After the surprises of 2005, it will be a surprise in 2006 if a monster hurricane doesn’t disrupt oil and gas operations in and along the Gulf of Mexico.
It was a surprise in 2005 when Hurricane Ivan of September 2004 turned out not to have been nature’s best shot at US Gulf Coast production, processing, and transportation. It actually was two surprises-Hurricanes Katrina and Rita, either of which alone made Ivan look like a kid brother and together created havoc from which US production, gas processing, and refining have yet to fully recover.
Ivan was bad enough, of course. It damaged platforms and pipelines. Its effects on oil and gas production lasted into 2005 and convinced some industry observers that, as hurricanes go, things couldn’t get much worse.
Katrina proved otherwise. A Category 3 storm-initially thought to have been Category 4-when it made landfall on the Mississippi Gulf Coast, Katrina had hurricane-force winds as far as 125 miles from its center. Unlike Ivan, which confined its damage to offshore facilities, Katrina wrecked refineries and gas processing plants as well as platforms and mobile rigs. Rita hit less than a month later, extending hurricane devastation to the west.
In mid-December, production on federal gulf leases still shut in because of hurricane damage amounted to 441,400 b/d of oil and 2.3 bcfd of gas. Two refineries with combined capacities of 367,000 b/cd remained shut down, and three refineries were running at reduced rates. Seven gas processing plants with capacities of 100 MMcfd or more each were inactive. Many gulf pipelines still operated at diminished rates. And this was after nearly 3 months of reconstruction.
Who could have predicted these setbacks to industry operations and energy supply at the start of 2005? Yet what forecaster, at the start of 2006, doesn’t at least mention the potential for cataclysmic weather as a possible surprise that can’t be ignored? And the reason isn’t only that two consecutive stormy years in the Atlantic and Gulf of Mexico have heightened awareness of the potential for disruption. According to climatologists, the 20-30-year hurricane cycle has entered a period of increasing storm frequency.
So a new variable complicates forecasting, an exercise in which this editor asks the OGJ staff to indulge at the beginning of every year. The resulting preview of everything from markets to vanguard technologies captures the varied perspectives of a group of professionals, many of them technical specialists, in daily contact with the oil and gas industry.
Weather and topics
Hurricanes add ominous weight to a variable with persistently strong influence over prices of oil and natural gas-the weather. They therefore have the close attention of OGJ’s market analysts.
“Much of the oil and gas market outlook depends on the 2006 hurricane season and winter weather,” says Marilyn Radler, senior editor-economics, whose market expectations will appear in the Forecast & Review special report in the Jan. 16 issue.
“Another highly active hurricane season stands to dampen US production and offshore investment again, and an especially cold winter will pressure the gas market,” Radler says. “Barring any major disruptions to the economy, demand for oil and gas should remain strong.”
Senior Writer Sam Fletcher, who writes daily about oil and gas markets, echoes her views.
“The two biggest questions now facing US oil and natural gas markets are how high might natural gas prices soar if this winter proves unusually cold and how long will it take Gulf Coast production and processing to recover from the hurricane damage suffered this summer,” he says.
Fletcher, who writes the daily Market Watch and weekly Market Journal features for Oil & Gas Journal Online, notes that energy futures prices on the New York Mercantile Exchange fluctuate with weather expectations and that the NYMEX gas price hit a record of nearly $16/MMbtu in mid-December.
“If natural gas futures prices are hitting record levels this soon into the winter heating system, with adequate supplies on hand, what might prices be if an extended cold snap pulls gas storage to marginal levels later this winter?” Fletcher asks. “And how high may prices go if a cold winter is followed by an unusually hot summer that escalates demand?”
On another subject, Radler offers a preview of the Capital Spending Outlook special report she’ll prepare for the Apr. 3 issue of OGJ.
“Capital spending will be up more than in the past 2 years, but companies will continue to grow not only through the drillbit but also through acquisitions,” she says. “Firms also will continue to use excess cash from high oil and gas prices to increase dividends and repurchase their own shares.”
Variety of expectations
Other of OGJ’s nontechnical editors, who write on a variety of oil and gas subjects, have an unsurprising variety of expectations for 2006.
Steven Poruban, senior editor, thinks big mergers will continue.
