LATI N AMERI CA

G Brazilian pre-salt developments speed ahead

G Continued expansion for Trinidad & Tobago
ENERGY TRADI NG
G Bringing traders closer to the asset
PI PELI NES
G Canadian pipeline sector faces uncertain times
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The following are used throughout Petroleum Review:
mn = million (10
6
) kW = kilowatts (10
3
)
bn = billion (10
9
) MW = megawatts (10
6
)
tn = trillion (10
12
) GW = gigawatts (10
9
)
cf = cubic feet kWh = kilowatt hour
cm = cubic metres km = kilometre
boe = barrels of oil sq km = square kilometres
equivalent
b/d = barrels/day
t/y = tonnes/year t/d = tonnes/day
No single letter abbreviations are used. Abbreviations go
together eg. 100mn cf/y = 100 million cubic feet per year.
MEMBERSHIP
N E WS
3 UPS T RE AM
7 DOWNSTRE AM
10 I NDUS TRY
12 GOVE RNMENT
S P E C I A L F E AT U R E S
14 L ATI N AMERI CA BRAZI L
Brazil speeds ahead with pre-salt development
17 L ATI N AMERI CA BRAZI L
Brazils oil carnival?
18 L ATI N AMERI CA F I NANCE
Seeking finance as the states role expands
22 L ATI N AMERI CA TRI NI DAD & TOBAGO
Expansion plans continue despite economic gloom
26 L ATI N AMERI CA KI DNAP & RANSOM
Your money or your life
F E AT U R E S
29 SHI PPI NG PI RACY
Preventing piracy
30 MI DDL E EAST OMAN
E&P development in Oman
32 DECOMMI SSI ONI NG E&P
Counting the cost of dismantling
34 CANADA PI PEL I NES
Feast or famine?
38 ENERGY TRADI NG REGUL ATI ON
Traders under scrutiny
40 ENERGY TRADI NG RI SK MANAGEMENT
Bringing traders closer to the asset
42 DRI L L I NG OF F SHORE
Declines are happening but they should be short-lived
46 EI TECHNI CAL ENVI RONMENT
Gasoline ether oxygenates in UK groundwater
R E G U L A R S
2 F ROM T HE E DI T OR
F R O M T H E E D I T O R
2 PETROLEUM REVIEW JUNE 2009
M
uch publicity has recently been
given to sightings of the green
shoots of economic recovery.
Unfortunately, virtually all sightings are
ambiguous with any number of com-
mentators giving equally large num-
bers of interpretations. Economists
have developed half an alphabet of
recovery options ranging from the opti-
mists V featuring a rapid decline fol-
lowed by an equally rapid recovery, to
the pessimists long L where the
economy, having crashed down,
remains on a low plateau for an
extended period.
Perhaps the most pessimistic outlook
of all was expressed by Joseph Stiglitz
at the recent Estoril conference in
Portugal (entitled Global challenges,
local solutions), when he expressed the
fear that the economic outlook could
easily resemble an inverted square root
sign. Let us hope this Nobel prize
winning economist (2001) is profoundly
wrong.
At the time of writing oil markets
had just had a run at $60/b for WTI,
temporarily achieving it on 12 May and
then falling back to the mid $50s. The
market is caught between an under-
lying belief that the market for oil has
bottomed out and is now recovering,
and a whole series of news items which
indicate recovery may be longer and
slower than hoped.
It is perhaps worth recording that
prices above $55/b are a very recent phe-
nomena. In the price run up which
started in early 2004, prices only reached
$55/b in mid-2005. So, by any historic
standard, current oil prices are high. The
challenge being that although current
price levels would justify new invest-
ments onshore and in shallow waters,
they are not high enough to justify
deepwater, tar sands or high-cost
enhanced recovery investments.
Challenges ahead
The latest Oil Market Report from the
International Energy Agency (IEA) illus-
trates many of the current challenges.
In the face of further dismal predictions
about global economic activity, the IEA
has revised its oil demand predictions
for 2009 down a further 230,000 b/d, to
83.2mn b/d or 3% below 2008 levels.
The report also showed that OPEC pro-
duction rose by 270,000 b/d in April
2009, reversing the downtrend seen
since October 2008. OPEC has also
revised down its demand predictions
but remains rather more optimistic
than the IEA, with 2009 demand
pegged at 84.03mn b/d.
Clearly the old joke about OPEC
being like a teabag and only working
well when in hot water still applies. Oil
prices approaching $60/b are the equiv-
alent of warm water for OPEC and the
temptation to overproduce becomes
overwhelming for some countries.
Whenever OPEC agrees on cutbacks
there are always some countries that
feel they are special cases needing
more favourable treatment. Angola is
reportedly going to seek a better deal
at the OPEC Ministerial meeting on 28
May. Its spare capacity represents nearly
20% of the countrys sustainable pro-
duction capacity. Only Saudi Arabia and
the United Arab Emirates have shut in
higher percentages.
