OGJ Newsletter

Jan. 25, 2010

General InterestQuick Takes

KPO 'in talks' with Kazakhstan over Karachaganak

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

"Currently, talks on this issue are ongoing between the energy ministry, [Kazakhstan's state-owned] KazMunaiGas (KMG), and all the project participants," said Masimov, referring to BG and Eni, each with a 32.5% interest, along with Chevron 20% and Lukoil 15%.

The government's aim of purchasing a 10% stake, first reported last month, has been linked with efforts by KPO—including international arbitration—to secure a refund of more than $1 billion for export duties it should not have to pay under its final production-sharing agreement.

Under the FPSA, signed in 1997 by the Kazakh government and KPO partners, the consortium is to operate the Karachaganak facilities until 2038.

Some industry analysts suggest the government is using export duties as a pretext for pressuring the consortium to sell a stake in the Karachaganak project similar to its successful effort to gain a stake in the Eni-led Kashagan project.

In 2008, the Kazakh government doubled its stake in Kashagan to 16.8%, following a protracted dispute with the Agip-led consortium over costs and production delays. Eventually, the newly formed North Caspian Operating Co. BV—including KMG—replaced the Agip consortium as operator of the field (OGJ, Feb. 2, 2009, p. 33).

However, according to one analyst, the government's current move is more about money than it is about control of the project. Karachaganak "is very profitable for investors and if you join the project at a later stage of development you have smaller operational and financial risks," Artem Konchin, an oil analyst at UniCredit SPA told Bloomberg News.

Kazakh officials are aware of the value of the KPO project. In December, Massimov and other officials joined KPO executives to launch the first leg of the Karachaganak-Uralsk gas pipeline being built by KPO in the Western Kazakhstan Oblast.

"The pipeline goes through the territory of five districts, and it potentially allows for gasification of 146 settlements within Western Kazakhstan Oblast," said Massimov, calling the development "a great achievement."

The second leg of the Karachaganak-Uralsk pipeline is due for completion in second half 2010. When complete, the Karachaganak-Uralsk pipeline will supply gas to the villages situated on the left bank of the Ural River along the way between Karachaganak field and Uralsk City.

According to KPO partners, Karachaganak is one of the world's largest oil and gas-condensate fields. Covering more than 280 sq km, it is estimated to hold more than 1.2 billion tonnes of oil and condensate and more than 1.35 trillion cu m of gas.

Tajikistan: Investment needed to boost production

Tajikistan needs a considerable increase of investment for the quickest development of the country's natural gas resources, according to a senior government official.

"A record amount of natural gas was produced in Tajikistan in the 1970s, 525 million cu m/year, when huge funds were invested in this sphere," said Azim Ibrohimov, who heads the country's main geology directorate.

Today—taking into account industrial enterprises—the country needs annual production of 800 million cu m to 1 billion cu m of gas, Ibrohimov said, adding, "A multifold increase of funding is needed today to produce at least similar amounts of domestic gas."

Ibrohimov, who noted that five companies prospect for gas in the country, said there is still no fully encouraging information that Tajikistan could fully supply all of its own gas.

"Taking into account prospecting work done by these companies, one cannot say that Tajikistan will (fully) be provided with its own natural gas in the near future," Ibrohimov said.

The comments come as Tajikistan faces a crisis over its gas supplies from neighboring Uzbekistan. Earlier this month, Uzekistan's state-owned Uzbektransgaz reduced its supplies of natural gas to Tajikistan by 50% due to a dispute over payment (OGJ Online, Jan. 11, 2010).

EU, Iraq sign strategic partnership MOU

European Union Energy Commissioner Andris Piebalgs and Iraq's Minister for Oil Hussain Al-Shahristani signed a memorandum of understanding outlining priorities for an "energy strategic partnership," which includes Iraq as a possible natural gas supplier to the Southern Corridor gas lines.

For its part, the EU could help Iraq develop its electric power system and tap its vast renewable resources.

