COMMENT HERE'S HOW TO ASSURE ADEQUATE INVESTMENT LEVELS IN NORTH SEA

Peter I. Bijur
President
Texaco Ltd.

From an address to the Financial Times North Sea Oil and Gas Conference, London.

The North Sea is a success story of a partnership between government and industry in which everyone is winning.

I am here today to talk about what it will take to keep the success story going-to keep the North Sea attractive to large investors.

Petroleum investment has always been cyclical-a series of booms followed by sharp declines. In current pound terms, North Sea investment has grown steadily, barring a brief decline in the mid-1980s. But by adjusting costs to 1990 pounds, three bursts of very strong investment appear: 1975-78, 1982-86, and the third boom, which we are in as I speak.

Based on projects approved or under construction, the current boom can be expected to last at least into 1993. However, beyond that time, we can anticipate reduced annual investment.

Now is the time to prepare for that downturn by analyzing what will be required to keep North Sea investments attractive beyond the current boom.

NORTH SEA CHALLENGES

Here are the most significant challenges facing North Sea investors: competing investments, declining prospectivity, and technical barriers.

International companies are keenly aware of the wealth of investment opportunities that will compete for funds with North Sea projects in the 1990s.

In Texaco we have identified several massive, potential developments that will cost as much as 3 billion each. From the Duri steamflood in Indonesia to CO2 floods in Texas, from oil fields of the U.S.S.R. to development of a major Australian gas field, plus significant investments in the downstream, we at Texaco face hard choices about which are the best investment. So do other major oil companies.

Added to this array of competing opportunities is the second challenge-declining prospectivity of the North Sea. In the early years of North Sea exploration and development, large fields with highly productive reservoirs such as Forties and Brent came on stream. During its peak period of 1980, for example, Forties produced some 520,000 b/d of oil, Brent during 1986-88 some 476,000 b/d.

But today, the situation is very different. Maturity has come to the North Sea and with it reductions in the number and size of commercial discoveries, as well as declining production from major fields.

For all of the impressive size of remaining U.K. Continental Shelf reserves listed in the Brown Book, the fact is that the average size of U. K. discoveries has been declining from almost 500 million bbl in 1970 to about 25 million bbl today.

The trend is toward development of smaller fields, with many coming on stream as satellites to early, larger fields now in decline. Rather than fields producing hundreds of thousands of barrels per day, today's projects often forecast peak rates of 20,000-60,000 b/d.

Despite this maturity, not all of the North Sea prospects are small. However, the large prospects that remain to be developed are burdened by the third challenge to continued investment growth: technological barriers.

The northern and deepwater regions of the North Sea exemplify this challenge. As frontiers, in every sense of the word, there is no reason industry should not expect some giant discoveries within these areas.

Texaco was awarded operatorship of Tranche 9 in the U.K. Frontier Round. These 12 blocks increased our net acreage in the U.K. by more than 30%. But to be successful there, we must first overcome technical challenges of complex geology and hostile, Atlantic weather.

Industry hopes for major discoveries in the frontier areas, but it should be noted there are giant prospects identified in mature areas, development of which has been held up by technological hurdles.

Given the challenges of economically marginal fields and large reservoirs that are technically difficult to develop, some of the competing opportunities I mentioned might seem more attractive.

OPPORTUNITIES

Technological challenges are only part of the story. The North Sea offers equally great opportunities as well. And it is because of those opportunities I am confident the North Sea will attract large sums of capital beyond the turn of the century.

My optimism is based on two factors:

• The U.K. government has an encouraging, supportive attitude toward investment. This is important because among all of the countries represented in the North Sea, the U.K. has the greatest petroleum investment and broadest industry participation.

• We are an industry that has faced some awesome technical challenges, and history has proved we can overcome them.

It takes more than large hydrocarbon accumulations to attract capital. In some locations around the world, political and economic risks are much greater than the risk of dry holes.

The U.K. government, by contrast, has offered a stable, flexible, free market environment. Stability inspires confidence, and confidence emboldens us in our willingness to take risks. In short, investments inevitably will flow to countries whose governments encourage and support investment.

