Copy Cats in the North Sea

Published Dec 12, 2003
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Oil & Gas Forecast

If you want to see a future trend of world exploration, look no further than the Norwegian sector of the North Sea. What is happening there now gives a very good indication as to the future course of offshore oil and gas exploration trends worldwide. Like the British sector of the North Sea and the shallow water Gulf of Mexico before it, the Norwegian continental shelf (NCS) is typically becoming a mature area. Recoverable oil and gas resources on the NSC are estimated at 12.8 billion cubic metres of oil equivalents. This figure represents a 7 percent drop in the recoverable reserve estimation for last year. In order to prolong its life, the region has several options: closer co-operation with the United Kingdom to maximise cross border extraction; a change in the licensing regime to encourage exploration and maximise development in mature areas; extension of existing fields and the opening up of new areas for exploration.

Ownership Patterns
In the UK sector, a number of small to medium players have been buying into the region as the majors exit in search of deeper waters and larger finds. A similar pattern is beginning to emerge in Norway. For instance, the Canadian independent Tailsman recently announced the acquisition of supermajor BP’s interest in the Norwegian Gyda field. Recent sales include a 7.9 % share of Statoil’s interest in Tyrihans to Norsk Agip and ConocoPhillips sale of 15% in Njord field to Ruhrgas. Meanwhile, ExxonMobil has exited from blocks 15/6b and 16/9. The partial privatisation of Statoil in 2001 also gave an opportunity for small companies to enter the Norwegian theatre. Shell is also selling off non-core assets. In line with it’s recently announced intention to concentrate on the Norwegian Sea, most of the ex-Enterprise assets recently sold off are in the North Sea. Buyers have been minnows such as Paladin Resources and DNO and US independents such as Marathon. One small, but highly prominent player, is the Norwegian State’s Petoro with holdings in all 147 commercial discoveries on NCS. Its holdings range from 5% to 89%. Given the administration of all these field, Petoro could also decide to offload some of its smaller holdings in a rationalisation program.

Discoveries and Exploration
In common with the UK, the Norwegian government is seeking to bolster flagging interest in its maturing areas. This is in response to the lowest level of exploration activity since the early 1970s. With 15-20 new wells planned this year, this represents a 30% decrease on 2002 levels. It is hoped that the new system of predefined areas within mature areas will make the system more predictable and aid companies in their long term planning. While the NPD is encouraging exploration in mature areas of the NCS, oil majors are increasingly turning their eyes northwards towards such areas as Nordland VI in the Norwegian Sea. An environmental report on this area is pending.

Pressure on the Norwegians to open up more of the environmentally sensitive Norwegian part of the Barents Sea is also mounting. ExxonMobil was the only supermajor to bid for blocks in the North Sea Awards 2002 along with Agip, DNO, Dong, Norsk Hydro, OER Oil, Paladin, RWE-DEA and Statoil. At the time of writing there were currently only four active exploration wells in Norwegian waters. Results from Norsk Hydro’s wildcat 35/8-5 are now being analysed.

Statoil is drilling two wells. Located in 6405/7 the Ellida prospect lies in 1,200m of water in the Norwegian Sea 60 km northwest of Ormen Lange. It is closer to Ormen Lange’s geological play than the Havsule and Solsikke dry wells. Meanwhile the Graaspett prospect lies close to the Staer, Falk and Lerke structures in production licence 128.

Eight commercial oil and gas discoveries were made on the NCS in 2002 as compared to 12 the previous year. Around 15 wells are anticipated in 2003. Deep-water results have so far been disappointing. Norsk Hydro’s Solsikke, Shell’s President and BP’s Havsule have all been disappointments. The only really large deep-water discovery to dated deemed worthy to move to the development stage has been Norsk Hydro’s Ormen Lange made back in 1997. Exploration on the 16th licensing round has yielded few results. There have only been two discoveries, one of which is unlikely to be developed.

Tampen Area
Statoil took over operationship of this area at midnight on 31 December 2002. The change in operatorship was the result of Norsk Hydro’s share of the purchase of Saga in 1999. The area is one of the most mature in the North Sea, but there is life there yet. Statoil is currently considering three options for the further development of the area; modifications to existing platforms, a new platform or a link up with the Brent field. If the issues of the pricing of Norwegian gas and cross border development are settled, both governments stand to gain. Debottlenecking, one of the proposed Tampen modifications is also an option for the aging Statfjord field. A recent Statoil report concludes that an additional 360 mmbbl of oil could be recovered from Statfjord. Unless Britain and Norway co-operate fully, exploration dollars could easily move away from the pricey North Sea to the relatively cheaper Russian Barents Sea waters where the prospects of large finds are still credible.