“The announcement made last month by Conoco- Phillips to buy Burlington Resources Inc. for $35.6 billion will mark the first of several multibillion-dollar deals proposed by major oil firms for larger independents during 2006,” he predicts.
In Poruban’s view, the trend won’t be the province only of the majors.
“I suspect that the independents, now flush with cash from elevated oil and natural gas prices, will take advantage of consolidations to keep reserves-to-production ratios in check as well as to expand their operations into their respective-and highly specialized-niche areas,” he says.
National oil companies, too, have pursued large mergers in a trend Poruban expects to continue.
On a separate subject, Poruban, who makes assignments and manages news stories and general-interest features for the print magazine, OGJ Online, and OGJ’s electronic newsletters, sees a broad economic concern this year.
“One of the biggest unanswered questions about 2006 will be just how the mandated lowering of sulfur content in diesel fuel will affect markets,” he says. “How long will it take for such a change to trickle down from the transportation industry to consumers who will without doubt pay more for shipped goods? Will this spark a recession in the US?”
Judy Clark, senior associate editor, expects trouble for producers from the high oil and gas prices now lifting their profits.
“Oil and gas companies will be caught in a vise of rising costs and governmental attempts to control oil and gas prices,” she says. “This will have the two-pronged effect of lining federal and state coffers while deflating industry exploration incentives later in the year.”
Clark, who edits general-interest features and writes news stories, thinks high oil and gas prices will persist, “fed by the spirals of accelerating demand, soaring costs for services, and recruitment wage tugs-of-war for trained personnel as the ‘great crew change’ commences in earnest.”
She notes the recent political movement toward approval of leasing of federal waters now off-limits.
“As national and state officials struggle to balance budgets,” she says, “the lure of ‘easy’ revenue from offshore oil and gas leases and production taxes will increasingly offset perceptions of potentially negative environmental consequences, and 2006 will see a stronger leaning toward offshore permits.” California and Florida will be exceptions, Clark adds.
Like many OGJ writers and editors, Clark expects high prices of oil and gas to stimulate development of alternative energy sources.
Nontechnical issues
By some definitions, progress toward alternative sources is well under way as production of unconventional oil and gas grows.
“Oil sands and coalbed methane will play an increasingly important role in the energy supply,” predicts Paula Dittrick, senior staff writer. “Oil sands projects, especially, are apt to advance in 2006 because many oil companies are increasing their capital expenditures for these projects.”
A subject of special concern to Dittrick, who writes frequently on the financial aspects of oil and gas operations, is accounting for reserves.
“I doubt that questions about reserves reporting ever will be completely resolved,” she says. “The nature of estimating reserves will always remain somewhat subjective, depending on the individual making the estimate.”
Jeannie Stell, survey editor, sees a conflict between calls from some US politicians for new refineries after the 2005 hurricanes and the plans she documents in two construction surveys every year.
“Despite rumors of proposals for a greenfield refinery, the OGJ survey reveals no firm plans for a domestic grassroots facility,” she says.
While several refiners are adding distillation capacity at existing facilities, “the consensus seems to be that it is more economical to import additional gasoline and diesel to meet accelerating demand” than to invest in new refineries, she says.
Outside the US, Stell adds, major new refineries are planned in countries that include India, Kuwait, and China. And petrochemical construction is brisk.
“If all projects are completed in the coming years,” she says, “worldwide capacity of ethylene will be increased by more than 29 million tonnes/year by 2011.”
Statistics Editor Laura Bell, who keeps track of energy prices through the many tables she compiles for OGJ, thinks oil and gas prices will remain at recent levels through 2006.
“These high prices could heighten the awareness of the need for finding and implementing alternative transportation fuels such as ethanol and biodiesel,” she says. “We have already seen some of the hybrid vehicles being heavily marketed to consumers.”
Angel White, associate editor, thinks a late-2005 political development will last through the new year.
“In 2006,” she says, “I expect a continued ban on drilling in the Arctic National Wildlife Refuge.” On Dec. 21, the US Senate defeated the latest attempt at congressional approval for leasing of ANWR’s Coastal Plain.
White also expects concern about costs of the US Strategic Petroleum Reserve to rise this year but to give way to even greater concern about the potential for disruption to oil supplies.
And she sees the potential for changes in refinery safety regulation, affecting both refineries and regulators, as a result of the fatal Mar. 23, 2005, explosion at BP PLC’s 460,000 b/d refiner in Texas City, Tex.