The production increases in April
came from Angola (40,000 b/d),
Ecuador (20,000 b/d), Iran (100,000 b/d)
and Venezuela (20,000 b/d), while
Nigerian production actually declined
by 20,000 b/d. Iraq, which is outside the
OPEC quota system, increased produc-
tion by 40,000 b/d.
OPEC currently has the ability to
increase its production quite signifi-
cantly both by bringing shut in capacity
back onstream and by utilising some of
the new capacity it is commissioning.
This restricts further price rises and
companies ability to invest in new
high-cost supplies.
In short, the key question is whether
OPEC feels comfortable enough with
oil prices in the $50s and would rather
have more intensive utilisation of its
capacity or whether it is determined to
go for the Saudi King Abdullahs $75/b
target price, which would bring greater
revenues but would also facilitate non-
OPEC capacity investment.
Clearly the low-cost producers of the
Gulf can cope with lower prices rather
better than high-cost producers such as
Libya and Venezuela. What OPEC
decides will decide the trajectory of oil
prices over the next few months. If by
accident or design it follows the low oil
price route it will facilitate the global
economic recovery but will make it dif-
ficult for all but the richest and
strongest oil companies to sustain
major investments in new capacity.
Exciting developments
There are, however, a number of
exciting developments in the non-OPEC
world. Tullow Oil now claims its
Uganda oil fields have well in excess of
1bn barrels of oil and it looks like
Uganda will become a major new
African producer. The Russians and the
Japanese have just signed contracts to
develop two oil fields in eastern Siberia.
Iraq plans to expand its loading
capacity in the Gulf and also to award
development contracts for the
Nassiriyah field and later for the
southern portion of the East Baghdad
oil field. Brazils National Petroleum
Agency has just announced that the
pre-salt area offshore may contain
50bn barrels, making Brazil one of the
worlds top ten reserve holders. In early
May, extended test production began
at the Tupi field, which will help define
the costs and challenges of developing
the pre-salt resources of Brazil.
All the indications are that for the
next few months any gains in oil prices
are likely to be tentative and slow as
the overhang of excess stocks on land
and at sea, as well as OPEC spare
capacity, are slowly worked off and the
global economy recovers. In short, a flat
bottomed U shaped recovery looks the
most likely candidate out of the econo-
mists alphabet soup. For oil prices, the
cautious estimate from the Norwegian
Oil Ministry that oil prices will average
$54/b this year and $62/b in 2010 looks
very plausible.
Chris Skrebowski
Alphabet soup of recovery options
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entirely those of the Consulting Editor
and do not necessarily reflect the view
of the EI.
Petrofac has brought onstream the
West Don oil field in the UK North Sea,
less than one year after receiving field
development programme (FDP)
approval. Peak production is expected
to be in the region of 25,000 boe/d.
Development partners are Valiant
Petroleum, Nippon Oil Exploration and
Production (UK), Stratic Energy and
First Oil. Petrofac is also operator of
the nearby Don Southwest field, which
is due to be commissioned towards the
end of 2Q2009. Peak production from
both fields is expected to reach in
excess of 40,000 b/d.
Wintershall and GDF Suez have signed
an agreement on the exchange of E&P
interests in the German sector of the
North Sea. GDF Suez is to receive a
40% stake in the H&L sections that lie
offshore north-west of the East
Friesian island of Borkum. Wintershall
will in exchange receive 25% of the
Cuxhaven concession which directly
adjoins the Schleswig-Holstein
Mittelplate oil field.
Eni has been awarded the operator-
ship of and 40%participating interests
in two exploration licences (PL529 and
PL533) in the Barents Sea, offshore
Norway, and a 30% participating
interest in another licence in the same
area (PL532, of which StatoilHydro is
operator).
Northern Petroleum has been
awarded two offshore permits
d63F.R-NP and d64F.R-NP that cover
UK
EUROP E
I N B R I E F N E W S upstream
3 PETROLEUMREVIEW JUNE 2009
Complete news update
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Review represent just a fraction of
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members.
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more about the latest developments
and trends in your industry?
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New UK North Sea tax incentives
The UK Chancellor of the Exchequer
Alastair Darling unveiled plans for a
number of tax incentives for North Sea
exploration under his latest Budget.
New field developments in the UK
were subject to corporation tax at a
rate of 30% and a further supplemen-
tary charge of 20%. However, under its
April 2009 Budget, the UK government
implemented the following value
allowances, with immediate effect, for
fields that have not yet received devel-
opment approval:
Fields with less than 2.75mn toe
(20.5mn boe) receive a total allowance
of 75mn against supplementary
charge profits. The total allowance
will be reduced on a straight line basis
to zero for those fields with up to
3.5mn toe recoverable reserves (26mn
boe). The maximum annual allowance
will be one fifth of the total allowance
(15mn for a 20.5mn boe field).
