OGJ Newsletter

Feb. 22, 2010

General InterestQuick Takes

BLS cites rising energy prices in latest PPI

Rising energy prices were a major influence as the Producer Price Index for Finished Goods climbed 1.4% in January, the US Department of Labor's Bureau of Labor Statistics reported on Feb. 18. Energy goods accounted for about 75% of the broad-based advance in the finished goods, intermediate goods, and crude goods indexes, it said.

"The index for finished energy goods rose 5.1% in January, its fourth consecutive monthly increase," BLS said. About two thirds of the advance can be attributed to an 11.5% jump in gasoline prices, it added. Increases in the liquefied petroleum gas and home heating indexes also were major factors, it said.

The PPI for intermediate materials, supplies, and components climbed 1.7% in January—its largest increase since a similar advance in August 2009, according to BLS. It noted that the index for intermediate energy goods rose 6.9% in January, its biggest increase since a 9.6% jump in November 2007. A 20.4% surge in diesel fuel prices was a major factor in the January advance, with gasoline and jet fuel indexes also making a major contribution.

BLS said its crude energy materials PPI jumped 16.8% in January. "From October through January, prices for crude energy materials climbed 27.5%, following a 9.4% gain for the 3 months ended October 2009," it added. Two thirds of January's monthly increase can be traced to a 25.5% surge in the natural gas index, with oil prices also contributing, DOL's statistical service said.

The latest PPI did not surprise American Petroleum Institute Chief Economist John C. Felmy, who noted that other reports have shown that oil prices rose from December to January. "Gasoline prices also climbed. It shouldn't be such a surprise, since retail sales figures prices which have been released also were affected by increased gasoline prices," he told OGJ.

Felmy cautioned that BLS price indexes are a point-to-point index on a certain day each month. "If you were trying to compare the average for the month, we've seen prices come down since the end of January," Felmy said.

Pertamina fails to clear environmental hurdles

The development of some 16 oil and gas blocks owned by Indonesia's state-run PT Pertamina has been postponed due to the company's failure to obtain recommendation from the environmental office.

The Energy and Mineral Resources Ministry could not issue the necessary permits for the development of the 16 oil and gas blocks because a recommendation from the environmental office had not been obtained.

"Eight of the required licenses have been proposed since 2008 but have not been issued so far," said Sahala Lumbangaol, the state-owned Enterprises Ministry's deputy for mining and strategic industries, energy, and telecommunications.

Meanwhile, the Indonesian government drafted a regulation that would grant Pertamina the right of first refusal for oil and gas blocks when their existing contracts expire.

According to Edi Hermantoro, director of upstream oil and gas at the Ministry of Energy and Mineral Resources, Pertamina prior to any decision to extend the contract with the existing operator would have the chance to submit a proposal to develop the block, which would then be evaluated by a government-formed team.

Under the proposed regulations, the government would earn 85% of production revenue from a block compared with the present 60%. The final draft of the new regulations is said to be awaiting the approval of Energy Minister Darwin Saleh.

Analyst BMI said the regulations will be "worrisome" for foreign investors hoping for long-term returns on their investments, while "there are some doubts as to whether Pertamina's increasing upstream influence at the expense of IOCs will improve Indonesia's ability to efficiently exploit its resource base."

AED Oil acquires acreage in Indonesia

AED Oil Ltd. has agreed to purchase two wholly owned subsidiaries of Nations Petroleum Co. Ltd. that hold interests in oil and gas contract areas in Indonesia.

AED said it will pay Calgary-based NPC $1.5 million and will issue the firm 12 million shares of AED for 100% and 60% respective stakes in permits in West Papua and Madura Island.

The Rombebai area covers 5,795 sq km and lies in northern coastal Papua, while the South Madura area is primarily onshore and covers the southern part of Madura Island.

AED said four wells drilled in the Rombebai contract area in the 1950's by Royal Dutch Shell PLC encountered natural gas, but the reserves were not developed as the firm was exploring for oil.