Areas of cooperation covered by the MOU involve development of an Iraqi energy policy, an energy action program for 2010-15, assessment of Iraq's hydrocarbon pipeline network, enhancing pipeline safety and reliability, identifying sources and supply routes for gas from Iraq to the EU, and a plan for development of renewable energy in Iraq.

Exploration & DevelopmentQuick Takes

Pioneer beefs up Eagle Ford shale efforts

Pioneer Natural Resources Co., Dallas, completed its second South Texas Eagle Ford shale well, formed an Eagle Ford asset team, and is pursuing a joint venture with bids expected in the second quarter.

The company turned to sales its Robert Crawley Gas Unit-1 well in Live Oak County which flowed 17 MMcfd of gas with 7,300 psi wellhead flowing pressure on a 24⁄64-in. choke from a 5,400-ft lateral after a 16-stage frac. True vertical depth is 14,000 ft.

The Eagle Ford shale at the Crawley location, 3 miles south of Pioneer's liquids-rich Sinor-5 discovery well, is 1,000 ft deeper and has a 30% thicker pay zone than at the Sinor location.

The well's goal was to test productivity towards the dry gas window in a deeper, thicker Eagle Ford shale section with a longer lateral and additional frac stages. With the highest gas rate reported to date in the play, Crawley-1 exceeded the company's expectations and confirmed that dry gas wells provide strong economics at today's prices.

Pioneer holds more than 2,000 sq miles of 3D seismic data, logs from more than 150 operated wells, proprietary core samples, and microseismic results in the Eagle Ford play. It is operating two horizontal rigs with wells in DeWitt and Karnes counties under way, both targeting liquids-rich areas.

Two asset teams will report to William F. Hannes, formerly executive vice-president business development, who is named executive vice-president South Texas operations. They are the existing South Texas asset team and the newly formed Eagle Ford shale asset team.

Pioneer named three other executive vice-presidents: Danny L. Kellum over Permian operations, Jay P. Still over Midcontinent operations in addition to Rockies, Alaska, and Barnett shale assets, and Chris J. Cheatwood over business development and geoscience-engineering technology.

PTTEP joins Australian exploration project

Thailand's PTT Exploration & Production PLC (PTTEP) agreed to farm into a 20% interest in three exploration blocks off northwestern Australia.

It became the fourth stakeholder in blocks WA-378-P (3,634 sq km), WA-396-P (4,467 sq km), and WA-397-P (3,886 sq km), joining the joint venture led by Woodside Energy Ltd.

The farm-in represents PTTEP's fifth venture in Australia where the state-owned firm is seeking to further its presence.

The joint venture plans to drill an exploration well this year after seismic showed ``great potential for gas,'' said PTTEP chief executive Anon Sirisaengtaksin.

After PTTEP's 20% farm-in, Woodside Energy has a 50% stake in those permits, Mitsui E&P Australia Pty Ltd. holds 20% and Toyota Tsusho Gas E&P Browse Pty Ltd. has 10%.

Pakistan Petroleum signs exploration pacts

Pakistan Petroleum Ltd. (PPL) has signed two oil and gas exploration agreements with the Pakistani government.

PPL signed concession agreements for the 2,459-sq-km 2467-12 Jungshahi block and the 2,436-sq-km 2568-18 Gambat South block, both in Sindh.

PPL intends to invest more than $17.05 million in the blocks over 3 years for work including 2D and 3D seismic surveys and drilling.

The agreement resulted from a Sept. 30, 2009, bidding round.

PPL operates Sui, Kandhkot, Mazarani, Adhi, and Chachar fields in Pakistan with total production of 786 MMcfd of gas, 4,989 b/d of oil, and 150 tonnes/day of LPG.

Industry Scoreboard

Drilling & ProductionQuick Takes

Shell, Petronas sign Majnoon contract with Iraq

Iraq's Ministry of Oil has signed a 20-year contract with Royal Dutch Shell PLC and Malaysia's Petronas to provide technical assistance in the development of the Majnoon oil field.