Heavy oil fields with a specific gravity
of less than 18 API and viscosity
greater than 50 cp will have an
allowance of 800mn (maximum of
160mn/y) against supplementary
charge profits.
High pressure/high temperature
(HP/HT) fields with a reservoir temper-
ature of more than 176.67C and pres-
sure greater than 14,993 psi will also
receive a value allowance of 800mn
(maximum of 160mn/y) that can be
offset against supplementary charge
profits.
The allowances are not cumulative
but, should a field qualify in more than
one category, the higher of the value
allowances will be applied. The annual
allowance will be the lower of either
the maximum annual allowance or the
field supplementary charge profit.
Although the fiscal changes will be
welcomed by the industry, it is unclear
exactly how significant the value
allowance will be in driving forward
these field developments. As market
analyst Wood Mackenzie notes: Our
analysis suggests that the impact on
small fields may not be material enough
to influence a development decision.
However, we believe the larger value
allowance for heavy and HP/HT fields
could be enough to trigger field devel-
opment. Despite the new allowances,
we feel that low oil prices, high costs
and lack of funding will still delay pro-
jects and therefore the measures may
not have the impact the government
seeks. For well-funded companies, the
allowance will certainly help move pro-
jects up their ranking of global oppor-
tunities. However, for those which are
more cash-constrained, the difficulty in
accessing capital will still be a barrier.
In addition to the incentives for small
and challenging fields, it was
announced that new legislation will be
introduced to this years Finance Bill.
Unlike the value allowance, the new
legislation provides no further commer-
cial incentive for the exploration and
development of new oil and gas pro-
jects, comments Wood Mackenzie. It
does, however, ensure companies can
take full advantage of tax relief when
decommissioning an asset, and will pre-
vent tax becoming a barrier to the re-
use of depleted oil and gas fields.
Under this new legislation, compa-
nies will be able to access ring-fenced
corporation tax (RFCT) and petroleum
revenue tax (PRT) relief when decom-
missioning a change of use asset, for
example, a carbon capture and storage
project developed using the infrastruc-
ture of a ceased oil and gas field. The
relief will be given in the same way as
if decommissioning had taken place
immediately after the asset ceased
being used for oil and gas production
purposes. New legislation will also
allow decommissioning relief where a
company ceases to be a participant in a
field if, for example, a licence expires
during the decommissioning period. At
present, companies cannot access PRT
relief on decommissioning costs if they
are incurred more than 12 months after
a licence expiry. Finally, changes to the
calculation of chargeable gains on dis-
posal of an asset should encourage deal
flow. No chargeable gain will arise
from a swap deal, providing the value
of assets exchanged is equal. In addi-
tion, no chargeable gain will arise if the
proceeds of an asset sale are reinvested
in another chargeable ring fence asset.
The tax breaks come at a vital time
for the industry. Financial pressures
brought on by the credit crisis and
volatile oil prices have hit even the
biggest players in the energy sector and
companies have responded to these
pressures by reducing investment in
exploration and concentrating on those
wells that they know are profitable.
I N B R I E F N E W S upstream
4 PETROLEUM REVIEW JUNE 2009
the offshore extension of the Crotone
and Rossano basins offshore Italy,
where previous operators have
acquired high quality 3D seismic data.
The permits lie adjacent to d59F.R-NP
and close to the Luna, Hera Lacinia,
Linda and Lavinia gas fields.
Apache has agreed to acquire nine
Permian basin oil and gas fields with
current net production of 3,500 boe/d
from Marathon Oil for $187.4mn. The
assets are located in Lea County, New
Mexico, and Reagan, Howard and
Sterling counties in Texas, as well as in
the Chenot/Putnam area in Pecos
County, Texas. The properties have cur-
rent net production of 10mn cf/d of
natural gas, 1,332 b/d of oil and 524 b/d
of natural gas liquids. The compamy
has identified more than 200 possible
drilling locations on the Marathon
acreage.
Kuwait Gulf Oil Company (KGOC) is
understood to be planning to invest
$11bn in the Neutral Zone between
Kuwait and Saudi Arabia over the
coming 20 years, aiming to almost
double production capacity to 900,000
b/d with Saudi co-operation. The pro-
gramme will cover all exploration,
development, and existing field and
production facility expansion, repre-
senting Kuwaits 50% share in the
Zones investment needs as well as
output. I think a fair target of the
[Neutral Zone] is to go for between
350,000450,000 b/d as Kuwaits share
by 2030, KGOC Chairman Bader al-
Khashti told Reuters. Production cur-
rently stands at 538,000 b/d. Much of
the additional output will come from
Chevrons al-Wafra field steam injec-
tion project (with a pilot project
coming onstream in September),
which is expected to raise heavy oil
recovery rates from around 5% to 40%
at a cost of $10bn (half of which will
come from Kuwait).
