Crude Oil Buoyed by Weak Dollar, Positive Manufacturing Data
In a bout of post-weekend short-covering, crude futures edged back into positive territory on the New York Mercantile Exchange this past Monday led by encouraging domestic manufacturing data and a weaker dollar. As the U.S. currency lost ground against the euro, its denominated price of light, sweet crude oil for March delivery gained more than $1.50 from last week’s lower price tag to settle at $74.43 a barrel.
Additionally, Wall Street was encouraged by Exxon Mobil Corp.’s earnings report, which beat out analysts’ expectations. The world’s largest publicly traded oil and gas company, ExxonMobil posted upstream earnings of $5,780 million, up $146 million from the fourth quarter of 2008.
“Oil prices were starting to lose momentum, and coming in this week, without the dollar continuing to rebound and with better-than-expected manufacturing numbers, the market took that as a sign that things may be turning around,” said analyst Gene McGillian at Tradition Energy in Stamford, Connecticut. On Friday, the oil price exited the month of January down more than 8% from December 2008.
He continued, “I think that the market is showing strong resistance near $74-$75, and for the price to get boosted above that, we’ll need to see another round of unexpected economic data.”
Arctic Oil Tempts Norway to Seek Drilling at ‘Gates of Hell’
Norway has started a push to explore for oil and natural gas in more remote regions like its Arctic volcanic island of Jan Mayen, as the country seeks to reverse almost a decade of dwindling North Sea output.
“We’ve explored an increasingly large part of the Norwegian shelf,” Oil Minister Terje Riis-Johansen said in an interview on a trip to the barren outpost on Sept. 23. “If we now wish to develop Norway as an oil and gas nation, it will have to be in other areas.”
Diminishing access to traditional reserves is prompting countries to turn to unconventional sources such as oil sands and shale-rock formations to meet demand. Russia, Canada, the U.S. and Iceland are vying for a stake of the Arctic, which may hold as much as 50 percent of the world’s undiscovered oil.
Crude output from Norway, the world’s fifth-biggest oil exporter, peaked between 2000 and 2001 and may fall 9.7 percent this year, according to the Petroleum Directorate. Norway gets almost a 25 percent of its economic output from oil and gas, which has made it the world’s second-richest nation and financed its cradle-to-grave welfare system.
Jan Mayen Island is reputed to have been discovered by the Irish monk Brendan in the 6th century, who sailed past it during volcanic activity and thought he had found the “gates of hell,” according to a hand-out by the oil ministry. “This is extreme exploration,” Bente Nyland, head of the Norwegian Petroleum Directorate, said in an interview on the island on Sept. 23. “You’re in an area where you have very little control, so you need to have a lot more knowledge before you can start any activity.”
BP, Europe’s second-largest oil company, estimates the Arctic Ocean may hold around 200 billion barrels of oil equivalent, or 25 percent to 50 percent of the world’s undiscovered hydrocarbons.
Last year, the U.S. Geological Survey estimated the area to hold 90 billion barrels of oil.
BP makes “giant” oil find in Gulf of Mexico
Oil major BP Plc said it has made an oil discovery in the Gulf of Mexico, which analysts believe could contain over 1 billion barrels of recoverable reserves, reaffirming the Gulf’s strategic importance to the industry.
BP said in a statement on Wednesday that it had made the “giant” find at its Tiber Prospect in the Keathley Canyon block 102, by drilling one of the deepest wells ever sunk by the industry.
Further appraisal will be required to ascertain the size of volumes of oil present, but a spokesman said the find should be bigger than its Kaskida discovery which has over 3 billion barrels of oil in place.
Estimates of recoverable reserves range from around 20 percent of oil in place.
“Assuming reserves in place of 4 billion barrels and a 35 percent recovery rate, BP’s proven reserves .. would rise by 868 million barrels — equivalent to 4.8 percent of the group’s 18.14 billion barrels of proven reserves,” Aymeric De-Villaret, oil analyst at Societe Generale said in a research note.
BP, the biggest oil producer in the U.S. and biggest leaseholder in the Gulf of Mexico, has a 62 percent working interest in the block, while Brazilian state-controlled Petrobras owns 20 percent and U.S. oil major ConocoPhillips owns 18 percent.
Iain Armstrong, analyst at Brewin Dolphin, said the discovery may have implications for long-term oil prices.
“It will ease concerns about peak oil because it shows there is life left in these mature areas,” he said, adding that it could be the second half of the next decade before the find is producing.