The consortium targets a production plateau of 1.8 million b/d of oil, up from a current level of 45,000 b/d. Majnoon, which lies in southern Iraq, is one of the world's largest oil fields.

Lead operator Shell will hold a 45% share, with partner Petronas holding 30%. The Iraqi state holds 25% of the participating interests in all licenses.

"Iraq's oil and gas reserves are among the largest in the world and we look forward to applying our experience and technology to support ongoing efforts to rebuild the country's energy infrastructure," said Shell Chief Executive Officer Peter Voser.

The signing follows the contract award on Dec. 11, 2009, and the approval of the Iraqi Council of Ministers on Jan. 5.

Shell begins drilling for shale gas in Sweden

Royal Dutch Shell PLC, despite opposition from environmentalists, has begun to drill for shale gas in Sweden, saying there may be enough gas to make the country self-sufficient for a decade.

"There could be enough gas to cover Sweden's gas needs for at least 10 years," said a Shell spokesman, adding that the firm is drilling its first well now and expects to finish three wells by the end of March.

Shell's drilling program has met with resistance from local residents, according to the Skanska Dagbladet newspaper which last week said neighbors to the planned drilling site appealed to the Environmental Court over an earlier approval by the county administrative board.

Last November, the county administrative board of Sjobo gave the green light to Shell's application to conduct test drilling for gas in the municipality. That approval came after an earlier one by the Swedish Mining Inspectorate.

The approvals have been granted despite objections of some local residents and activists who fear the drilling program could have adverse effects on the environment, especially on the region's water supplies.

Goeran Gustafson, a science teacher active in a green group which seeks to stop the project, expressed concern about the impact on ground water, saying that it could be contaminated by heavy metals and other dangerous substances.

Sweden is one of several countries in Europe where exploration for shale gas is being carried out by international oil and gas companies. Others include the UK, France, Germany, Austria, Poland, and Hungary.

In addition to Shell's work in Sweden, ExxonMobil is exploring Lower Saxony, while OMV is testing formations near Vienna. By yearend, ConocoPhillips and 3 Legs Resources are expected to have test results from northern Poland (OGJ Online, Sept. 21, 2009).

The International Energy Agency estimates that unconventional gas resources in Europe, including coalbed methane, could amount to 35 trillion cu m, six times higher than the continent's conventional gas resources.

Ensco takes delivery of ultradeepwater semi

A subsidiary of Ensco International PLC has taken delivery of the third of seven ultradeepwater semisubmersible rigs being built for it by Keppel FELS Ltd., Singapore (OGJ, July 20, 2009, p. 43).

After sea trials and final outfitting in the Gulf of Mexico, the new rig, Ensco 8502, will begin drilling late in the second quarter under a 2-year contract with a subsidiary of Nexen Inc., which has the option to extend the term by 1-2 years.

Dan Rabun, Ensco chairman, president, and chief executive officer, said construction is on schedule for delivery of the fourth 8500-series semi later this year.

Rigs in the series can drill to 35,000 ft in 7,500 ft of water. Each has a hoisting capacity of 2 million lb and 8,000 tons of variable deck load. Each has an open layout to accommodate subsea completion work.

The rigs can be modified to drill and complete wells in 10,000 ft of water.

ConocoPhillips advances Surmont expansion

ConocoPhillips Canada Resources Corp. said it will start construction this year of the second-phase of its steam-assisted gravity drainage (SAGD) Surmont oil sands project in Alberta. The company expects production from Phase 2 to start in 2015.

Phase 2 will increase Surmont bitumen production capacity to 110,000 b/d from 27,000 b/d, the company said. Production from Phase 1 started in October 2007.

Surmont is a joint venture of ConocoPhillips and Total E&P Canada Ltd. The project lies in the Athabasca oil sands region about 40 miles southeast of Fort McMurray.

Processing Quick Takes

Chevron plans downstream restructuring

Chevron Corp. plans to restructure its global downstream business in a move company officials said would leave the organization smaller and less complex.

A video message to employees from Mike Wirth, executive vice-president for the company's global downstream business, warned of unspecified workforce reductions.