UK independent Heritage Oil has con-
firmed a major discovery at its Miran
licence in Iraqi Kurdistan, reporting
that it has discovered up to 4.2bn bar-
rels of oil, with a recoverability factor
of between 50% and 70%. The com-
pany says that it expects the field to be
low cost and straightforward to bring
onstream and that it could produce
between 10,000 b/d and 15,000 b/d of
oil by the end of the year as part of a
first development programme.
MI DDL E EAS T
NORTH AMERI CA
ABS has been selected to class the first
newbuild jack-ups for Petrobras in 25
years. The Brazilian company has
ordered two LeTourneau Technologies
(LTI) Super S116E design jack-ups. The
sister units to be named Petrobras 59
and Petrobras 60 will be built at So
Roque do Paraguau, Bahia, Brazil, by
Consrcio Rio Paraguau. This consor-
tium comprises three major Brazilian
contractors Oderbrecht, Queiroz
Galvo and UTC. The self-elevating rigs
are capable of drilling under high pres-
sure and high temperature, operating
in water depths of up to 350 ft with
drilling depths of up to 30,000 ft. The
rigs are intended for operation off-
shore Brazil and are expected to be
delivered in 2011.
ABS has also provided its basic design
approval for Petrobras mono-column
floater, production, storage and
offloading unit (MPSO) intended for
ultra deepwater operation in the Gulf
of Mexico. The approval is significant
as it consolidates the MPSO design con-
cept as one viable option for the next
phase of the Cascade Chinook field.
The MPSO is a short cylindrical
mono-column floater with a storage
capacity of some 800,000 barrels that
breaks with the tradition of converting
existing tankers into floating produc-
tion, storage and offloading vessels
(FPSOs). It has some characteristics of a
spar, but a much shallower draft. The
design is such that it minimises heave
and pitch, making it more suitable for
the application of steel catenary risers
(SCRs). With water depths pushing the
10,000 ft mark in some field develop-
ments, industry has voiced some con-
cern with the possibility of riser fatigue
caused by the motions of the FPSO
assigned to the field. The new
Petrobras hull design is intended to
reduce heave, thus lessening the
fatigue on the SCRs. The MPSO has
been designed to be permanently
moored to the seabed, remaining on
station for its operational life. This pre-
sents a major advantage over the tradi-
tional ship-shaped FPSO which would
require a disconnectable turret due to
the environmental characteristics of
the Gulf of Mexico.
ABS to class Petrobras new jack-ups
Iraq sends out final licensing round documents
The Iraqi Oil Ministry has sent out its final licensing round terms document to
prospective bidders, raising the sums sought in signatory bonuses significantly in
exchange for other loosened term conditions, reports IHS Global Insight. Pre-
qualified companies can now move on with finalising their bids before the
planned end-June bid submission and the ensuing contract signing, now scheduled
for August.
Iraq is demanding signatory bonuses to be repaid over five years up to 16 times
higher than previously communicated in an effort to raise funds for its own project
costs, as well as possibly to fend off bids from lesser firms, comments the market
analyst. Bid evaluation and awards will be made by the Oil Ministry immediately on
submission, with the Cabinet having to clear the individual contracts during July,
exposing deals to the increased politicisation witnessed over the past year.
The analyst continues: The publishing of the final contract enables Iraq to take
a big step forward, although the high up-front cash payment demands risk making
its contracts even more unattractive, given the otherwise tight terms, high
demands, and long pay-back times levied on prospective investors.
Total has announced positive results for the Moho Nord Marine-4 (MHNM-4) well,
offshore of the Republic of Congo, in a water depth of 1,078 metres in the northern
part of the Moho-Bilondo licence. The discovery follows on from the Moho Nord
Marine-1 and 2 finds in 2007 and the positive delineation well of Moho Nord
Marine-3 in 2008.
These discoveries reinforce Totals confidence in the emergence of a development
pole in the northern part of the Moho-Bilondo licence.
Phase 1 development of the southern part of Moho-Bilondo, where production
began in April 2008, is currently continuing with drilling of further wells that will
permit the plateau of 90 000 boe/d to be reached in 2010. The development is com-
prised of 14 subsea wells tied back to a floating production unit (FPU) with output
exported to the onshore Djno terminal.
Total holds a 53.5% interest in the licence, alongside Chevron (31.5%) and Socit
Nationale des Ptroles du Congo (15%).
New development pole in Moho-Bilondo
The Iraqi Oil Minister, Hussein al-
Shahristani, recently told Iraqs Al-
Sharqiya TV channel that the country
will need approximately $50bn over
the coming five years to repair and
upgrade the oil industry, after years of
war, sanctions and a lack of cash. The
money would allow Iraq to increase its
oil output to 6mn b/d from its current
production levels of around 2.4mn b/d,
while also repairing and modernising
the current production facilities and
infrastructure, which in many cases is
crumbling, comments market analyst
IHS Global Insight. Shahristani also said
that the two currently ongoing
upstream licensing rounds would be
followed by at least two more, in
which exploration contracts and con-
tracts for discovered but yet undevel-
oped fields would be included.
