requirement will come from an intensive refurbishment and redevelopment program that is starting on some of Shell's older oil platforms in the northern North Sea, including the large Brent oil field which has four platforms.
A similar program is starting on smaller gas field platforms in the U.K. North Sea southern basin. Some of the units in this area will become unmanned.
Shell said a feature of this program will be a switch to less labor intensive maintenance, simplified processes, and use of more advanced technology. This will lead to reduced offshore manning.
The latest Shell platform being prepared for offshore service, in Gannet field, will have a crew of fewer than 40, compared with more than 200 on a first generation platform like Brent.
This year Shell is likely to prune the total workforce by about 400 with a similar number next year. Most of the employment cuts will occur toward the end of the 1990s.
Shell Expro, based in Aberdeen, employs about 3,000 persons onshore with a further 1,700 working offshore. On average there are about 7,000 contractors' employees on offshore installations.
The numbers offshore could be reduced by about 40% and there could be a 25% decline in numbers onshore.
Shell is the busiest operator in North Sea drilling. At the middle of this month the company had 11 rigs under contract, one of which was about to go off contract after it finished drilling a wildcat. In the second half of the month five of the 10 remaining rigs will be on exploration work.
BP Exploration, which fueled the 1990 exploration drilling boom with 50 wells, is still hungover from this excess that was required to meet commitments given to the government in the takeover of Britoil plc. Last year BP drilled only 17 wildcats and appraisal wells, compared with 30 in 1989. This year the number could be about 22-23 wells.
CONOCO ACTIVITY
Conoco (U.K.) Ltd., one of the major players in British waters, plans to spud five or six wildcats this year, compared with its original plan for about 12. The appraisal program will also be reduced by about one-third.
The company emphasized that wells have only been deferred--not canceled--and its will meet all obligations under U.K. licenses.
Conoco has, after paying a penalty, released the Sonat DF 97 semisubmersible, which was under long term contract to the company.
Conoco will retain just one long term contract rig, Neddrill 6, which will move to drill wells in the company's Lyell field development program in the northern North Sea.
At the end of March the company had three rigs--two on exploration and one on development drilling--working in the North Sea.
In addition to easing back its drilling effort, Conoco is looking for in-house economies and like many other companies has appealed to its staff to find ways to contain costs.
Suggestions from Conoco personnel enable the company to reduce offshore manning in some cases. Redundancies will be avoided as far as possible as the company becomes involved in new projects that will require more manpower.
However, it could mean that new fields will be commissioned in the future without a substantial increase in the company's offshore payroll.
Conoco personnel have suggested economies in drilling that are saving about 100,000 on a well costing several million pounds.
The current downturn is unlikely to affect the company's short and medium term development plans because the U.K. North Sea is one of the company's profit and production centers.
Conoco is under way with development of satellites to Victor gas field and the Murdoch-Caister gas project, both the in the southern basin. Its biggest project is Britannia field, formerly Kilda-Lapworth, a joint development with Chevron U.K. Ltd. and the biggest undeveloped gas/condensate field in British waters.
CHEVRON CUTS
Amonth other large operators, Chevron Corp. has cut its world capital and exploration budget by 11%.
North Sea exploration has been cut pro rata with other international programs. Chevron U.K. is reducing its drilling budget by nearly .50%.
The company is maintaining its budget for development of core assets such as Alba oil field, where large investments have already been made, and in Britannia field, a core asset for later in the decade.
Chevron is trimming its asset portfolio to bring it into line with future capital supply. Chevron U.K. has disposed of off shore acreage it would have kept at oil prices of $2530/bbl. Through brainstorming sessions with all levels of staff and its partners, it has been seeking greater operating efficiency in Ninian oil field, one of the North Sea giants that is now in a production decline. The current target is to reduce operating costs by 50 cents/bbl.
Development of Ninian satellite fields will help keep the production and transportation system running at viable levels.
In addition, personnel have come up with a list of 600 suggestions for reducing costs. Not all will be implemented, but could help the company reach the 50 cents/bbl target.
