OGJ Newsletter

Feb. 1, 2010

General InterestQuick Takes

Partners block part of Maersk's acquisition

Maersk Oil said its agreement to buy Devon Energy Production Co. LP's interests in the Gulf of Mexico Cascade and St. Malo fields is off because partners declared preferential purchase rights in those fields.

Stakes in those two fields were part of a $1.3 billion transaction involving three fields that Devon announced last year (OGJ, Nov. 23, 2009, p. 34).

When the transaction was first announced, Maersk and Devon said the deal was subject to a waiver of preferential purchase rights by other partners in the fields. Maersk might still buy a stake in Jack field from Devon.

In a news release issued late Jan. 22, Maersk said a partner exercised its preferential rights at Cascade field, where Brazil's state-run Petroleo Brasileiro SA (Petrobras) and Devon each own 50% interest. Maersk also said partners had exercised their rights in St. Malo field where Devon owns 25% interest. Petrobras operates Cascade field.

Raymond James & Associates analysts reported Chevron Corp. and Statoil ASA exercised their preferential rights in St. Malo field. Chevron operates St. Malo field.

A Devon spokesman on Jan. 26 told OGJ that talks continue with Maersk about its existing plans to buy Devon's 25% interest in Jack field. Meanwhile, Maersk is in talks with Devon about possibly buying additional gulf assets from Devon that were beyond the initial three-field transaction.

Raymond James analysts issued a Jan. 26 research note suggesting that Jack field assets "could be taken by Maersk under the original agreement but may be left at the altar."

Valero to sell Delaware City assets

Valero Energy Corp., San Antonio, said Jan. 22 that it is in advanced negotiations to sell the assets of its terminal operation and discontinued operations at its 210,000-b/d Delaware City, Del., refinery to PBF Investments LLC, Greenwich, Conn.

Valero last year announced it was permanently closing the refinery, citing financial losses caused by "very poor economic conditions, significant capital spending requirements, and high operating costs." The refinery shutdown started immediately upon the announcement (OGJ Online, Nov. 20, 2009).

Bill Klesse, Valero chairman and chief executive officer, said there is no specific timetable for when negotiations might be completed. Valero has agreed that no removal of process equipment will take place while negotiations are under way.

PBF Investments is a joint venture of European refinery Petroplus and the US private equity firms of Blackstone Group and First Reserve Corp. Reuters reported Petroplus has been interested in US refining assets since early 2008.

Klesse noted Delaware Gov. Jack Markell has been working with state economic development officials and Valero to find a buyer for the Delaware City site.

Kazakhstan asks Kashagan partners to cut costs

Kazakhstan's state-owned KazMunaiGas (KMG) has proposed to its partners in the North Caspian Operating Co., which is developing Kashagan oil field, a reduction in spending to $7.4 billion from the planned $10.4 billion.

In addition to KMG, the consortium includes Total SA, Exxon-Mobil Corp., ConocoPhillips, Royal Dutch Shell PLC, Eni SPA, and Inpex.

"We have suggested that this year the expenditures be optimized and, as a result, the budget be cut down by nearly $3 billion. The proposal is now being reviewed by the authorized agency," KazMunayGas Pres. Kairgeldy Kabyldin told the country's energy ministry, giving no reason for the cut.

However, analyst IHS Global Insight observed that the Kazakh government and the Kashagan consortium have a "long history" of strained relations over cost overruns and delays at the Central Asian state's flagship offshore project.

After a protracted negotiations, KazMunaiGas doubled its interest in Kashagan, a takeover that analysts said was part of a global trend by governments to reclaim control over strategic energy assets.

IHS Global Insight noted that Kazmunaigaz raised its stake to 16.81% as a result of that previous round of "sparring" between the consortium and the government, which pushed back the timetable for production and agreed on a plan for controlling costs.

"Nevertheless, with the wild swing in oil prices over the past 18 months, expenditures in the first stage of the project have continued to be a source of friction," the analyst said, adding that Kabyldin's comments "hint that the government is keen to keep a lid on rising costs again, which are now expected to reach $38 billion by 2014."