The discovery also bodes well for other exploration in that part of the Gulf of Mexico, including at Royal Dutch Shell’s nearby Great White field, Jason Kenny, oil analyst at ING in Edinburgh, said.
The Gulf of Mexico has become increasingly important to Western oil majors as oil rich-countries such as Saudi Arabia, Venezuela and Russia reserve their richest fields to be developed by their state-owned oil companies.
The Gulf is especially attractive because it offers high profit margins, due to relatively low taxation compared to countries such as Russia and Nigeria, and because of the low political risk.
As nearer-shore discoveries dry up, companies have pushed further out to sea, which has forced them to develop new technologies to detect and extract the oil.
The prospects for massive discoveries in the deep water of the Gulf of Mexico is also good news for U.S. politicians’ ambitions to reduce the country’s reliance on imported oil, although oil executives doubt the U.S. is capable of becoming self sufficient in oil.
Offshore spend to rebound after 2009 and 2010 lows
Despite the global recession, offshore spend is expected to grow strongly – from $578 billion (bn) Capex and $379bn Opex over the last five years to $807bn Capex and $549bn Opex over the period to 2013. Exploration for fresh oil & gas supplies and development of existing and newly found accumulations from ever more demanding reservoirs in new extremes of environment, are expected to drive offshore industry spends.
These headline forecasts appear in the new, fully updated edition of the ‘World Offshore Oil & Gas Production and Spend Forecast 2009-2013′ released earlier this week by Douglas-Westwood and Energyfiles. With the offshore sector responsible for both the highest cost and highest technology element of spending in the oil and gas industry, the report delivers a comprehensive quantitative analysis of offshore oil & gas production and gives a detailed forecast of global spending.
Sourced from data in the ‘Energyfiles Global Databases’, the report shows that in 2008 offshore oil production was nearly 10bn barrels (bbls) or 34% of total production, whilst offshore gas production had risen to nearly 6bn bbls in oil equivalent terms, equaling 29% of all gas production (they stood at 9bn bbls and under 4bn bbls equivalent respectively back in the year 2000). Higher oil prices – which are double what they averaged five years ago – stimulated investment leading to equipment and personnel shortages as demand soared. Costs increased for most consumables and services, especially high technology services, more than ever in 2005 to 2007.
“But 2008 saw the beginnings of financial turmoil,” notes report author Dr Michael R. Smith of Energyfiles. “High prices and economic decline reduced energy demand. Global oil demand, standing at around 85mm bbls per day in 2007, declined in 2008 and will decline even further in 2009 – the first time this has happened for two consecutive years since 1983. Oil prices had risen at unprecedented rates from a low of $13 per bbl (for Brent in 1998), to an average of $85 per bbl in 2008. But the average figures show only part of the picture. The spot price for Brent crude spiked at $143.95 on the July 3 2008 and had tumbled back to $36 by the end of the year. “The price volatility immediately led to uncertainty and project delays so that in 2009 we have a period of across-the-board cost deflation. Global upstream oil and gas budgets for 2009 have reportedly been cut by 21% with more than 20 planned large projects being postponed. On the other hand the biggest oil companies only planned, on average, to cut spending by 5%.”
The report examines these cut-backs, projecting them to be short-lived. Continued steady increases in oil and gas production, after the declines of 2009, will, after 2010, once again drive all industry offshore annual expenditure up from over $240bn in 2008 to nearly $340bn in 2013.
“Last year I commented that to attain such growth the industry will have to look and spend in every far-flung part of the world” reflects Dr Smith. “Nothing has changed that view and new deep and very deepwater project approvals in Angola, India and China for example are a testament to this. But different economic circumstances and an unparalleled volatility in price and fiscal conditions, allied to continuing political uncertainty in many of the world’s major producing regions, as well as the increased impact of new environmental strategies – in both developed and undeveloped countries – has made the assessment of project risk even more tricky.
“Historically, global economic recessions have led to declining energy demand,” says Dr Smith, “but the resultant lower prices have soon led to a recovery in demand and then prices, especially as OPEC has acted to rein in output to tighten supply. Thus in early 2009 the supply/demand balance for oil had already stabilised, despite the worsening recession. Our analysis points to stability within the offshore industry in 2010, whilst in 2011 a return to growth is forecast. Many more challenging and expensive projects must be brought onstream – and most of the high technology sectors of the offshore industry remain equipment and people resource-constrained.”