The Iraqi Oil Ministry is understood to
have re-issued tenders for the devel-
opment of the Halfaya oil field in the
southern Missan province. Bids to
install a crude processing, desalting
and dehydration facility at the field
were originally due to be submitted by
25 March. Halfaya is currently pro-
ducing some 50,000 b/d a figure that
is estimated could rise to a 250,000-b/d
plateau.
Aker Solutions has been awarded con-
tracts from Exxon Neftegas, as oper-
ator on behalf of the Sakhalin-1
consortium, for designing, constructing
and delivering the Arkutun-Dagi
gravity base structure (GBS) for the
Sakhalin-1 project. Once completed,
the GBS will be located offshore
Sakhalin Island on the east coast of
Russia and will be a part of the drilling
and production facilities for the
Arkutun-Dagi development, a future
phase of Sakhalin-1. The other partici-
pants in the Sakhalin-1 consortium are
SODECO, ONGC Videsh, and affiliates
of Rosneft, Sakhalinmorneftegas-Shelf
and RN-Astra.
Marathon Oil has entered into a pro-
duction sharing contract (PSC) with the
Indonesian government for a com-
bined 49% interest in the Kumawa
block offshore Indonesia. Marathons
co-bidder, Komodo Energy, a sub-
sidiary of Black Gold Energy, was
awarded the remaining 51%.
Marathon Indonesia New Ventures
will serve as the operator. The
Kumawa block is located offshore
ASI A- PACI F I C
RUS SI A & CENT RAL AS I A
I N B R I E F N E W S upstream
5 PETROLEUM REVIEW JUNE 2009
OMV (35%) and joint venture partners Pakistan Petroleum (PPL; 30%), Eni (30%)
and Government Holdings Private Limited (GHPL; 5%) recently announced first gas
from the Tajjal field in the southern Pakistan province of Sindh. As part of the fast-
track development, the gas is being routed via a 20-km long pipeline to the Sawan
gas plant which is operated by OMV Pakistan. Sui Northern Gas Pipelines (SNGPL),
as gas buyer, will distribute the additional gas from Tajjal to northern Pakistan.
The initial extended well test gas rate from Tajjal-1 was around 25mn cf/d (4,000
boe/d) and the planned testing period will last for about three months. After the
extended well test, OMV will decide with partners on an appraisal well pro-
gramme and a field development plan will be submitted to the government of
Pakistan for approval.
Pakistans Tajjal field produces first gas
Oil discovered in disputed Ambalat
Eni is understood to have made an oil
discovery in the offshore Ambalat area
off the east coast of Borneo that is cur-
rently being disputed by Indonesia and
Malaysia. It is reported that the dis-
covery could produce between 30,000
b/d and 40,000 b/d. According to IHS
Global Insight, both countries are keen
to assert sovereignty over Ambalat
given its favourable oil reserve esti-
mates, as a means of reducing reliance
on oil imports and to meet projected
increases in domestic oil demand. The
company states that: The Indonesian
government is likely to take a strong
stand against any challenge to Enis
exploration efforts given the political
sensitivities surrounding issues of terri-
torial integrity and partly to appease
domestic constituencies that have car-
ried out anti-Malaysian demonstrations
in response to previous clashes. For
Malaysia, drilling by Eni is likely to be
viewed as an assertion of sovereignty
over the area. The close proximity of
Malaysian and Indonesian naval
patrols in the area will create a poten-
tially volatile situation, which could
lead to increased deployments of mili-
tary forces to the region and even a
potential confrontation.
The Ambalat block is said by the
Indonesian government to have oil
reserves of between 100mn and 1bn
boe, with the potential to be
exploited for 30 years. The area lies on
an important sea lane of communica-
tion (SLOC) running from the Lombok
Strait through the Makassar Strait and
to the Molucca Islands in the Celebes
Sea. A number of large-tonnage oil
tankers pass through this route,
making the area important in terms of
energy security.
The Norwegian government is
reported to have approved the devel-
opment concept for Enis (operator;
65%) Goliat field, the first oil field to
be developed in the Barents Sea.
StatoilHydro holds the remaining 35%
stake in the project, which is expected
to cost some $4.34bn. Goliat is
located on production licences 229
and 229B in waters depths of some
400 metres.
Estimated field reserves are put at
174mn barrels of oil. The development
plan calls for subsea wells tied to a
floating production, storage and
offloading (FPSO) vessel (the partners
have selected Sevan Marines FPSO
1000 cylindrical design). Production is
expected to reach 100,000 b/d, plus
associated gas. Goliat is due onstream
by 2013 and has an anticipated life of
15 years.
Green light for Goliat field project
Chevron has started crude oil production from the Tahiti field, the deepest pro-
ducing field in the Gulf of Mexico in 1,240 metres (4,100 ft) of water. Daily produc-
tion is expected to ramp up to approximately 125,000 barrels of crude oil and 70mn
cf of natural gas before the end of the year. Located at Green Canyon blocks 596,
597, 640 and 641, Tahiti is estimated to contain total recoverable resources of
between 400mn and 500mn boe. Production is from two subsea drill centres tied
backed to a floating production facility supported by a truss spar. The total cost for
the first phase of the project is $2.7bn.