Further testing by NPC indicates that the permit's Gesa reservoir could contain 5 tcf of gas, but an AED executive acknowledged that the firm faces a large range of uncertainties as the reservoir sands have yet to be drilled, AED said.

Analyst IHS Global Insight agreed, saying, "AED has high hopes of building an LNG plant at Rombebai to monetize any reserves discovered" but that, "significant uncertainties as to the potential of the area remain, particularly as reservoir sands have not yet been penetrated through drilling."

Last November, AED signed a letter of intent with NPC to buy its wholly owned subsidiary that holds a 50% operating interest in the Brunei Block L oil and gas permit, which comprises a large production-sharing agreement covering about 2,200 sq km both onshore and offshore.

In the preceding 12 months, NPC had undertaken a $20 million 3D seismic program over a large part of Block L, delineating several drill-ready prospects. AED also said that planning had reached "advanced stages" for a two-well drilling campaign for early 2010.

At the time, AED managing director Pedro De Souza said the firm was "also evaluating Asian assets held by other Nations' wholly owned subsidiaries" and that "an exclusivity period has been agreed over these assets."

Around the same time, a leak was reported at Puffin field, which had been suspended since May after Sinopec and AED terminated the charter contract of Sea Production for the use of the Front Puffin floating production, storage, and offloading vessel at the field for alleged breaches related to occupational health, safety, and the environment (OGJ, Nov. 2, 2009).

Industry Scoreboard

Exploration & DevelopmentQuick Takes

Mozambique Rovuma wildcat is gas discovery

The Windjammer deepwater exploration well in the frontier Rovuma basin off Mozambique cut more than 480 net ft of natural gas pay in high-quality reservoir sands with 4,100 ft remaining to be drilled.

Anadarko Petroleum Corp., operator of the discovery, said the net gas pay lies within a gross column of more than 1,200 ft. The well is at intermediate casing point of about 14,000 ft and is projected to 18,100 ft.

So far, the well has tested one of the seven identified play types in Anadarko's operated acreage off Mozambique, and the results are a strong indication of the basin's potential, Anadarko said.

Windjammer is in Offshore Area 1 in 4,800 ft of water in the Mozambique Channel 30 miles east of Mozambique's coast and slightly farther south of the border with Tanzania. After testing deeper objectives, Anadarko plans to move the Bedford Dolphin drillship to its Collier prospect about 50 miles south-southeast on the block.

The Anadarko-led group will drill two to four more wildcats in the basin this year. It will use results from Windjammer and Collier to determine which prospects are drilled next.

Interests in the well are Anadarko 43%, BPRL Ventures Mozambique BV 11.75%, Cove Energy Mozambique Rovuma Offshore Ltd. 10%, Mitsui E&P Mozambique Area 1 Ltd. 23.5%, Videocon Mozambique Rovuma 1 Ltd. 11.75%. Mozambique's Empresa Nacional de Hidrocarbonetos' 15% interest was carried through the exploration phase.

KOC to tap Shell nonassociated gas expertise

Kuwait Oil Co. has signed a 5-year service contract with Royal Dutch Shell PLC to manage the further development of nonassociated gas-condensate fields in northern Kuwait.

Shell is expected to provide technical advisors because the fields involve "unconventional geological formations, difficult reservoir conditions, and complex gas compositions," Shell said. Geologic and engineering details were not immediately available.

Deep gas exploration that started last decade has resulted in production of 140 MMcfd of nonassociated gas, short of Kuwait's goal of 175 MMcfd by this time, officials said. The ultimate goal is 2.5 bcfd of nonassociated gas output by 2030.

Kuwaiti sources reported the country's first nonassociated gas discovery at the MU-12 well below Mutriba oil field, southwest of Raudhatain (OGJ, May 10, 2004, p. 34). The well produced gas-condensate from the Permo-Triassic Sudair formation at 19,000 ft. At least one Mutriba well has been drilled as deep as 23,000 ft.

Kuwait also has deep nonassociated gas production in Umm Niga field and from the Lower Jurassic Marrat formation in Sabriyah field. Kuwait has claimed that 35 tcf is recoverable from those two fields. Flows have also been reported from the Middle Jurassic Sargelu formation in northern Kuwait.