Exploration trends
Alan Petzet, chief editor-exploration, knows where to look for clues to exploration and development activity this year.
“Anyone unclear on how the industry will spend its recent profits should read oil company capital spending plans for 2006,” he says. “The expected increases in outlays are pretty imposing.”
But the need is imposing, too.
“An ExxonMobil Corp. executive said recently that even if 50 companies its [ExxonMobil’s] size existed, they could not produce 100% of the world’s energy needs,” Petzet says.
He points out that oil companies require the high profits they’ve recently reported to fund the projects they increasingly undertake costing in the billions of dollars apiece. And the high prices that have fed those profits are enhancing the economics of a growing range of opportunities.
“Operators are anxiously revisiting numerous oil and gas discoveries rendered uneconomic or marginal in past exploration campaigns by low oil and gas prices,” Petzet observes.
Shortages of skilled workers will keep operators from taking advantage of all the opportunities that become economic, he says, adding, “Employed staffs will find little time to come up for air.”
Exploration and development in the US and Canada will keep shifting toward unconventional resources, and technology applied worldwide will be impressive. As operators press their efforts to shorten the time between discoveries and production starts, however, they’ll encounter problems.
“Political instability will make this goal elusive in many areas,” Petzet says. “It is easy to envision companies pulling out of certain countries in 2006, as some did in 2005, because of deteriorating political or fiscal regimes.”
Meanwhile, natural challenges never relax.
“The resources to be found increasingly lie under 5,000-10,000 ft of water or more, in deserts with 600-ft dunes, at 30,000 ft beneath 10 ft of water, or 40,000 ft or more from an ice-blocked seacoast,” Petzet says.
LNG’s resurgence
While another big year is shaping up for the LNG business, trade remains out of balance.
“The resurgence of the worldwide LNG industry that began in 2000 hit full stride with developments in 2005 and 2006,” says Warren R. True, chief technology editor-LNG/gas processing. Demand continues to push supply, with Europe and Asia leading growth rates that are unlikely to abate this year. Total demand in 2005 approached 145 million tonnes, but delays of several liquefaction plant start-ups slowed demand growth.
“This year, something on the order of 17 million tonnes of terminal capacity will open, while only about 16 million tonnes of nameplate liquefaction capacity are set to start up, with many plants a year or more away from full capacity,” True says. Capacity under construction at the start of the year totals about 98 million tonnes/year with start-ups as distant as 2009-10 but much due on stream in 2007-08, he adds, citing data from industry consultant Andy Flower.
Due on stream this year are Nigeria LNG’s Train 5 with 3 million tonnes/year of capacity; RasGas Trains 4 and 5 in Qatar, 9.4 million tonnes/year; and Darwin LNG in Australia, 3.6 million tonnes/year.
“None of these, however, is likely to be producing at capacity in 2006,” True says.
Expansions of two US import terminals will add 1.64 bcfd of sendout capacity. New terminals in China and Japan will have sendout capacities totaling 78 MMcfd.
“With supply constrained, few terminals, certainly none in the US, are likely to be regasifying and sending out natural gas at their respective capacities,” True says.
The rapidly growing LNG shipping fleet had about 185 vessels at the end of 2005 with more than 125 vessels on order. Shipping capacity will grow even faster as vessels with above-standard capacities enter the fleet to carry supplies from Qatar.
Because shipping capacity is growing faster than liquefaction capacity and, to a lesser extent, regasification capacity, True says, some vessels have had to hunt for business. Charter rates have plunged.
He says the risk-management firm Aon Corp., Chicago, said in late 2005 that the mismatch in timing of new LNG carrier deliveries and new liquefaction capacity “signals a surplus of shipping capacity of 10-12% in 2006-08.”
Drilling efficiency
Nina M. Rach, drilling editor, thinks 2006 will be a year of major gains in drilling efficiency.
“I expect to see record-breaking footage in fields around the world as operators begin to optimize their drilling operations by analyzing mechanical specific energy (MSE) and using MSE surveillance to eliminate bit inefficiencies,” she says. “This will change some of the assumptions in technical limit drilling.”