Kabyldin's comments coincided with reports that Kazakhstan hopes to resolve a new emerged dispute with a group of foreign companies led by BG Group and Eni over the huge Karachaganak gas field this year.

Earlier this month, Kazakhstan's Prime Minister Karim Masimov said his country was negotiating to purchase a stake in the Karachaganak gas-condensate project from Karachaganak Petroleum Operating BV (KPO), a consortium of BG, Eni, Chevron Corp., and OAO Lukoil.

Industry Scoreboard

Exploration & Development Quick Takes

Pay nearly tripled at gulf's Lucius find

An appraisal well 3,200 ft south of an Anadarko Petroleum Corp. group's December 2009 Lucius oil and gas discovery in the ultradeepwater Gulf of Mexico cut nearly three times the pay thickness of the discovery well.

The updip appraisal well, drilled to about 20,000 ft in 7,100 ft of water on Keathley Canyon Block 875 some 260 miles off Louisiana, encountered almost 600 net ft of light oil pay with additional gas-condensate pay in thick subsalt Pliocene and Miocene sands, Anadarko said. The discovery well found more than 200 ft of pay (OGJ Online, Dec. 10, 2009).

Anadarko described Lucius as a "major discovery" without giving a resource estimate. Wood Mackenzie Consultants floated an initial estimate of 150-200 million bbl of oil and natural gas liquids and around 1 tcf recoverable. Lucius is likely large enough for stand-alone development, the consultant said.

Anadarko said, "The reservoirs are characterized by excellent porosity and permeability and contain high-quality oil. We anticipate additional appraisal activity in 2010 as we continue to evaluate development options for this very large accumulation."

Lucius is 70 miles south of infrastructure at the Red Hawk spar and 7.5 miles east of Chevron's Buckskin, a 2009 Paleogene discovery (OGJ Online, Feb. 6, 2009).

Anadarko operates Lucius with 50% working interest. Plains Exploration & Production Co. has 33.33%, and Mariner Energy Inc. has 16.67%.

Multiple pays yield gas in western New York

Gastem Inc., Montreal, found gas in one sand and two shales with good thickness at its first well in a planned drilling program on 35,000 acres in western New York.

The Ross-1 vertical well in Otsego County yielded gas from Ordovician Utica shale, Silurian Oneida sand, and Devonian Marcellus shale, the company said. TD is 4,950 ft. The three zones "will be the subject of extensive programs in the coming months," the company said.

Gas flowed on penetration of the Marcellus and was flared at modest rates from natural fractures. The organic-rich Oakta Creek and Union Springs members of the Marcellus formation showed higher permeability than anticipated and were of encouraging thickness. The Marcellus shale was not stimulated because of the present regulatory situation.

Oneida flowed at the rate of 2 MMcfd of gas on a 4-hr drillstem test and has become one of Gastem's primary targets in the area.

A completion in the Utica shale was performed using the frac volume approved under current New York state regulations that authorize use of 80,000 gal of water. This modest vertical frac in one of the Utica's three members resulted in a sustained rate of more than 70 Mcfd over a 24-day test.

Final results of laboratory core analysis for all formations for the determination of original gas in place and rock properties will be completed in about a month. When review work is completed, information will include recoverable volumes across the Ross property and a resource estimate for Gastem's acreage.

ExxonMobil to expand Iraq's West Qurna 1 field

ExxonMobil Iraq Ltd. signed an agreement with the Iraq Ministry of Oil to redevelop and expand West Qurna 1 field in southern Iraq.

The agreement was signed in Baghdad in the presence of the Iraq Oil Minister Hussain al-Shahristani and Rob Franklin, president of ExxonMobil upstream ventures. The consortium members are ExxonMobil as the lead contractor with 60% interest, Oil Exploration Co. (owned by the Iraq government) with 25% interest, and Royal Dutch Shell PLC with 15% interest.

Franklin said ExxonMobil would continue discussions with the Iraqi government on other opportunities to help develop the country's resources.

As part of the agreement, ExxonMobil will focus on recruitment and development of local employees, development of qualified local vendors for the supply of goods and services, and on supporting corporate citizenship initiatives in health, education, and infrastructure.