The emirate hopes to boost nonassociated gas output to 1.5 bcfd by 2015. The original plan called for as few as 85-90 wells, but lately officials have begun talking in terms of nearly 200 wells.

Associated gas production is also expected to rise to 1.5 bcfd from the present 1 bcfd as Kuwait hikes oil output to a goal of 4 million b/d from 3.15 million b/d currently.

TransAtlantic to start Thrace basin gas sales

TransAtlantic Petroleum Ltd., Dallas, plans to begin gas sales through a 30-km gathering system into the Botas pipeline by early March from its Thrace basin Edirne license in northwestern Turkey.

TransAtlantic resumed drilling at Edirne in January and has spud Yolboyu-1, third well in its five to seven-well campaign. Yolboyu-1 is a 6,500-ft exploratory well that targets deeper gas potential south of the existing 3D seismic survey.

The company logged and cased the first two wells, Kumluk-1 and Kartal-1, where logs indicate net pay. All wells will be completed in a batch. On western Edirne, the company shot a further 81 sq km of 3D seismic and has begun interpretation.

TransAtlantic is operator with 55% interest in more than 119,000 gross acres.

Drilling & ProductionQuick Takes

Apache starts up Van Gogh off W. Australia

Apache Corp., Houston, started production from the Van Gogh development on Production License WA-35-L in the Exmouth basin off Western Australia.

Van Gogh, discovered in 2003, is Apache's first field development with a floating production, storage, and offloading vessel. The wells are completed subsea and include 19 horizontal production laterals, 2 water injection wells, and 1 gas injection well.

Apache said the total horizontal interval drilled for all of the production wells exceeds 106,000 ft.

The Ningaloo Vision FPSO has capacity to process 150,000 b/d of liquids, including 63,000 bo/d, and store 540,000 bbl of oil.

Van Gogh is 32 miles north-northwest of Exmouth.

Apache is the operator of Van Gogh and has a 52.5% interest. Inpex Australia holds the remaining interest.

Apache also operates or has an interest in several other projects in Western Australia.

Apache holds a 28.57% interest in the BHP Billiton Petroleum Ltd. operated $1.7 billion Pyrenees project, scheduled to start producing in this year's second half. The project includes the Crosby, Ravensworth, and Stickle oil fields, which lie in 560-820 ft of water on Block WA-12-R in the Exmouth basin (OGJ Online, July 3, 2007). BHP Billiton holds the remaining 71.43% interest in the Pyrenees development.

In 2011, Apache expects to start production from its operated Reindeer field through the Devil Creek processing plant—Western Australia's first new domestic natural gas processing hub in Western Australia in more than 15 years. Apache said Devil Creek is forecast to increase Western Australia's domestic gas production capacity by as much as 20%. Apache holds 55% interest in Reindeer with the remaining interest held by Santos Ltd.

Apache also will supply gas from its Julimar and Brunello discoveries to Chevron Corp.'s Wheatstone LNG project and become a foundation equity partner in the project. Apache said the fields contain an estimated 2.1 tcf of gross gas reserves. Apache holds a 65% interest in the discoveries and plans to make a final investment decision on the first phase of Wheatstone in 2011. Kuwait Foreign Petroleum Exploration Co. owns the remaining 35%.

Total to proceed with Shetlands project

Total SA has advanced a decision to invest in two UK gas fields after the British government earlier this month introduced tax breaks to encourage development in the area west of the Shetland Islands.

Total's director of North Sea operations Patrice de Vivies said he expected to sanction the development of the Laggan and Tormore gas fields, which will be brought on stream in March as a single project.

Total's decision follows a recent announcement by the British government that it would give a £1 billion-plus tax boost to help to jumpstart production in remote gas fields west of the Shetland Islands.

"The legislation, if approved by the House, will extend the field allowance, announced in Budget 2009, to remote deepwater gas fields, which are found in the west of Shetland area," said Chancellor of the Exchequer Alistair Darling (OGJ, Feb. 8, 2010, p. 28).