She cites ExxonMobil’s efforts to develop work flows “that leverage the historical drilling data in its databases.” The company tested MSE surveillance while drilling more than 500,000 ft of hole with what it calls its “fast drill process” (FDP) in Qatar, South Texas, Nigeria, Australia, Nova Scotia, and Sakhalin Island in 2005.
Rach says the company improved rate of penetration (ROP) by 50-100% and cut total well times by as much as 35% with FDP and found downhole vibration to be the major bit-related problem.
Companies are addressing the challenge, she notes. “In February, Halliburton Co. will present results of a real-time downhole torsional vibration monitor. Kerr-McGee Corp. is using real-time pressure-while-drilling data to help optimize ROP and hole-cleaning. ExxonMobil is training hundreds of contractors in FDP, and the new approach is sure to trickle through the industry.”
Meanwhile, the rig fleet grows.
“US yards are busy building land rigs, and I expect to see more land rigs manufactured in other countries entering the US in 2006 to feed the busy market,” Rach says. “We already had new rigs from China, Italy, and the Czech Republic-Netherlands arrive in the US in 2005.”
And contracts for construction of mobile offshore drilling units “are announced nearly weekly,” she says. “Not all newbuilds are slated for firm contracts. Many new rigs are being built on spec by new-venture companies, particularly European venture capitalists.”
A year ago, Rach says, no one imagined that shipyards would have contracts for several new semisubmersibles. “But as day rates continue to climb higher and more rigs are taken out of circulation by long-term contracts, the market appears to support newbuilds.” She says five semis were commissioned in the first half of 2005 and 10 more in the second half.
Companies also have been refurbishing and upgrading hulls, Rach says, pointing out that the number of semis cold-stacked around the world fell to 11 in mid-December from 16 early in 2005.
Production spurt
With the Gulf of Mexico recovering and megaprojects coming on stream around the world, global oil and gas production this year should set records, says Guntis Moritis, production editor.
He expects continuation of entrenched trends including development of gas resources in tight and unconventional formations, deepwater exploration, improved flow assurance to increase subsea-tieback distances, production of heavy oil, exploitation of arctic resources, increasing use of secondary and enhanced oil recovery methods, addition of “intelligent” and digital technology to wells and fields, development of gas for LNG and gas-to-liquids projects, improvement of completion methods, and protection of the environment such as through carbon dioxide sequestration.
Breakthroughs are possible this year, Moritis says, in technologies for developing unconventional resources such as shale oil, gas hydrates, and coal gasification.
“Application of technologies such as multiphase meters and pumps, subsea processing, and the digital oil field will continue to expand as these technologies demonstrate that they can decrease a field’s life-cycle costs, improve operations, and increase ultimate hydrocarbon recovery,” he says.
Moritis also expects “incremental improvements” in drilling and completion practices “as improved tools and procedures allow the development of more problematic reservoirs.”
He says the industry will continue to make headway in eliminating the “chronic problem” of flaring associated gas.
“The problem of leaving a lot of unrecoverable oil in existing fields also won’t be solved,” he adds. “But the industry continues to make advances that improve the recovery factors of many producing fields.”
Refining, petrochemicals
While last year’s hurricanes highlighted the need for refining capacity in the US, David N. Nakamura, refining/petrochemical editor, expects demand for oil products to continue to outrun capacity growth.
“The only short-term solutions will be for refiners to raise utilization rates, which are at historically high levels, or use more expensive lighter crudes to specifically produce more gasoline,” he says.
US refiners are finishing construction of the units they need to meet requirements taking effect this year for ultralow-sulfur diesel. Most refiners have to begin making diesel able to meet the requirement in June. Under extensions granted by the Environmental Protection Agency to address logistical concerns, terminals must meet the new product specification of 15 ppm sulfur by Sept. 1 and retailers by Oct. 1. Most pipelines will require sulfur content of 8 ppm.
EPA reports that they are ready to meet the new standards, Nakamura says.
“Their attention is turning to either increasing primary distillation capacity or adding coking capacity to give them the ability to run heavier, less expensive crudes,” he says, citing Marathon Oil Corp.’s plan to add 180,000 b/d of capacity at its Garyville, La., refinery and ConocoPhillips’s plan to add delayed cokers at three of its refineries.
Yet meeting diesel demand remains difficult, a condition evident in the premium diesel prices have maintained against gasoline.