Chevron holds a 58% interest in Tahiti and is the operator, StatoilHydro holding
25% and Total 17%.
Deepwater Tahiti oil field comes onstream
West Papua, Eastern Indonesia, in the
Semai region, approximately 180 miles
south of the recently commissioned
Tangguh LNG facility. It is a high-
potential, under-explored area with
water depths ranging from 2,400 to
more than 4,000 ft.
Total (24%) and Inpex (operator;
76%) have launched the front-end
engineering and design (FEED) for the
development of the Ichthys field,
located in the Browse basin offshore
north-west Australia. With proved
and probable reserves estimated to be
around 530mn barrels of condensate
and 12.8tn cf of natural gas, Ichthys is
one of the largest discoveries in
Australia and will be the first major
gas development in the Browse basin
region. First production from Ichthys,
aimed at the Asian market, primarily
Japan, is expected in the middle of the
next decade. The field will have a pro-
duction capacity of over 300,000
boe/d, including 100,000 b/d of con-
densates, 1.6mn t/y of LPG and
approximately 8.4mn t/y of LNG.
OMV has made its first offshore oil
discovery in Libya. An exploration well
drilled in block NC202 in the offshore
Sirte basin tested with a natural flow
rate of up to 1,264 b/d. Block NC202
forms part of a package of exploration
blocks including the neighbouring off-
shore block NC201, NC199 (Cyrenaica),
NC200 (Murzuq basin), NC203 and
NC204 (Kufra basin), which were
awarded to Repsol and OMV in June
2003. OMV holds a 14% interest in this
package. The other partners are the
National Oil Corporation of Libya
(65%) and Repsol, which acts as oper-
ator and holds the remaining 21%.
Apache has reported two new
Jurassic oil and gas field discoveries in
the Faghur basin play in the extreme
south-west part of Egypts Western
Desert producing complex. Phiops-1x
is a new oil field discovery located in
the South Umbarka concession about
4 km north-west of Apaches Kalabsha
field. The well is currently producing
1,619 b/d of oil and 4.1mn cf/d of gas.
The WKAL-A-1x discovery is located
8.3 km west of Phiops-1x in the West
Kalabsha concession and Apache
plans to apply for a development
lease. The company has also made its
first discovery in the North Tarek con-
cession along the Mediterranean
coast, with the NTRK-C-1X well, which
tested at 3,489 b/d of oil and 5mn cf/d
of gas.
AF RI CA
I N B R I E F N E W S upstream
6 PETROLEUM REVIEW JUNE 2009
Uncertain times ahead for North Sea E&P
A new report from Subsea UK has
revealed that offshore oil and gas
activity in mature provinces such as the
North Sea is more at risk than deep-
water areas like West Africa in the cur-
rent economic downturn. The outlook
for 2009 has become more uncertain as
announcements of capital expenditure
decreases filter through from explo-
ration and production companies glob-
ally. Expectations are that offshore
activity will be adversely affected, par-
ticularly in regions where production is
mature and investment costs are high.
The deepwater markets, however, seem
to be more insulated from what may be
a short- to medium-term reduction in
upstream investment as projects in these
areas are often larger and planned on
longer term, more conservative oil price
assumptions, said Alistair Birnie, Chief
Executive of Subsea UK.
The report states that the price of raw
materials is expected to fall and, as that
forms a large part of upstream expendi-
ture, there should be reductions in the
price of manufactured goods. However,
in tighter credit markets, there is evi-
dence that oil and gas companies
around the world are beginning to
delay the launch of new projects and
reschedule the start of existing ones.
Birnie added: This report confirms
what we have been hearing anecdotally.
While the outlook in the long term
remains positive for oil and gas and
subsea in particular current events are
adversely affecting the market. There is
growing uncertainty among subsea
companies which is knocking confidence
and therefore investment and activity
levels. This volatile market is com-
pounded by the banks lack of appetite
for investing.
Commissioned by Subsea UK, with
support from Scottish Enterprise, the
report has been compiled by Douglas
Westwood using publicly available com-
pany reports and broker reports to assess
the earnings per share for oil and gas
companies projected for the following
quarter compared with that for 2008.
Dorado and King South onstream
BP has brought onstream the Dorado
and King South fields in the Gulf of
Mexico as subsea tiebacks to the
existing BP Marlin tension leg platform
(TLP) infrastructure. Dorado comprises
three new subsea wells located about
two miles from Marlin. BP is operator,
holding a 75% interest, with Shell
holding the remaining 25%. King South
comprises a single subsea well located
about 18 miles from the Marlin TLP and
is 100% owned and operated by BP.
