Non-OPEC offshore output challenging OPEC

Rapid growth in offshore oil production outside the Organization of Petroleum Exporting Countries will continue to be the major challenger to OPEC's dominance of global oil output to the turn of the century.

New deepwater provinces and new horizons in the North Sea and Gulf of Mexico will command the spotlight among non-OPEC offshore oil pros- pects to 2000.

A study by the International Energy Agency, Paris, finds that these areas are benefiting from sweeping change in upstream oil technology and practices during the last decade that fundamentally altered the medium-term outlook for the world oil market.

Declining costs and increasing effectiveness are overturning a previous consensus that saw imminent non-OPEC supply declines in the face of rapidly rising demand, with a resulting sharp hike in dependence on supplies from a few large Middle East producers.

At the heart of this change is the opening up of new prospects in the North Sea and elsewhere that were not accessible or economic without improvements in technical capabilities and changes in organizational relationships among companies and between companies and governments.

Offshore production role

Offshore production is expected to exceed 5 million b/d and represent more than 80% of total non-OPEC production growth during 1995-2000, says David H. Knapp, the study's main author and a member of IEA's oil industry and markets division in Paris.

The study focuses on details of expected rapid growth in offshore production as the advancing technology phenomenon spreads from the North Sea to the Gulf of Mexico and elsewhere.

IEA Executive Director Robert Priddle says the sharp decline in Russian oil production that began late in the 1980s has tended to conceal the upward trend in production in many non-OPEC countries.

With the bottoming out of the Russian production decline in the mid-1990s, Priddle reports, significant growth in total non-OPEC supplies is occurring and is anticipated to continue in the second half of the 1990s.

Total non-OPEC production is expected to continue to increase by more than 6 million b/d. And the main source of that growth has been and is expected to continue to be offshore, he says.

While total onshore non-OPEC production decreased by 2.6 million b/d during 1990-95, offshore production grew by 3.2 million b/d.

During 1995-2000, offshore production is projected to increase by about 5.1 million b/d, while onshore growth is anticipated to be only 1 million b/d, Priddle says.

Northwest Europe

The peak for U.K. crude oil production is projected at 3.3 million b/d in 1999, while the peak in Norwegian crude oil production is expected to be 3.6 million b/d and a year later. Danish production is expected to grow by 37.5% to 275,000 b/d from 1995's level.

The peak is substantially higher and later than recent conventional wisdom would have suggested, IEA says, with consequent repercussions for the medium-term oil market.

The decline rates after the peak could also be relatively gentle if technology and constructive fiscal environments delay termination of production in aging fields, if enhanced recovery techniques allow an even higher recovery factor from known reserves, and if European natural gas markets allow for rapid development of more liquids from a number of gas/condensate fields early next century.

If any or all of these conditions are obtained, the study says, the decline rate during 1995-2000 could be fairly gentle, despite sharp declines in many of the older and larger fields. Additional satellite developments in the U.K. sector and new fields in the West of Shetland and Haltenbanken areas could offset much of the expected sharp declines in the large older fields off Northwest Europe.

The potential for further delay or softening of the decline beyond 2005 depends on the development of undiscovered prospects in the Norwegian More and Voring basins and the Atlantic Front areas of the U.K., Ireland, and Faeroe Islands, as well as faster and more intensive development of known deposits in the Haltenbanken and West of Shetland areas and possibly the Norwegian Barents Sea.

North Sea oil supply increases accounted for more than 70% of the non-OPEC supply growth outside the former Soviet Union (FSU) during 1992-95 and are projected to add another 1.07 million b/d during 1996-97, or about 40% of projected near-term non-OPEC, non-FSU oil supply growth.

New fields account for most of the 5-year rise during 1992-97, with a mix of satellite fields tied back to existing platforms and new fields with their own pipelines or floating production systems.

The increases from the U.K. and Norwegian sectors during 1993-95 were comparable-587,000 b/d vs. 528,000 b/d, respectively. The start-up of several large Forties systems fields led the gains until the start-up of production from the Haltenbanken and Tordis and Sleipner fields.

In the Norwegian sector, the 1996 rise was dominated by two large new fields, Heidrun and West Troll, whereas the U.K. sector increase is spread among a number of smaller new fields starting up mainly during second half 1996 and in 1997.

The U.K. fields are again a mixture of satellite-field developments in the central North Sea and initial production from two new areas, West of Shetlands and Liverpool Bay off the western U.K.

Beyond 1997, the pattern of large new fields in the Norwegian sector and smaller fields in the U.K. sector is expected to continue, the study points out. Symptomatically, only the new field development at Schiehallion in the U.K. sector might have a peak of 100,000 b/d or more.

However, there are six such fields in Norwegian waters as well as two currently producing fields, Brage and Valhall, which have each been upgraded to more than 120,000 and 150,000 b/d, respectively, from less than 90,000 b/d, by new equipment at Brage and a new platform at Valhall.

North American offshore

The projected gain off North America, particularly the Gulf of Mexico, is almost as large as the North Sea increase in the last half of the decade.

This contrasts with the first half of the decade, when North American offshore growth was at least 1 million b/d less than that from the North Sea. An incremental 1.6 million b/d is expected to be produced from areas off the U.S., Mexico, and Canada vs. a net rise of less than 600,000 b/d during 1990-95.

The change in the prospects off North America is even more interesting, the study notes. The prevailing view in the early 1990s was that sharp declines were foreseen for the Gulf of Mexico and that political and budgetary difficulties would delay if not cancel planned expansions in the Canadian Atlantic and Mexico's Campeche Sound.

Mexican offshore oil production has continued its moderate growth, moving to 1.947 million b/d in 1995 from 1.796 million b/d in 1990. Production off Mexico is expected to reach 2.402 million b/d in 2000.

Production in 1990 off the U.S. was 739,000 b/d and 1.01 million b/d in 1995 and is projected at 2.027 million b/d in 2000.

Gulf of Mexico

The declining share of the North Sea in worldwide offshore production growth is a direct result of a new co-leadership with the Gulf of Mexico.

Many of the organizational and technological lessons that were learned in the North Sea are being taken advantage of in the U.S. gulf.

But there are a number of important differences, the study notes. Mainly as a result of the differences in geography, gulf developments have been almost exclusively platform-based as opposed to the increasing number of floaters being used in the North Sea.

So far, gulf oil fields, even in deep water, are relatively close to shore, and a variety of short pipelines to the shallower water facilities can be easily tied into by the extensions from deeper- water developments. The deepwater tracts using tension leg platform (TLP) technology are benefiting from experience gained with the North Sea TLPs, such as those in Hutton field in the U.K. sector and, more recently, Norway's Heidrun field.

The proliferation of satellite fields seen in the North Sea is not currently a characteristic of Gulf of Mexico growth, but that might merely reflect the early state of development of the deepwater tracts, the study says. So far, however, Gulf of Mexico oil supply growth in the U.S. and Mexican sectors is driven by large, relatively separate projects.

In addition, the local gas supply situation is much more positive than in the North Sea. There is still a ready market for any gas produced in the gulf. This results in an integral role for gas in field development economics.

One common spur for both regions may be constructive fiscal environments.

In 1995, the U.S. Congress passed legislation that gives royalty relief to future deepwater producers, exempting the first 17.5 million bbl of oil equivalent (boe), 52.5 million boe, or 82.5 million boe of oil and gas production from water depths of 200-400 m, 400-800 m, and more than 800 m, respectively.

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