Floating Production: Brighter Times Ahead
Forecast: Capital Expenditure on Floating Production Units by Year of Installation ($m) Source: The World Floating Production Report 2009-2013 – Douglas-Westwood Ltd
Despite an estimated $10 billion of expected orders failing to materialise as the global economy derailed in 2008 and 2009, the floating production sector is expected to recover in 2010 and over the period 2009 to 2013 a total of $46 billion is forecast to be spent on floating production systems installed worldwide. These are amongst the forecasts in a new report launched last week by energy analysts Douglas-Westwood.
Announcing the results of the study, Douglas-Westwood management stated that, “the study stated that the turbulent nature of energy and financial markets that developed in the second half of 2008 has persisted into 2009 and has had a dramatic impact on the FPS sector. E&P companies are reining in expenditure and delaying projects as they respond to lower commodity prices, constrained cash flows and to challenges faced in the global credit market. While the situation has improved somewhat in recent months. the current economic climate remains difficult. The oilfield equipment and services sector is inherently a capital and asset-intensive industry and its reliance on debt markets, to fuel expansion, has meant that many companies are feeling the effects of global financial constraints.”
“The impact on this sector has been massive and to see $10.4 billion of anticipated orders this time last year for 2008/9 not materialise is unprecedented. However, we are convinced that the long-term fundamentals for the sector are strong: the need to exploit reserves in deep waters, marginal fields and remote locations will undoubtedly increase as the offshore industry matures and floating production systems are a key enabling technology in these areas.”
“We forecast that a total of 121 floating production systems will be installed worldwide over the 2009-2013 period. FPSOs will account for the largest proportion of these installations (94 vessels), along with 12 TLPs, 11 FPSSs and four spars. With this level of demand, global capex in the FPS sector is forecast at $45.8 billion. Of this overall market value, the world’s three major deepwater regions – Africa, North America and Latin America – account for 59% of forecast global FPS capex.
“Our analysis of the leading operators in the FPS sector suggests that Brazil’s national oil company, Petrobras, was the biggest spender on FPS systems over the 2004-2008 period. Petrobras is also expected to continue this lead over the forecast period, although ‘super-majors’ such as Total, Chevron, Shell and BP are all expected to commit to significant FPS expenditure over the coming five years. The sector’s top ten operators by expenditure account for 55% of the installations and 68% of the capex forecast worldwide for the 2009-2013 period.”
Russia Will Protect Interests in Arctic: Official
Russia will defend its interests in the Arctic amid the race for the region’s energy riches, a Russian official said June 10, while dismissing the possibility of open conflict over the far north.
“We will protect our interests in the future, but I don’t see that it will lead to a conflict in the near future,” said Artur Chilingarov, the Kremlin’s representative for international cooperation in the Arctic and Antarctic.
“We will build up our scientific, economic and research interest in the Arctic, but not our military,” he told reporters in Moscow.
Moscow raised the stakes this year in the diplomatic tug-of-war with the four other Arctic states – Canada, Denmark, Norway and the United States – by declaring plans to station more troops in Russia’s northern regions by 2020.
Chilingarov, a celebrated polar explorer and lawmaker, himself spearheaded a highly-publicized expedition in 2007 to plant the Russian flag on the Arctic seabed in a not-too-subtle demonstration of Russia’s territorial ambitions.
Interest in the economic exploitation of the Arctic has increased in recent years as the melting of the polar icecap means easier access to oil reserves. The Arctic likely holds 30 percent of the world’s untapped gas and about 13 percent of its oil, a U.S. geological survey published last month in Science magazine said.
“Everyone has their own national interests. I’ll say again that Russia’s interests in the far north, in the Arctic Ocean, are tied to the region’s economic potential for Russia: gas, oil, gold, diamonds,” Chilingarov said.
“These are all in Russia’s economic interests and we will protect them.”
Moscow has lodged a claim with a United Nations commission on a huge swath of Arctic seabed, arguing that the underwater Lomonosov Ridge, a geological structure which stretches across much of the pole, is a continuation of its continental shelf.
Shallow water drilling has declined but new ultra deepwater targets becoming increasingly viable.
According to the latest edition of the ‘World Offshore Drilling Spend Forecast 2009-2013’ - published last week by Douglas-Westwood and Energyfiles – $278bn was spent between 2004 and 2008 on offshore drilling. The report forecasts lower spends in 2009 and 2010 followed by a return to previous levels of growth, to total $367bn over the five year period. By 2013 the global drilling market will be worth an estimated $89 billion, more than doubling since 2004.
