UPSTREAM NEWS

OSHA ADDS UPSTREAM EMPLOYERS TO SVEP

The US Department of Labor's Occupational Safety and Health Administration recently revised its Severe Violator Enforcement Program (SVEP) to include the employers of the upstream oil and gas drilling industry. Under SVEP, employers could be subject to unlimited return or unannounced inspections for a period of at least three years. Effective February 11, 2015, employers in the upstream oil and gas industry will be added to SVEP upon a triggering event. Inclusion in SVEP is triggered after a non-fatality inspection results in two or more willful or repeated violations or failure-to-abate notices (or any combination of these violations or notices) for high-gravity, serious violations.

US, OPEC BATTLING FOR MARKET SHARE

Like a fighter who goes down after being sucker-punched, US shale producers are staggering but have not given up. In one corner is Saudi Arabia, the king of OPEC, which has ramped up its production to near-record highs in an effort to retain global market share for crude oil. In the other corner is the US, which had declining oil production until independent producers figured out how to exact oil, natural gas, and gas liquids in large volumes from shale deposits.

As Saudi Arabia pumps more and more crude, creating a glut in global supplies, US producers recently have begun to curtail oil production as prices plummeted. However, this doesn't appear to be fast enough for the Saudis, who appear to be maneuvering for a knockout blow against Uncle Sam. The cost of production for US shale producers is significantly higher than for conventional production in Saudi Arabia and in other OPEC countries, which gives those producers an advantage at a time of sagging oil prices.

On May 13 the International Energy Agency (IEA) released a report that confirms Saudi oil production is close to a record high. In its monthly report, the IEA noted that global energy demand was higher than expected, which should help ease the oil glut and keep prices from falling again. However, the agency said that the crude oil glut is extending into refined products, which could make the recent oil price recovery unsustainable.

The IEA remarked that despite bullish signals in the US, the oil market's fundamentals still look "relatively loose." Global oil production exceeds demand by approximately two million barrels per day, or about 2%, following huge growth in US shale production and OPEC's decision last November not to slash output in an effort to keep prices at a high level. Market share seems to be a bigger concern for OPEC, particularly the Saudis.

"In the supposed standoff between OPEC and US light tight oil (LTO), LTO appears to have blinked," said the IEA. "Following months of cost cutting and a 60% plunge in the US rig count, the relentless rise in US supply seems to be finally abating."

Nevertheless, a recent increase in oil prices has given US producers a new attitude. Several LTO producers claim to have achieved significant reductions in production costs in recent weeks, which would make them more competitive, says the IEA. At the same time, producer hedging has increased as companies took advantage of the price rally to lock in profits.

The IEA says it sees no sign that OPEC intends to curb its output in the near term, saying that early indicators suggest the cartel will sustain rates at around 31 MMb/d during May. In addition to Saudi Arabia, Kuwait and the United Arab Emirates have all raised their rig count and expanded their drilling programs.

OPEC production has now been above the cartel's self-imposed supply target of 30 MMb/d for the 12th consecutive month, as the fight over oil market share continues.

IHS: UNCONVENTIONAL TECHNIQUES COULD YIELD 141 BILLION BARRELS OUTSIDE NORTH AMERICA

As much as 141 billion barrels of potential incremental hydrocarbon resources could be unlocked if drilling and completion techniques refined in US shale plays are applied to conventional, low-productivity oil plays outside of North America, according to analysis from IHS.

Curious as to what the potential might be if newer techniques were applied to old plays, IHS Energy researchers conducted an assessment that identified more than 170 mature oil plays worldwide with untapped oil potential that might benefit from horizontal drilling and hydraulic fracturing.

"As many of the world's oil and gas producers struggle to lower costs and optimize existing assets, we wondered what kind of impact the application of newer technological innovations could deliver to the industry in terms of expanding conventional resource potential outside North America," said Susan Farrell, vice president of upstream energy research at IHS.

Of the estimated 141 billion barrels of potentially recoverable oil using unconventional techniques, the IHS assessment determined that 135 billion of those barrels exist in plays that would likely require hydraulic fracture stimulation to produce, while approximately 6 billion barrels sit in plays that may not require hydraulic fracturing.

"Drilling horizontal wells allows access to thinner zones, where vertical wells are not commercially productive," said Leta K. Smith PhD, director of upstream energy research at IHS Energy. "Also, horizontal wells allow engineers to connect compartmentalized portions of the reservoir with one well instead of many vertical wells, which addresses cost and footprint considerations as well as increasing the well-to-reservoir contact ratio."