In this regard, the tax regime in the U.K. offers specific incentives to North Sea investment. For example, it has provided a major boost to drilling by allowing companies to offset exploration and appraisal expenditures for Petroleum Revenue Tax (PRT) purposes against income from determined fields.

With the cost of drilling a North Sea exploration well anywhere from 2-20 million, you can see why this feature of the tax regime is essential to continue attracting investment. One measure of its success is that robust exploration activity has continued in the U.K.

Further incentives in the production phase, such as the oil allowance, also contribute to development of smaller fields.

In fact, many features of the U.K. tax regime, including limitation of royalties, overseas tax treaties, and the reasonable level of corporation tax, have helped make long term investments here attractive.

However, one area that needs to be addressed is the tax treatment of research and development.

This is closely related to the second factor that supports a positive outlook for future investment: the ability of our industry to overcome technical challenges.

From the beginning, the hostile North Sea environment consistently has forced companies operating here to pioneer technology. I'm sure you are familiar with some of these examples:

Texaco's Highlander field was not large enough to justify the cost of a stand alone platform. Yet, with what was then state of the art subsea technology, it became a very attractive investment. The Strathspey project in Block 3/4 will advance this technology.

Horizontal drilling is another technology that has moved many discoveries from the noncommercial category into successes. Horizontal well experience in the Danish North Sea shows that productivity can be increased fourfold for about twice the cost of a conventional well. Imagine what that kind of result can do for return on investment!

WHAT NEEDS TO BE DONE

Here are some actions that we-industry and government-can take to strengthen the outlook for investment in the North Sea.

Throughout industry we must put our global talent pool to work, applying that same innovation, enthusiasm, and perseverance we have shown in the past toward resolving the technical challenges that are out on the horizon.

New techniques of seismic acquisition and processing could unlock the means of discovering some fields that currently lie hidden by complex geology.

Other advances hold the key to reducing the cost of high quality seismic, allowing the industry to widen the search for prospects. For example, Texaco has run six lines of 3D seismic simultaneously in the North Sea, which greatly reduces cost and time.

Research also can show us how to improve the safety and environmental protection of new and existing developments.

Furthermore, by inventing more efficient designs, we can lower capital costs for exploration and development, changing some marginal projects into competitive investments.

Technology provides the key to all of these opportunities.

Prospects that pose particularly thorny technical problems are high pressure gas/condensate fields in the Central North Sea. These prospects are deep-as much as 17,000 ft deep-and hot-something like 350 F. They are under extremely high pressure, which means that we pay particularly close attention to safety in equipment design and procedures. Reservoir relationships are difficult to assess, and information is expensive to gather.

Deep, hot, high pressure wells can cost more than 15 million each.

We have conventional techniques to develop these prospects, but at a cost and with risks that are not generally acceptable to the industry.

Last year Texaco ran the first of a new generation of wellhead subsea systems that was rated for 15,000 psi and incorporated all metal to metal sealing. The design of this type of equipment is just now being developed and refined, but from the advances made to date we know we are on the right track.

But industry will achieve production from these prospects only if there is no letup in developing technology that will allow us to do it economically and safely. I am confident we can do it.

Government could offer some further support and encouragement for research to insure that enough resources are devoted to challenges the North Sea presents. As innovation becomes ever more critical, industry may need-not just want, but need-more tax incentives to maintain the level of research and development required for the future.

For the U.K. in particular, whatever the arguments once were for waiting 3 years to see whether research and development is field specific before allowing it to be set against PRT, surely it is now time to say that all North Sea R&D is worthwhile-whether related to PRT paying fields or not-and will contribute to maximizing production.

On this basis, we recommend that all North Sea related R&D expenditures should be immediately recoverable against a company's U.K. PRT liability wherever generated. This change would spur further North Sea related research and development and, in my opinion, is likely to result in substantially increased offshore investment in the future. I hope the government will welcome a dialogue on this issue.