According to a report by the Houston Chronicle, Wirth told employees details of the restructuring would be available in March. The plan is to be in place by the third quarter, he said.

Chevron confirmed that employees had been told of the reorganization and the streamlining of staff that will result. A company official told Oil & Gas Journal the video message made no new announcement about assets or the markets in which Chevron works.

The official said downstream assets and markets have been subject to "ongoing review" for many months and already have resulted in cutbacks of various forms.

The video message follows a Jan. 11 interim financial update from Chevron that warned fourth-quarter 2009 downstream earnings would be "sharply lower, mainly due to significantly weaker refining margins."

Chevron's global refining capacity totals 2 million b/d.

According to the 2008 annual report, the company has 937,000 b/d of capacity in wholly owned refineries in the US, including 265,000 b/d at El Segundo, Calif.; 54,000 b/d at Kapolei, Ha.; 330,000 b/d at Pascagoula, Miss.; 243,000 b/d at Richmond, Calif.; and 45,000 b/d at Salt Lake City, Utah. It also has an 80,000-b/d asphalt plant at Perth Amboy, NJ.

Outside the US, Chevron owns refineries at Burnaby, BC, 55,000 b/d; Cape Town, South Africa, 110,000 b/d; and Pembroke, UK, 210,000 b/d.

It also owns shares in refineries outside the US through international affiliates with net capacities totaling 747,000 b/d. The international capacities include 350,000 b/d through Chevron's 50% share of the Yeosu refinery in South Korea and 145,000 b/d through its 50% share of the Pualau Merlimau refinery in Singapore.

Aramco gets nod to build Jazan refinery

Saudi Aramco was tapped to build and finance the $10 billion Jazan refinery. Its capacity will be 250,000-400,000 b/d, said Minister of Petroleum and Mineral Resources Ali Al-Naimi.

Bidding by 8 Saudi firms and 42 international companies that concluded last year.

King Abdullah bin Abdul Aziz al-Saud approved the project in 2006 as part of a wider development plan for the southern province, but bidding had been delayed as the country tried to generate foreign company interest in the project.

A project fully built and owned by private companies had been a goal, but potential investors expressed concerns the distance of the planned refinery from its supply fields would undermine the plant's economics.

Shell Canada to shut Montreal refinery

Shell Canada Products plans to halt operation of its 130,000 b/d Montreal East refinery and to convert the facility into a terminal for gasoline, diesel, and aviation fuel.

In a press statement Shell said the refinery "no longer fits with Shell's long-term strategy."

Shell opened the refinery in March 1933 as a 5,000-b/d topping plant.

According to Oil & Gas Journal's latest Worldwide Refining report, the Montreal East refinery's processing capacities include 14,610 b/cd of visbreaking, 27,900 b/d of fluid catalytic cracking, 20,910 b/d of semiregenerative catalytic reforming, 14,100 b/d of hydrocracking for distillate upgrading, 49,500 b/d of catalytic hydrotreating for cat reformer feeds, and 27,000 b/d of hydrotreating for kerosene/jet desulfurization.

BP, Husky JV to upgrade Ohio refinery

BP-Husky Refining LLC will undertake a $400 million equipment upgrade at its 155,000 b/d Oregon, Ohio, refinery outside Toledo.

Owned in equal parts by BP PLC and Husky Energy Inc., Calgary, the company plans to start work later this year and complete it in 2012, according to a company statement. BP operates the refinery.

The project targets improved efficiency and competitiveness by reducing energy consumption and lowering operating costs. The company said recession-driven low demand for gasoline and other fuels has squeezed profit margins. The upgrade also targets cutting operating costs.

Work will replace two older catalytic reformers and a hydrogen plant with a single reformer. The new unit will increase gasoline production, upgrade existing infrastructure, and improve overall plant reliability.

The new 42,000 b/d reformer will require less energy than both the ones it replaces and achieve higher production of gasoline and hydrogen per increment of feedstock by operating at lower pressures resulting in. By utilizing the higher-efficiency reforming technology, said BP-Husky, it expects to reduce overall regulated air emissions by more than 5%.