The data, derived from the ‘Energyfiles Global Database’, predict total global wells to rise 7% over the period 2009- 2013, despite a sharp decline in 2009. Approximately 18,310 offshore wells were drilled over the last five years. The forecast is of a decline in 2009, followed by consistently rising numbers including a sharp jump in 2011, to total 19,570 by 2013.
“Asia is still seeing the highest activity, followed by North America and then Western Europe,” said report author Dr. Michael R. Smith of Energyfiles.
Due to a lack of opportunity, shallow water exploratory drilling has been on a declining trend albeit with a modest price-led resurgence in 2006 and 2007. Shallow water exploratory drilling levels are not expected to ever return to their most recent 2007 peak but growth in deepwater drilling has supported exploratory drilling over the last five years – to reach 40% of all exploratory wells by 2013.
The steady growth is a result of new ultra deepwater targets becoming increasingly viable, as the capability of deepwater production systems is improved, giving additional encouragement to explorers to take these expensive risks.
With surging oil prices shallow water development drilling grew rapidly up to 2006, before flattening off. A decline is now forecast followed by returning growth as many of the delayed projects of 2009 are restarted. Growth would be even more marked if not for better, more productive, well bores allowing fewer wells per field. And total development drilling levels will be supported by continued rapid growth in deepwater drilling from 2010.
From 2010 a return to increases in spending are forecast, especially directed at deepwater development projects. The big expansion in the number of rigs available for these projects will just about meet market demand. Even though total well drilling numbers are forecast to flatten off after 2012 this will not prevent overall spends continuing to rise as wells become ever more costly and oil prices surge again.
The global recession has had its effect. As economic growth began to slow there was an inevitable effect into energy demand. Global oil demand, standing at around 85,000 barrels per day in 2007, declined in 2008 and will decline even further in 2009 – the first time this has happened for two years running since 1983. In early 2008 high oil prices and a global shortage of drilling opportunities ensured that even the most expensive offshore drilling projects went ahead. Now in 2009 there is across-the-board deflation in prices and delays in both shallow and deepwater projects.
Although global economic recessions have always led to declining energy demand, the resultant lower prices soon engineer a recovery in demand and then prices, especially as OPEC acts to rein in output. Thus in early 2009 the supply/demand balance for oil had already stabilised, despite the worsening recession. The numbers in this report point to a return to stability in 2010 and, by 2011, a strong growth in the offshore drilling industry is forecast, especially in high technology areas,” says Dr Smith.
Where the oil is: drilling under some of the world’s toughest conditions
“We are a seafaring people who have for centuries lived from the sea; people risking their lives every day to provide for their families and contribute to this province. And yet we will never, ever be able to accept the loss of precious lives to the sea.” — Newfoundland and Labrador Premier Danny Williams, on Thursday’s tragic loss of 17 lives in an offshore helicopter crash.
The east coast of Newfoundland is arguably one of the most hazardous places on Earth to put in a day’s work. Considered the foggiest place on the planet (as much as 80% of the time in the summer) temperatures range from –8C in winter to +20C in the summer. Winds howl. If you fall into the water your core body temperature cools in moments. And there are icebergs to dodge. But that’s where the oil is, so that’s where the workers must go.
Helicopters have provided the quickest way to get them there, and until Thursday’s fatal accident they had performed flawlessly. The choppers take workers to the three main development fields off Newfoundland: Hibernia, Terra Nova and White Rose. A new field, Hebron, is under development.
The three existing fields have produced nearly one billion barrels of oil in about a dozen years.
Hibernia
The production platform Hibernia is the world’s largest oil platform (in terms of weight) and consists of a topsides facility mounted on a gravity base structure. Inside the gravity base structure there are storage tanks for 1.3 million barrels of crude oil. Hibernia can produce as many as 230,000 barrels of oil a day, making it the most productive well in Canada. A dedicated fleet of shuttle tankers continuously operates between the platform and an onshore storage terminal adjacent to an oil refinery at Come By Chance. There are about 1.2 billion barrels of oil in the field, and Hibernia is expected to remain in production for at least another 25 years.
Terra Nova
Discovered in 1984 by Petro-Canada, the field is the second largest off Canada’s East Coast. Terra Nova is the first harsh environment development in North America to use a Floating Production Storage and Offloading (FPSO) vessel, the Terra Nova FPSO. Production from the field began in January 2002 Petro-Canada believes there are about 440 million barrels of recoverable oil in the field and can output about 120,000 barrels a day.