Another recommendation recognizes the responsibility of all of us to work together because through teamwork we will achieve greater success than any of us could achieve alone.

A recent example of an emerging trend toward greater cooperation is the LINK program, which recently was announced by Energy Minister Colin Moynihan. It will be a 12 million effort among government, academia, and industry for research into reservoir analysis.

Broad cooperation like that envisioned for the LINK program will be a catalyst for discovery in some of the greatest areas of technical challenge we face as an industry.

Competitive relationships among coventurers too often have resembled uneasy truces between warring camps, with companies jealous of every technological advance and every scrap of knowledge. But given the grip the North Sea has on its remaining oil, this is not a sensible attitude for the years ahead.

What is needed is a fresh approach to joint ventures. In too many joint ventures the operator operates and the nonoperating partner signs checks.

It doesn't have to be that way. You have only to look at Caltex in Indonesia to see what is possible. This 50-50 venture between Texaco and Chevron is a truly cooperative partnership, with an interaction of people and ideas that has made it one of the most successful joint ventures in history.

In the Danish North Sea, Texaco, as a nonoperator member of the Danish Underground Consortium, regularly seconds staff to the operator, Maersk Oil & Gas. It is perhaps significant that DUC operations have been fertile ground for technical innovation, whether horizontal drilling or the new lightweight Star producing platform design.

An operator/supplier partnership also can bring benefits to all parties by teaming up people with different areas of expertise.

Texaco has adopted this approach on our multiphase metering project, working with Jiskoot Autocontrol Ltd., a supplier specializing in offshore meters. This research project, undertaken with financial support from the European Community, is developing advanced metering systems that will offer substantial savings for future offshore satellite installations.

From cooperation within a joint venture, it is easy to visualize a step-out to cooperation among joint ventures.

This approach is being used to tackle some daunting technical challenges on the Clair prospect, which extends across several blocks. Rather than working independently, with the accompanying duplication of effort, a group of eight companies has decided to work together on technical evaluation, saving costs and gaining ideas.

These examples of cooperation-LINK, DUC, and Clair-are areas in which teams will be making a difference during the next few years.

Further down the road, industry faces another complex challenge in which cooperative research may help solve problems that currently pose obstacles to investment.

Enhanced oil recovery other than waterflood, is not used generally in the North Sea. But as basins mature, companies find it necessary to focus less of their investment funds on looking for new reserves and more on striving to get the most value from the existing reserve base.

The opportunity is there. We estimate that in some North Sea fields as little as 40% of original oil in place will be recovered using conventional primary recovery techniques and waterfloods. With tertiary EOR, recovery factors in these fields could be increased to as much as 60%, resulting in a 50% increase in total oil produced from the field. Thus, we could expect enhanced oil recovery to become more important in the North Sea in the future.

At Texaco we have a field scale steamflow laboratory in which a variety of steam distribution systems are being designed and tested. The results of this work are transferred and perfected in our operations at Kern River, Calif., and those of our Caltex joint venture at Duri, Indonesia.

While this wealth of experience throughout industry will be helpful in the North Sea, you will have noted that none of the current EOR success stories I mentioned involves offshore installations. Significant technical impediments remain to be overcome in bringing EOR to the North Sea. Research must take into full account the specific difficulties of offshore work, such as limited platform space, weight considerations, and the feasibility of supplying flooding agents to the platform.

Adapting current technology to the offshore environment is not the only challenge. At current oil prices, tertiary EOR as we know it is just not cost effective in the North Sea. We all must recognize that it may take many years-perhaps more than a decade-for research scientists and engineers to develop tertiary recovery processes that have commercial application offshore. This is an enormous challenge, but one we must overcome if the countries surrounding this basin are to achieve the highest possible recovery from their petroleum resource base.

These are just some of the areas where teamwork and broad cooperation can make a difference in keeping the North Sea investment outlook robust. There are, of course, many others. Each of us must look for those opportunities and participate where our talents and experience can add value. When we work together there is no technical hurdle that is insurmountable.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.