In addition, the study said, modern seismic and measurement-while-drilling technologies would allow operators to achieve better placement of fractures to take advantage of natural fracturing and other geologic features for maximizing production and avoiding water zones. "Combined with other technologies developed for shale development, such as pad drilling, these improvements could breathe new life into some of these older, conventional fields," Smith said.

Three examples cited in the IHS analysis that showed operators already leveraging some of these newer techniques included the Saint Martin de Bossenay field in the Paris (France) basin; the Tahe Complex in China's Tarim basin, and the Bir Ben Tartar field in Tunisia.

The Saint Martin de Bossenay was abandoned by 1996. Recently, the field was redeveloped using modern technology, including seismic specifically targeting non-produced portions of the field. Hydraulic fracturing was not used, since it is not permitted in France. Following redevelopment, the field's recovery factor improved from 40% to 44% - adding 1 million barrels to the 2P (proven plus probable reserves).

The top four countries outside of North America for potential incremental oil recovery in low-productivity conventional plays include Iran, Russia, Mexico and China.

WOODMAC: UPSTREAM PROJECTS TO ALTER GLOBAL CRUDE ROUTES, REFINING

By 2025 mega-projects offshore Brazil and Norway will add some 3.8 barrels million per day (b/d) of new crude supply from the Atlantic basin according to Wood Mackenzie. Since most of this crude will be of a similar quality; relatively heavy and sweet, it represents an opportunity for refineries in Europe and beyond.

The pre-salt mega-projects in Brazil will produce 3.2 million b/d by 2025 - 78% of all Brazilian production. With Petrobras having canceled, or delayed many of its refinery expansion plans, domestic refining capacity is expected to reach only 2.5 million b/d that same year. If no further expansions emerge, export markets will therefore be needed for up to 1.8 million b/d of crude by 2025.

While the US Gulf Coast is a natural fit for pre-salt crude, it will end up competing with US crudes and imports from Canada, Mexico, Venezuela, the Middle East and West Africa. Europe, however notes Wood Mackenzie, has limited capacity for processing heavier crudes.

"As a result, we believe over 1 million b/d of pre-salt crude will flow to Asia by 2025," says Gordon McManus, research director EMEARC refining and oil product markets at Wood Mackenzie. "

As new supply from North America fills US refineries, Brazilian pre-salt crude will look to Europe, but it will compete with Norway's Johan Sverdrup field. When Johan Sverdrup production peaks in 2024, total heavy crude supply in northwest Europe will exceed 1 million b/d, while demand will remain close to the current 600,000 b/d, McManus said. Lower shipping costs will favor the Norwegian crude, but the competitive balance will depend on refined product pricing, and how well-matched European refineries are to the new crude streams. This will become clearer once the all-important crude assay data for Johan Sverdrup is released to the market.

Gail Anderson, principal analyst upstream oil and gas at Wood Mackenzie, notes that the dramatic growth in heavier crude availability will influence price differentials in the region. "We expect pre-salt Brazil and Johan Sverdrup will trade at a 3-4% discount to Brent. Medium and heavy crude discounts to Brent are likely to widen when this heavier supply peaks - benefiting complex refiners. In turn, this would make the Atlantic basin less attractive to Urals and medium Middle Eastern grades which could be diverted east."

PEMEX, FIRST RESERVE, TPH CO-HOST MEXICAN ENERGY SUMMIT

First Reserve and Tudor, Pickering, Holt & Co. (TPH) co-hosted the Mexico Energy Strategic Summit recently in Mexico City, with the participation of Petroleos Mexicanos. Pemex and First Reserve recently noted a $1 billion agreement to jointly pursue large-scale infrastructure opportunities including the Los Ramones pipelines.

"What's happening in Mexico is revolutionary....and is a bright spot in a world where governments all too often are going the wrong way in encouraging oil and gas investment and development," noted Maynard Holt, co-president of TPH. "We have multiple assignments in Mexico today and are very excited for the potential that exists in a US/Canada/Mexico energy partnership. The US resource boom could and should become a North American boom-something that is exciting for jobs, security, stability, living standards and the growth and reliability of the world's energy supply."

CHEVRON MAKES DISCOVERY OFFSHORE AUSTRALIA

Chevron Australia Pty Ltd. has made a gas discovery in the Greater Gorgon Area located in the Carnarvon Basin, offshore northwest Australia. The Isosceles-1 exploration discovery well encountered approximately 440 feet of net gas pay in the Triassic Mungaroo Sands in 3,175 feet of water. The well fulfilled the second year work commitment in the exploration program. It is located in the WA-392-P permit area approximately 60 miles northwest of Barrow Island, off the coast of Western Australia. Chevron Australia is the operator of WA-392-P with a 50% interest while Shell Australia and Mobil Australia Resources each hold a 25% interest.