Downsizing and Mergers
BP, ConocoPhillips and Norsk Hydro are cutting their workforce in the North Sea. As yet, it is unclear how many Norwegian staff will lose their jobs, but BP is looking to cut its cost base by 30%. Norsk Hydro recently announced the axing of 300 jobs; full time and consultants.

ConocoPhillips has decided to merge its Norwegian and British operations into a pan-North Sea operation and make Stavanger its North Sea regional headquarters. The move is an interesting one as a pre-merger Conoco was significantly stronger in the UK sector than Phillips. In Norway, both companies were fairly evenly matched in terms of licence holdings. However, as operator of the Ekofisk area Phillips had a higher profile.

Indications are that the Norwegian sector is being viewed with increasing importance by the company. ConocoPhillips recently approved a plan for further development and growth in the Ekofisk area. More efficient production and draining of the Ekofisk flanks should lift output to 450,000 bpd. In addition, ConocoPhillips recently spudded the Tommeliten Alpha wildcat. Situated around 19 kilometres from Ekofisk, there could easily be a tie back should the well prove successful.

Interest in the Russian sector of the Barents Sea is hotting up, global warming notwithstanding. Russian’s Natural Resources Ministry is shortly expected to announce a three-block tender round for North Dolginsky, South Solginsky and West Matveyevsky. The bidding will be open to Russian companies and any Western company with a Russian entity. From its new position in Norway and its joint venture Polar Lights Company with Arkhangelskgeoldobycha and Rosneft, soon to be replaced by Lukoil, in the Ardalin and Oshkotyn onshore oil fields, ConocoPhillips is well placed to move into this area. Conoco was also involved in negotiations over the 320 bn cm gas production Shtokmanovskoye field in the Barents Sea.

Although Norwegian oil production is expected to plateau, happily gas production is expanding and Norwegian gas will find a ready market in the United Kingdom. The Norwegian government is also looking to expand its LNG production to supply the international market. Any Norwegian LNG production increases beyond Snohvit’s committed volumes could almost certainly find a hungry market in the rapidly expanding US market.

Symphony Fails to Strike the Right Note
As the United Kingdom moves from being a net producer of natural gas to a net importer, new transportation routes are needed. One of these is Marathon’s Symphony Plan. Currently, gas from the Heimdal platform is piped via the new Vesterled connection to the Frigg system to St Fergus in Scotland. Clearly, the gas is needed further south. Oil discoveries in the neighbouring Gekko, Kneler, Kameleon, Kameleon East and Boa finds could finance the construction of this line. At present a condensate pipe runs from Heimdal to Brae in the UK sector. This could be used for oil transportation if Marathon decides against an FPSO development of its new finds.

However, the Ormen Lange partners; Norsk Hydro, Statoil, ExxonMobil, BP and Petoro may decide to build a pipeline to Sleipner and hence on to Dimlington, Easington or Bacton. This proposed pipe would have a capacity of 20 billion cubic metres per year and Marathon may find it more economical to fall in with this project. Left on the side lines is BP, owner of much of the existing UK pipeline network and operator of the Skarv field. Located in block 6507/05 and due onstream in 2008, this 60bcm field awaits a firm date for development based on an export route for its gas being made available.

Norsk Hydro
Norsk Hydro is Norway’s second largest oil and gas company. It is associated primarily in people’s mind with oil and gas production, but this company has an agri-fertiliser unit which is about to be spun off. Although nominally an independent company, the Norwegian government holds a 44% stake. With their eyes possibly on the decline expected in North Sea oil output Norsk Hydro and Statoil recently met with representatives from the Saudi oil ministry with a view to increasing their international stance. Norsk Hydro has also become involved in Block 34 offshore Angola as technical assistant to state oil company Sonangol. Last year Norsk Hydro production averaged 484,000 barrels of oil equivalent against the anticipated 490,000 boepd however the company is still viewed favourably by analysts and is hopeful of maintaining its 510,000 boepd production target for 2003. The loss of 23,000 boepd at the moment is attributed by the company to scheduled maintenance shutdowns.

There are still many commercial discoveries in both sectors of the North Sea, however, to insure that these are fully exploited, the Norwegain and British governments need to ensure a friendly fiscal environment in which State, independents and supermajors are able to work mutually and profitably.

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