Two competing consortia—one led by ExxonMobil and the other by OAO Lukoil—submitted bids that met Iraq's conditions for the 8.6 billion bbl West Qurna 1 field, including Iraq's price of $1.90/bbl per additional barrel. ExxonMobil proposed an additional 2.1 million b/d, while Lukoil offered 1.5 million b/d for the field, which now produces 279,000 b/d (OGJ Online, Oct. 19, 2009).

ConocoPhillips, Statoil to explore Chukchi Sea

ConocoPhillips and Statoil USA E&P have entered into a deal for Statoil to acquire 25% working interest in 50 ConocoPhillips leases acquired in the Chukchi Sea OCS lease sale in 2008.

ConocoPhillips will retain operatorship and majority working interest in these leases.

Statoil and ConocoPhillips have conducted joint operations for more than 30 years on the Norwegian continental shelf (NCS). Their NCS operating experience provided both extensive expertise in tackling harsh environments as well as developing new technology to enhance recovery from existing fields.

"By adding on these leases to the 16 we already have in Chukchi, we have now acquired a sizable acreage portfolio to explore in the coming years," said Tony Dore, heading up Statoil's exploration group in North America.

ConocoPhillips' initial drilling in the Chukchi Sea is scheduled for 2012.

In addition to undisclosed financial considerations from Statoil, ConocoPhillips will also acquire 50% working interest in 16 Statoil-operated Gulf of Mexico leases and acquire all of Statoil's 25% working interest in five additional gulf leases operated by ConocoPhillips. All of the involved gulf blocks are in the emerging Lower Tertiary play where ConocoPhillips has participated in the 2009-announced discoveries Tiber and Shenandoah.

Chevron, Woodside make finds off W. Australia

Two operators have made recent gas finds off Western Australia.

Chevron Australia's Yellowstone-1 wildcat in permit WA-268-P in the Greater Gorgon region has intersected a 137-m gas column.

The find follows last year's discoveries nearby at Satyr-1 and Achilles-1. All of them bode well in support of Chevron's plans to eventually turn the Gorgon-Jansz-Io LNG development into a five-train project.

At the moment the focus is on three trains and a total of 15 million tonnes/year of LNG. However as the gas reserves build up with new discoveries, the sights will be lifted to a plant with greater capacity output.

Separately, Woodside Petroleum Ltd. reported reaching good gas sands with its Noblige-1 wildcat, which was drilled in permit WA-404-P in the Greater Pluto field area.

Measurement-while-drilling logs at several levels in the well have indicated natural gas, one of them over a 300-m gross interval in the intra-Triassic age primary target.

The well is now drilling ahead into deeper targets and Woodside will wait until reaching total depth before undertaking a full evaluation. This will involve a full suite of wireline logs and pressure data to indicate the number of hydrocarbon zones, their size, and potential.

Nobligwe-1 is close to the previous Martell discovery, which confirmed a 110-m gas column and the presence of a gas-water contact in 2009.

The new find is welcome news for Woodside, which is attempting to secure additional gas reserves for the second train at its Pluto LNG facility proposed for the Burrup Peninsula plant.

Noblige-1 is part of the company's exploration campaign of up to 20 wells in the Greater Pluto area that began in October 2009 with the Pelion-1 and Eris-1 wells in WA-34L.

Noblige is being drilled by the Jack Bates semisubmersible rig, but the next well, Larsen-1, will be drilled with the Maersk Discoverer semisubmersible, as Jack Bates is due for release to Hess Corp. for its proposed 16-well program in the Carnarvon basin region off Western Australia.

Drilling & ProductionQuick Takes

Chevron proceeds with Papa Terra off Brazil

Chevron Overseas of Brazil Ltd. will proceed with the development of the Papa Terra project, its second deepwater field off Brazil.

Petroleo Brasileiro SA (Petrobras) is the project's operator and had announced in January 2009 the suspension of the development because of uncertain market conditions and excessive costs (OGJ, Jan 26, 2009, Newsletter).

Papa Terra will produce heavy 14-17° gravity oil from Block BC-20 in the southern Campos basin, about 70 miles off the coast in 3,900 ft of water. The production facilities will include the first tension-leg well platform off Brazil. The TLP will connect to a floating production, storage, and offloading vessel that has a 140,000 bo/d production capacity.