"Approval of the legislation will be sought no later than the end of March," a Treasury spokesman said.

In December Total was holding talks with the British government on extending tax relief to its Laggan and Tormore fields in the west of Shetland region. Total said the fields could be brought on stream in 2014, depending on the tax break.

According to analyst BMI, Total has a "relatively large" exposure to the West of Shetland. It is the operator of the Laggan and Tormore fields with a 50% interest, alongside partners DONG Energy 20%, Eni SPA 20%, and Chevron Corp. 10%.

"Total forecasts output from Laggan-Tormore to be 90,000 b/d of condensate and 5.2 billion cu m/year of gas," BMI said, adding that "This would be a massive boost to Total's UK production, which has being falling steadily in recent years."

BMI said Total's liquids output has dropped from 135,000 b/d in 2005 to just 91,000 b/d in 2008, while over the same period its gas output has fallen to 6.7 billion cu m from 9.6 billion cu m.

Oil output rising in Turkey's Selmo field

Production at Selmo, Turkey's second-largest oil field by cumulative production, is expected to top 2,000 b/d of 34° gravity oil as soon as three recently drilled wells are placed on production.

The field, in Turkey's Southeast basin north of the Zagros fold belt, averaged 1,715 b/d in the first half of February vs. 1,534 b/d in fourth-quarter 2009.

TransAtlantic Petroleum Ltd., Dallas, with 100% interest in the field, plans to drill at least 18 infill wells at Selmo in 2010. The underdeveloped field has produced 83 million bbl of the 600 million bbl estimated in place. Spacing averages 188 acres/well.

In the past 90 days the company has reworked wells to reduce water cut and acidized the upper producing intervals in several wells. The MSD dolomite and Upper LSL limestone formations have made good completions with low water cut.

A fourth pulling unit and the company's own acid stimulation equipment are to arrive in the second quarter of 2010, enabling the company to pump higher-rate jobs.

ProcessingQuick Takes

Paramount Petroleum to buy California refinery

Paramount Petroleum Corp. plans to buy a closed Bakersfield, Calif., refinery from Flying J Inc., and its subsidiary Big West of California LLC, for $40 million, subject to approval from a bankruptcy court.

The refinery, which has a 65,000 b/cd capacity, supplies diesel and gasoline to California. It was shut down for lack of cash with which to buy oil (OGJ, Feb. 9, 2009, Newsletter).

Paramount, a subsidiary of Alon Energy USA Inc., agreed to pay $40 million plus the fair market value of inventory. Clean Fuels project equipment and a 250-acre buffer property were excluded from the transaction. The agreement also includes an assumption of environmental clean up obligations.

Flying J is based in Ogden, Utah. The Bakersfield refinery closure did not affect Flying J's 30,000 b/cd capacity refinery in Salt Lake City, the company said.

Elme ethylene plant in Nigeria due revamp

Elme Petrochemicals Co. of Nigeria has let a contract to KBR for a revamp of the company's 550,000-tonne/year ethylene plant at Elme, near Port Harcourt.

The plant cracks NGL and feeds units able to produce 240,000 tpy of polyethylene, 95,000 tpy of polypropylene, and 100,000 tpy of naphtha.

KBR will provide an extended basic engineering design package for the partial revamp of six furnaces to use proprietary KBR technology. The revamp is to enhance operating performance and reliability of the 15-year-old furnaces, improve run lengths, and improve overall performance and reliability, KBR said.

Elme Petrochemicals is a subsidiary of the Indorama Group, Jakarta.

TransportationQuick Takes

Montana gas storage, pipeline project planned

Williston Basin Interstate Pipeline Co. has launched a $100-130 million project to boost delivery capacity from its Baker natural gas storage field in eastern Montana by April 2012.

Part of the project is an expansion of the company's gas pipeline system that connects Baker, the largest gas storage field in the US, with Northern Border Pipeline north of Dickinson, ND.