NORWEGIAN DRILLING
Most of the 45 wells expected in Norwegian waters this year will be in the North Sea, where 34 well starts are scheduled. Six wells are scheduled off mid-Norway and five in the Barents Sea.
Norway is bucking the trend in U.K. waters mainly because of the high level of commitment wells and extensive interest in licenses held by Den norkse stats oljeselskap AS and the government.
Foreign oil companies also have been encouraged by a revision of offshore terms that lightened the burden of carrying the state's share of exploration.
Before 1992 the Norwegian government's direct financial interest in licenses, usually 35%, was carried by foreign companies. That was an irksome provision when there were only one or two non-Norwegian companies in an exploration group.
Statoil lost its carried interest privileges in 1985, but the government's financial interest in new licenses has been carried by non-Norwegian companies until changes in the tax regime went into force this year.
The 50 exploration wells drilled in 1985, a record off Norway, were followed by a sharp decline that turned around in 1990.
Arild N. Nystad, director of the resource management division of the Norwegian Petroleum Directorate, reckons Norwegian waters still provide cost effective exploration.
During the past 5 years Norwegian exploration costs ranged from 50 cents to 90 cents/bbl of oil equivalent, compared with $2-6/bbl for exploration elsewhere.
Current costs off Norway are about 90 cents/bbl.
Nystad said company interest off Norway also is high because of success rates during the past 4 years ranging from 20% in 1988 to 38% in 1990 when 26 wildcats scored 10 discoveries. Last year the rate was down to 35% with 11 discoveries by 31 wildcats.
Another feature of activity in Norwegian waters, he said, is the high volume of 3-D seismic surveys under way.
On licenses awarded in the 13th round in March 1991, about one third of the blocks carried a requirement to conduct 3-D work. Last year 329,369 km of seismic surveys were shot off Norway, most of which was 3-D. The previous year the seismic total was only 119,409 km.
High levels of exploration activity off Norway are reflected in major investments in new oil and gas production facilities.
Norwegian Oil Minister Finn Kristensen expects no letup in the pace of development, a view that is echoed by executives in the Norwegian offshore industry.
Crude oil production, currently 2.1 million b/d, is likely to increase to 2.5 million b/d by the middle of the decade, Kristensen predicted.
Unlike a previous Labor administration, the current center-left government has no plans to impose any form of production restraint in the light of the world crude oil supply surplus that has restrained world crude prices.
Spending on new gas developments also is moving forward, and the current production level of 2.42 bcfd could reach 4.35 bcfd in the latter part of the decade and advance to 5.3-5.8 bcfd by the turn of the century if the current interest in Norwegian gas by European utilities is sustained.
Ten fields are under development in the Norwegian North Sea, with two more on the Haltenbanken area off mid-Norway.
"We expect a rise in the level of activity during the next few years," Kristensen said. "According to our current estimates, investment for the next 2-3 years, including field developments and pipelines, will be about 40 billion kroner ($6.28 billion)/year."
In 1991 the total value of contracts on the Norwegian shelf amounted to 32 billion kroner ($5.03 billion).
NEW LICENSES
During the next few months, Norway will announce details of the 14th offshore licensing round. Reaction by foreign companies to the licensing proposal will be studied very closely by everyone in the Norwegian industry for signs that current high levels of activity will be maintained to the mid-1900s.
As a protest against changes in the offshore tax regime, AS Norkse Shell did not nominate blocks that could be included in this round But the refusal to participate in the preliminary planning of the round does not prevent Shell from bidding for acreage once the blocks in the North Sea, Barents Sea, and off the coast of mid-Norway are put on offer.
However, two companies have told the Norwegian government they will not participate in the round.
Deminex (Norge) AS said it has enough to do elsewhere in the world.
Norske Fina AS also has told the government it will not participate in the 14th round. Fina said it preferred to concentrate its efforts on existing licenses in the Greater Ekofisk area where it is a member of a group led by Phillips Petroleum Co. Norway that has an extensive drilling program on existing licenses.
Deadline for applications in Norway's 14th round will be the end of this year or in early 1993. Awards are planned for the second or third quarter 1993.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