White Rose
Discovered in 1984, the White Rose offshore oil field consists of both oil and gas pool. The oil pool contains an estimated 440 million barrels of recoverable oil. White Rose is the second harsh environment development in North America to use a Floating Production Storage and Offloading (FPSO) vessel, the SeaRose FPSO. FPSOs are an attractive technology for deep-water projects. Production from the field began in November 12, 2005.
OPEC: Current Oil Prices Cannot Guarantee Future Market Stability
The current excessively low oil prices cannot guarantee its long-term stability in the crude market, Secretary-General of the Organization of Petroleum Exporting Countries (OPEC) Abdalla Salem El-Badri said this past Friday.
The moderation of prices since last summer’s extreme, certainly offers some short-term relief to consumers. However, if the current low price environment persists, this short-term relief may not translate into long-term gain, El-Badri said in a statement released by the OPEC secretariat in Vienna.
As to the International Energy Agency’s (IEA) remarks that the world would get a 1-trillion-U.S. dollar economic stimulus if oil prices stay at around 40 dollars per barrel through 2009, El-Badri said OPEC wanted to see the global economy back on its feet, but the short, medium, and long-term timeframes are all interlinked.
If low oil prices persist, it is not economically viable for OPEC member states to invest in the industry. Low oil prices inevitably mean less investment, he said. El-Badri also said OPEC remained committed to ensuring a stable, sound and sustainable oil industry.
OPEC will hold a ministerial conference on March 15.
Deepwater: A Robust Market in a Climate of Uncertainty?
A new study published last week by energy business analysts Douglas-Westwood, ‘The World Deepwater Market Report 2009-2013’ forecasts that the deepwater oil & gas sector will spend $162 billion over the period 2009 to 2013.
Steve Robertson, Douglas-Westwood’s Oil & Gas Manager, commented, “Overall, despite more moderate levels of expenditure during 2009 and 2010 relative to 2008, the deepwater sector is forecast to continue its growth trend, with annual expenditure reaching over $35 billion by 2013.”
The bulk of deepwater developments are being led by major oil companies and well-placed NOCs that we believe will not be hit by the economic downturn and turmoil in the debt markets to the same extent as smaller players. The analysts note, however, some impact on the sector may be felt through those deepwater operators that are reliant on external project finance. The result is that some delays to projects are inevitable until the financial markets become more settled. Oil prices appear to be less of an issue at present – their survey of deepwater operators indicates that most are planning against conservative assumptions and expect oil prices to recover to $50-70/bbl in the medium-term.”
According to Douglas-Westwood, the “golden triangle” of deepwater, namely Africa, the Gulf of Mexico and Brazil, will account for nearly 75% of global expenditure.
For Africa, a large number of world-class developments are underway or planned for the forecast period and valued at $60 billion. North America, which in deepwater terms means the US Gulf of Mexico, is set for substantial spend with $29.3 billion forecast for the 2009-2013 period. Latin American activity (also $29 billion) is dominated by Brazil and, given the potential of the country’s reserves, this is likely to remain the case for some time. The emergence of Asia as a significant region should not be overlooked, with expenditure over 2009-2013 increasing by 90% when compared to 2004-2008 and accounting for 9% of forecast global spend.
Three main elements dominate spend over the forecast period, namely: pipelines, the drilling and completion of development wells, and platforms.
Pipelines and control lines will continue to play a vital role in providing the necessary infrastructure for deepwater developments. The opening up of reserves further from the coast and the incorporation of satellite fields into deepwater hubs will drive expenditure with a total forecast spend of $57.7 billion. Expenditure on the drilling and completion of subsea development wells will amount to $53.8 billion. These two components of activity account for nearly 70% of all expenditure. The number and cost of deepwater floating production platforms is also set for major growth, with a total of 86 units forecast at a cost of $38.2 billion.
Overall, the analysts retain a positive outlook on the deepwater sector – ultimately this is where the majors need to play to secure significant reserve replacement and incremental production and there are simply not enough world-class opportunities elsewhere. They believe those that are currently active in this sector are most sheltered from the financial and economic turmoil and that as a result the sector will continue to be a promising long-term business area throughout the oil sector value chain.”
The World Deepwater Market Report 2009-2013 forms part of a series of reports that are used by companies in more than 50 countries. These include leading corporations, investment banks and agencies of governments. The report considers the prospects for this growing market and values future expenditure through to 2013. The report also reviews technologies and drivers and details prospects.
For more information, visit: Douglas Westwood.