Chevron expects production from Papa Terra to begin in 2013.

Chevron holds a 37.5% interest in the $5.2 billion Papa Terra project and estimates that the field will recover 380 million bbl of oil. Off Brazil, Chevron started production from Frade in 2009—its first deepwater project—and also holds a 30% nonoperated interest in Maromba field, where work continues to select an optimal development plan.

In the Santos basin, Chevron holds a 20% nonoperated interest in Block BS-4, where the company continues to evaluate development plans to commercialize Atlanta and Oliva fields.

Iraq, Eni group sign Zubair field agreement

The Iraqi government has signed another technical services contract for redevelopment of a giant oil field.

Eni, Occidental Petroleum Corp., and Korea Gas Corp. agreed with state-owned South Oil Co. and Missan Oil Co. as state partner to redevelop Zubair field near Basra. The companies signed an initial agreement last November (OGJ Online, Nov. 16, 2009).

Led by Eni, the consortium plans to increase Zubair production from its current level of about 200,000 b/d to 1.2 million b/d within 6 years and to keep output at that level for 7 years.

The group will earn $2/bbl on incremental production after output has increased 10%. The agreement includes a cost-recovery mechanism. Zubair Field Operating Division will manage the rehabilitation and expansion project, staffed mainly by employees of South Oil Co. Interests are Eni 32.81%, Oxy 23.44%, Korea Gas 18.75%, and Missan Oil 25%.

The ministry describes Zubair as a series of structural traps in a northwest-southeast trending anticline about 20 km southwest of the city of Basrah. The field has four domes named Al-Hamar, Shuaiba, Rafidyah, and Safwan. Safwan extends into Kuwait, where it is known as Abdalli field.

Zubair has produced from the Upper Cretaceous Mishrif formation and upper and lower units of the Lower Cretaceous Zubair formation, all candidates for redevelopment.

The government recently has signed service contracts for similar work by a group led by ExxonMobil Iraq Ltd. at West Qurna oil field (first phase) and by Royal Dutch Shell PLC in Majnoon oil field, both giants in southern Iraq (OGJ Online, Jan. 18, 2009, and Jan. 25, 2009).

Processing Quick Takes

Petrotrin's cost of refinery upgrade escalates

State-owned Petroleum Co. of Trinidad & Tobago Ltd. (Petrotrin) said the cost of upgrading its 175,000-b/d Pointe-a-Pierre refinery has escalated to $1.3 billion from earlier projections of just $350 million.

Imtiaz Ali, the company's general manager of strategy and business development, said the increase was due to rising construction costs and delays in receiving certificates of environmental clearance from regulators.

Ali said, "It is true we made mistakes in the way we estimated the cost of some of these projects, but we have learned our lessons. In addition, we did not realize that the cat cracker required so much work until we pulled it down, and that also significantly added to the increase in costs."

Speaking at an energy conference in Port of Spain, Ali said the refinery upgrade—to be completed by November—was crucial because its products were increasingly uncompetitive and margins were declining. He said the upgrade will allow the refinery to produce more gasoline in its mix and a higher-quality diesel fuel.

Petrotrin also produces 74,000 boe/d, and Ali plans to drill an additional 18 developmental wells to increase production and make it more reliable.

He revealed Petrotrin will undertake 215 sq km of 3D seismic on land that could lead to additional drilling for oil.

Petrotrin has 446.7 million boe of proved reserves.

KBR to offer BP resid hydrocracking process

BP PLC has signed an agreement under which KBR will offer licensing and engineering services for a proprietary resid hydrocracking process.

KBR said it will market BP's Veba Combi-Cracker (VCC) technology globally for refining, heavy-oil upgrading, and coal-to-liquids processing.

VCC feeds vacuum resid to a slurry phase reactor at 200 bar with an antifoaming agent. Hydrogen bubbles through the slurry mixture from below. Downstream of the slurry reactor, a separator removes unconverted material and the additive, while lighter products move to a fixed-bed catalytic hydrotreatment vessel for removal of nitrogen and sulfur. Typical products are heavy gas oil, light gas oil, naphtha, and light olefins.