By bringing new resources onstream
from areas close to the existing Marlin
TLP, BP has re-established plateau oil pro-
duction at Marlin a decade after first pro-
duction. This demonstrates the potential
to apply the latest technology to
leverage our existing infrastructure and
maximise recovery, said Andy Inglis, BPs
Chief Executive of Exploration &
Production. Dorado utilises dual comple-
tion technology enabling production
from five Miocene zones and King South
is produced through the existing King
subsea pump.
A total of 11 wells now produce into
the Marlin TLP, with gross production
of about 60,000 b/d oil and 70mn cf/d
of gas. Marlin has the capacity to
process 60,000 b/d of oil and 235mn
cf/d of gas.
The Norwegian Ministry of Petroleum and Energy (MPE) has awarded new pro-
duction licences in the 20th licensing round on the Norwegian shelf. A total of 34
companies have received offers to participate in 21 new production licences (nine
in the Barents Sea and 12 in the Norwegian Sea). Some 15 of the companies have
been offered operatorships one company, North Energy, has been offered its
first operatorship on the Norwegian continental shelf.
The areas furthest to the west and north awarded in the Barents Sea are
located in exploration provinces that have not previously been explored. The NPD
believes that the information obtained from these blocks will be an important
factor in further exploration of new areas. There is still a considerable potential
for new discoveries in the Norwegian Sea. Several of the blocks are located in
deep water in the Vring basin. This round includes blocks further north-west
than previously, in an area that has been marked by significant volcanic activity.
There will be significant challenges associated with mapping the prospective levels
in this area because a thick layer of lava covers the levels below. It is important to
get good imaging of the layers under the lava to improve understanding of this
area region, a complex and relatively unexplored area of the Norwegian shelf.
Latest Norwegian licensing round awards
Centrica has agreed to buy 20% of
British Energy from EDF for 2.3bn,
which compares to its September 2008
non-binding agreement to purchase
25% for 3.1bn. The deal is part-
funded with an asset swap as EDF is
acquiring Centricas 51% stake in
Belgian generation and supply utility
SPE for 1.2bn. Centrica will also take
a 20% share of British Energys uncon-
tracted output and will be entitled to
participate inEDFs plans tobuildupto
four new nuclear reactors in the UK,
initially taking a 20% stake in the first
reactor to be built.
UK government consent has been
granted to Norsea Pipelines to build an
800-MW gas-fired power station at
Seal Sands, Teesside. The combined
cycle gas turbine power station is part
of an overall development including a
LNG storage facility immediately adja-
cent to the site. In addition to gener-
ating electricity, the power station will
supply high quality heat to the LNG
facility, which would otherwise have
come from stand-alone boilers. This is
a highly efficient practice that will
result in significant savings in green-
house gas emissions.
British Gas claimed to be the biggest
supplier of electricity to homes in the
UK, serving around one in every four
homes has cut an average 10%off its
standard electricity prices. The price
cut follows a 10% reduction on gas
prices in February this year. According
to Managing Director Phil Bentley:
Together, these two price reductions
the biggest by any major energy sup-
plier this year will save British Gas
customers an average 132 on their
annual dual fuel bill. He continued:
British Gas is offering existing and
new customers the cheapest electricity
rates in the market place.
The UK has brought all underground
gas storage within scope of the Control
of Major Accident Hazards (COMAH)
Regulations, reports Hazardous Cargo
Bulletin. Until now, salt cavity storage
sites have been subject to COMAH
whereas storage in depleted reservoirs
has fallen under the Borehole Sites and
Operations Regulations 1995.
A new report published by the UK
Renewable Energy Association (REA)
estimates that the UKs proposed push
for energy efficiency and renewables,
with a consequent fall in fossil fuel
imports, could result in a trade balance
benefit for the UK economy of up to
UK
I N B R I E F N E W S downstream
7 PETROLEUM REVIEW JUNE 2009
Greenergy unveils major UK investment plans
Greenergy Fuels, one of the UKs
leading road fuel suppliers, has
unveiled plans for a multi-million
pound investment in a new, state-of-
the-art, 80,000 cm facility for petrol and
diesel blending and storage in Teesside.
The facility, which marks the first phase
of a more extended planned invest-
ment programme in Teesside, will
deliver diesel supplies from summer
2009, and full petrol and diesel blending
and loading facilities from early 2010.
The announcement continues
Greenergys investment in its petroleum
storage infrastructure and marks the
next step in its UK expansion strategy. It
follows the companys recent acquisition
and refurbishment of the Mayflower and
Cattedown terminals in Plymouth, sched-
uled to come online in September 2009,
and the completion of new tankage at
Vopak on the Thames in 2008. The new
Teesside facility will give Greenergy a dis-
tribution base in the region for the first
time, enabling it to enhance services to
customers in one of the largest urban
conurbations in the UK.