“Any upset in the diesel system could have far-reaching impacts,” Nakamura warns.
“Outside the US, refiners are mostly concerned with maintaining enough production to keep up with demand,” he adds, noting that OGJ’s latest refining survey shows that capacity is increasing worldwide, with no region showing a decline.
“New capacity is mostly in expansions in existing refineries,” he notes. “There are relatively few grassroots plants being built.”
Although the petrochemical industry had a year of reduced demand growth in 2005, Nakamura expects several years of greater market strength beginning this year.
High gas prices have hurt petrochemical manufacturers in the US, where the alternative feedstock, naphtha, goes mainly into gasoline production.
“The petrochemical industry will continue to shift overseas, to the Middle East and Asia, in coming years,” Nakamura says, adding that most demand growth is occurring in those or nearby areas.
Pipeline projects
Rapid growth of the gas market is stimulating global pipeline construction.
“Projections of mounting demand for natural gas, not just for the US and Europe but also in much of the developing world, have seen a multitude of plans advanced for getting it to market via pipeline,” says Christopher E. Smith, pipeline editor. “Many of these plans have been around for years and are being dusted off again in light of both the bullish demand forecast and higher current commodity prices.”
Some of the biggest projects remain just proposals, Smith notes. But some are advancing.
For example, work has begun on the Russian onshore section of the North European Gas Pipeline, the offshore portion of which will extend nearly 1,200 km beneath the Baltic Sea between Vyborg, Russia, and Greifswald, Germany.
Another ambitious project on which preliminary work has progressed is the Highlands pipeline, which is to carry gas from Papua New Guinea to various locations across Australia. The project has lined up multiple end-users and is due a final investment decision in the first half of this year, Smith says. Front-end engineering of the 4,300-km pipeline is 75% complete.
Growth of gas demand is pressing the two competing projects for a pipeline from arctic gas fields to the US Lower 48. This month, Imperial Oil Ltd. will participate in public hearings about its 1,194-km McKenzie Valley pipeline, a $7.5 billion project that is to carry Canadian arctic gas southward.
The 2010-11 proposed start-up of the McKenzie Valley line is at least 4 years earlier than the most optimistic projections for the 2,100-mile Trans-Alaska Natural Gas Pipeline, which is expected to cost $20 billion.
“Canada feels pressure to bring its gas to market first given the substantially greater scale of North Slope natural gas reserves-at least 26 tcf vs. 5.8 tcf for the three Northwest Territory fields combined,” Smith observes.
The McKenzie Valley line would tie in with existing pipelines, while the Trans-Alaska project, as currently conceived, would involve all new construction.
Among large oil pipelines, a similar competition is under way for projects to carry bitumen or synthetic crude from Canada’s oil sands areas to the US.
“The recent proposal by Altex Energy Ltd. to pipe raw bitumen straight from Alberta to the US Gulf Coast joins such already extant projects as Enbridge Inc.’s Gateway and Waupisoo and Kinder Morgan Canada’s effort to pipe syncrude west to British Columbia in competition with Gateway,” Smith says. “TransCanada PipeLines Ltd. and ConocoPhillips have also proposed the 3,000-km Keystone pipeline to bring crude from Hardisty, Alta., to Patoka, Ill.”
In China, Smith adds, the 4,000-km, 1.6 million-tonne/year crude pipeline from Xinjiang to Gansu, 36% complete last September, is to be finished this year.
“When these large and long time-horizon projects are added to a wide variety of somewhat smaller but still significant projects due to either start or complete construction in nearly every region of the world during 2006, the prospects for pipeline construction look very positive,” he says.
What surprises?
Developments predicted by OGJ’s editors won’t be surprises if they occur in 2006 since they are, after all, predicted here. And since nearly everyone now qualifies expectations with the possibility for hurricanes, more industry damage and market upset from storms wouldn’t surprise anyone.
What can’t be covered here are the surprises certain to occur. Surprise, though, is nothing new, and forecasting is always difficult.
An observation by OGJ’s Moritis puts the challenge into practical perspective.
“The industry remains a cyclic industry, and the patterns are still hard to predict,” he observes. “With new projects coming on stream, there is always a chance for short-term oversupply, especially if demand forecasts turn out to be over-optimistic.
“The government policies of most nations in the world as they affect the industry also can be as unpredictable as the weather.” ✦