BP says VCC achieves a resid conversion rate of 95%, compared with slightly above 70% for delayed coking.

In addition, VCC's liquid yield exceeds 100% because of the addition of hydrogen, while liquid yields of cokers typically fall below 80%, BP says. BP acquired the technology when it absorbed Veba of Germany in 2002.

A 3,500-b/d VCC demonstration plant was built in the 1980s near what is now BP's 264,000-b/cd Gelsenkirchen refinery in Germany. Poor economic conditions forced closure of the unit in 2000. BP also has operated a 200-b/d VCC pilot plant at Gelsenkirchen able to process a wide range of feedstocks.

Transportation Quick Takes

Cleanup progresses in Port Arthur oil spill

The US Coast Guard said about half the 450,000 gal of crude oil spilled into the Sabine Neches Waterway at Port Arthur, Tex., on Jan. 23 had been recovered, evaporated, or dispersed by Jan. 25.

The spill occurred when the 95,660-dwt Eagle Otome tanker collided with a barge after apparently losing power.

Although the incident forced closure of the waterway, the four major refineries in the Port Arthur-Beaumont area were reported to be operating at normal rates. Owners and capacities are Total SA, 174,000 b/d; Valero Energy Corp., 250,000 b/d; ExxonMobil Corp., 345,000 b/d; and Motiva Enterprises, 285,000 b/d.

USCG said the spill affected 9 miles of shoreline. It said clean-up involved 27 skimming vessels and 36 vessels deploying and working 59,800 ft of boom. The 210-ft Texas Responder recovery vessel was on scene. Lightering was planned for the Eagle Otome and two barges involved in the collision, which were being pushed by the towing vessel Dixie Vengeance.

Indonesia targets market for LNG sales

Indonesia's state-owned PT Pertamina and state gas distributor PT Perusahaan Gas have found domestic buyers for most of the liquefied natural gas to be produced from their planned floating terminal in Teluk Jakarta Bay.

"In 2011 we require huge amounts of LNG to fuel our power generators and we will probably absorb 80% of LNG supplied through the floating terminal," said Dahlan Iskan, recently appointed as president director for state power company PT Perusahaan Listrik Negara (PLN).

"We also asked Pertamina to immediately begin the construction of the terminal because the supply gas for PLN will depend on the terminal," said Dahlan, who added that a failure to access LNG would force the firm to use gasoline, "which is more expensive."

In 2009, PLN predicted it would require 2,233 MMscfd in 2010, about 1,300 MMscfd more than the available supply of about 900 MMscfd. But the firm sees increased demand growth, saying it will need 2,474 MMscfd by 2012, while the domestic supply may only be 1,781 MMscfd.

Meanwhile, most of the remaining supply from the Teluk Jakarta site also will go to the domestic market, according to Evita H. Legowo, director general for oil and gas at the Energy and Mineral Resources Ministry. She said "state fertilizer company PT Pupuk Kujang will absorb 18% of supply from the LNG terminal."

The Teluk Jakarta LNG terminal, 70% owned by Pertamina and 30% by PGN, will eventually have a capacity of 500 MMscfd, and is expected to take $200 million of investment before going online by September 2011.

Chevron signs LNG deals with Kyushu Electric

Chevron Australia has signed multiple agreements with Japanese power utility Kyushu Electric Power Co. Inc. for delivery of LNG from Chevron's Gorgon and Wheatstone gas projects off Western Australia.

Under the heads of agreements, Kyushu will receive 300,000 tonnes/year of LNG from Gorgon for 15 years. Kyushu will also acquire 1.83% of Chevron's equity share in the Wheatstone field licenses and 1.37% interest in the proposed Wheatstone gas processing facilities to be developed onshore at Ashburton North near Onslow.

In addition Kyushu will purchase 700,000 tpy of LNG from Wheatstone for 20 years. This sales volume is over and above the LNG that Kyushu will lift as an equity partner in the project, so that Kyushu's total uplift will be 800,000 tpy from Wheatstone.

Start of gas production from Gorgon is expected in 2014. Final investment decision on Wheatstone is expected in 2011.

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