The company would add as much as 125 MMcfd to existing firm storage deliverability capacity from Baker by drilling new wells, adding compression, replacing and looping gathering lines, and looping pipelines between Baker and Northern Border.

Withdrawal capacity of 115 MMcfd at Baker would be more than doubled if shipper interest exists.

A binding open season for the project began Feb. 16 and ends Mar. 18, 2010, said Steven L. Bietz, WBI president and chief executive officer.

"Usage of our storage facilities reached record levels in 2009 and we are currently sold out of firm storage capacity so this is an excellent time to move forward with an enhancement of our Baker storage field," said Bietz.

Baker is one of three storage fields owned and operated by WBI at which working gas capacity totals 193 bcf.

The other two are Elk Basin and Billy Creek fields in northern Wyoming.

Arrow to buy Gladstone LNG plant

Arrow Energy Ltd., Brisbane, is to buy the proposed Fisherman's Landing LNG plant to be built in Gladstone, Queensland, from its project partner Liquefied Natural Gas Ltd., Perth, for $168 million (Aus.).

This figure includes an up-front payment of $51 million in cash and options. The plant is to be fueled from Arrow's coalseam gas fields in the Surat-Bowen basins to the west.

The acquisition comes just a month after Arrow signed a deal giving it ownership of the first LNG train at the plant and supersedes this earlier agreement.

Arrow says the new deal is a further simplification of the Fisherman's Landing LNG development and the elimination of the commercial agreements with LNG Ltd. It will improve the ability to construct, finance, and ultimately allow for greater flexibility in the operation of the plan.

The acquisition price includes $45 million for reimbursement of project costs incurred to date, an initial $5.7 million licensing fee for the use of LNG Ltd.'s trademarked optimized single-mixed refrigerant (OSMR) liquefaction technology, and a grant of 12.5 million options exercisable at $3.50 each, which expire May 14.

Arrow will pay LNG Ltd. a minimum royalty of 0.7% calculated on the oil price differential above $60/bbl (US) for the first train. A higher royalty of 0.9% will be payable if capital expenditure for the project is materially lower than current estimates of $2.1-2.2 billion (Aus.).

Further payments will be required to LNG Ltd. when certain milestones in the project are reached. These include $24 million (Aus.) at final investment decision, an additional $5 million (US) licensing fee at FID, $24 million (Aus.) when the plant produces 1 million tonnes of LNG a year, and $63.5 million (Aus.) when the plant reaches 3 million tonnes/year of LNG production through a second train.

Arrow will now reassess the feasibility of the original Mar. 31 final investment decision date although first production is still scheduled for late 2012.

For its part LNG Ltd. will come out of the completed deal with $85 million (Aus.) cash, 12.5 million Arrow options, and no further commitments for Fisherman's Landing work. This will allow the company to focus on marketing its OSMR technology and other midscale LNG opportunities.

Peru LNG lets service, maintenance contract

Peru LNG has awarded a long-term service and maintenance contract to Wood Group GTS, a unit of John Wood Group PLC. The value of the contract is $150 million over 18 years, Wood Group said.

Wood Group GTS will provide a service and maintenance program to maximize machine availability of the gas turbines, compressors, and generators at Peru LNG's Pampa Melchorita site south of Lima.

The agreement covers two GE Frame 7 (7EA DLN-1) gas turbine-driven compressor trains for the LNG process and three GE LM2500 + DLE aeroderivative gas-turbine power generator sets.

Wood Group GTS will implement remote monitoring and diagnostics, supply of spare parts, component repair, inventory management, field service, and maintenance management to maximize machine availability over the 18-year term.

Since 2007, Wood Group Production Services has supported Peru LNG by supplying specialized and technical personnel to Compania Operadora de LNG del Peru, the operating company of Peru LNG.

COLP has been responsible for building the LNG plant and gas supply pipeline and will be responsible for plant and pipeline operation and support.


A Journally Speaking column entitled "Projection and the Pipeline" misstated the units of Alberta oil sands production in terms of billion b/d, while actual production estimates should have been stated in million b/d (OGJ, Feb. 15, 2010, p. 18).

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