The gasoline product, with a lower vapor pressure, will help the refinery meet future gasoline environmental regulations.

Planned Mideast refinery lets compressor contract

The Saudi Aramco Total Refining & Petrochemical Co. (Satorp) has hired Elliott Co., Jeannette, Pa., to supply all 17 compressor trains for the joint venture's export refinery to be built in Jubail, Saudi Arabia.

When it comes online in 2013, the Jubail refinery will be a full-conversion, integrated complex with a variety of compression applications, including sour service, hydrogen service, and refrigeration. The project includes construction of distillation and hydrotreating, conversion, sulfur and amine saltwater treatment, aromatics, and coker.

The Jubail compressor trains will be built and tested at Elliott's manufacturing plant in Sodegaura, Japan, the company said. When complete, the refinery will be able to process 400,000 b/d of Saudi heavy crude to produce high-quality transportation fuels and petrochemicals for markets in Asia, the Middle East, and Europe.

HEC lets contract for DSU at Turkmenistan gas plant

Hyundai Engineering Co. Ltd. (HEC) let a contract to Jacobs Engineering Group Inc. for license and design of its proprietary Superclaus technology for a desulfurization unit at a gas plant to be built in Turkmenistan.

The unit will be integral to the gas plant operated by state-owned Turkmengas, which produces, processes, and exports all gas reserves. Officials did not disclose the contract or investment values.

HEC of South Korea will design and build the plant, which is scheduled to be operational in 2012. Gas produced from this plant will be supplied to China.

Fire hits crude unit at Holly refinery

Fire broke out Jan. 17 in the crude unit at Holly Corp.'s 100,000-b/sd Navajo Refinery at Artesia, NM. There were no injuries.

Refinery fire-fighters extinguished the fire in about 1 hr.

The company said an initial investigation indicated failure of a pump seal. It said damage seemed to be "minimal."

The crude unit was to be shut down the week of Jan. 18 for 3 weeks for a scheduled turn-around. Holly expected to complete repairs during that period.

Transportation Quick Takes

IEA: Tanker capacity outpacing demand

Tanker capacity will outpace demand growth in 2010, further depressing freight rates, the International Energy Agency says in its Jan. 15 Oil Market Report.

In 2009, the global recession cut seaborne oil volumes by 5% while oil demand declined 1.5%, IEA says. Westbound shipments from the Persian Gulf fell because of the recession while eastbound shipments from there and West Africa rose because of Asian refinery expansions.

IEA cites reports that tanker demand, adjusted for increased floating storage, fell by 2-3% last year. The global oil tanker fleet, meanwhile, grew 7% from delivery of new tankers representing a total of 30-35 million dwt.

Fleet additions will remain at 5%/year during the next 3 years, IEA says. Orders in place and due for delivery through 2012 represent about 125 million dwt.

"The ability of the industry to negotiate more cancellations of newbuilds will be critical to shipping sector fortunes, although few were obtained during 2009," IEA says.

Scrapping increased to an estimated 6.8 million dwt in 2009 from 2.8 million dwt in 2008, with most of the increase coming in August and later.

Kinder Morgan Partners expands in ethanol

Kinder Morgan Energy Partners LP is expanding its role in the transportation of renewable fuels.

The company reported the acquisition from US Development Group (USD) of three unit train ethanol handling facilities in Linden, NJ; Baltimore, Md.; and Dallas and the formation of a joint venture with USD to coordinate access to the facilities.

The acquisition value is about $195 million, including $80 million in Kinder Morgan Partners equity issued to USD.

The terminals, along with similar facilities already owned by Kinder Morgan Partners, "will create a nationwide distribution network of ethanol handling facilities connected by rail, marine, truck, and pipeline," the company said.

Kinder Morgan Partners said it expects to handle more than 218,000 b/d of ethanol in 2010. The new transaction brings its total investment in the renewable fuels handling business to about $500 million.

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