Existing tankage at the Vopak ter-
minal at Seal Sands in Teesside will be
converted to create an advanced petrol,
diesel and biofuel blending terminal,
replicating the facility that Greenergy
currently uses at Vopaks West Thurrock
terminal on the Thames. Five brand
new, high speed state-of-the-art
loading racks will also be built for sole
use by Greenergy customers.
Further investments are planned for
the region, with Greenergy Chief
Executive Andrew Owens confirming
that Teesside is being proposed as the
hub for the companys new inland rail
distribution system. This would allow it
to use Teesside as the break bulk point
for other regions in the UK, with fuel
moved to new planned grass roots ter-
minals and existing terminals by rail
rather than by ship or road.
The first three months of 2009 saw the price manufacturers paid for their energy
plummet, with falls seen across electricity, natural gas and Brent Crude, according
to the latest edition of BDO Stoy Haywards Quarterly Manufacturing Energy
Tracker. The biggest mover was electricity, with a fall of 37% in comparison to the
previous quarter, and a 25% reduction year-on-year. This drop means that during
1Q2009 manufacturers paid on average 43/MWh the last time electricity prices
were this low was in 4Q2007. In addition, the price manufacturers paid for natural
gas in 1Q2009 fell by nearly one third (29%) in comparison to the previous
quarter, and 18% year-on-year.
Bringing further relief to the struggling sector, the price of Brent Crude fell to
an average of $47/b during the quarter (a 10% fall from the $52/b paid during
4Q2008). However, year-on-year this fall is even more pronounced, with the price
having dropped by a massive 53%.
Tom Lawton, Head of Manufacturing at BDO Stoy Hayward, said: As manufac-
turers are some of the most energy intensive businesses in the UK, this reduction
in key energy costs should come as welcome relief to the recession hit sector. With
optimism levels in the sector at a 12-year low and the number of manufacturing
businesses predicted to fail this year set to increase by 53%, the fall in energy
prices provides the sort of positive news manufacturers need.
UK manufacturers energy costs falling
12.6bn/y by 2020. The UK is projected
to be potentially reliant on imports for
80% of its gas needs by 2020 and the
International Energy Agency (IEA) has
predicted serious energy crunches
around 2013 and by 2020, despite the
global recession. For more informa-
tion, visit www.re-e-a.net
DONG Energy has bought a 50% stake
in a gas-fired power station project in
the Netherlands, partnered by Eneco,
the third largest power and gas
provider in the country. The 870-MW
power station will be built at the Port
of Rotterdam and is expected to be
commissioned before end-2011. DONG
Energy is currently constructing two
gas-fired power stations in Norway
(Mongstad) and Wales (Severn),
respectively. Enecogen will be the
companys third gas-fired power sta-
tion project outside Denmark.
The French Prime Minister Francois
Fillon has granted GDF Suez a 33.33%
block of shares plus one share in the
company formed to build and operate
the EPR (European pressurised reactor)
nuclear facility in Penly, alongside its
partner EDF which will hold the
majority of the capital. GDF Suez holds
a 75% stake in the project, Total the
remaining 25%.
SulphCo, a Houston-based technology
company with a patented ultrasound
process designed to desulphurise
crude oil products and crude oil, has
entered into a technology agreement
with OMV Refining & Marketing.
Based on results from recent labora-
tory and field testing of SulphCos
Sonocracking technology, SulphCo
and OMV have entered into the agree-
ment to evaluate SulphCos tech-
nology in several refining applications
and determine commercial applica-
bility in OMVs operations.
Norways Transport Minister Liv Signe
Navarsete officially openedStatoilHydro
and the HyNor partnerships Norwegian
hydrogen highway, HyNor, on 11 May
2009 at StatoilHydros new hydrogen
station at kern in Oslo. The hydrogen
transportation infrastructure for testing
and demonstrating hydrogen-powered
cars has been established along a 600-
km route between Oslo and Stavanger,
Norway. Its first hydrogen fuelling sta-
tion was opened at Forus in Stavanger
in 2006, the second in Porsgrunn in
2007, and now two new stations are
open in Oslo and Lier. HyNor has some
50 partners and manages a fleet of
EUROP E
I N B R I E F N E W S downstream
8 PETROLEUM REVIEW JUNE 2009
VGO supply builds in Europe
Increasingly sophisticated management
of European refineries is hitting
demand for feedstocks such as vacuum
gasoil (VGO) to make diesel, after rising
consumption over the past few years,
according to Argus FSU Energy.
However, FSU exports should remain
steady, leaving a glut of VGO on the
European market.
The recession has hit diesel demand
at a time when US and Asia-Pacific
imports have boosted the availability of
the product in Europe. This has encour-
aged European refiners to reduce
cracking runs and cut purchases of FSU-
origin VGO. Russian refiners running
Urals crude normally produce high-
sulphur VGO, which accounts for
around 90% of FSU exports.
VGO demand has risen in recent
years as European refiners boosted
hydrocracking capacity to produce
more diesel. Total started up a 2.4mn
t/y hydrocracker at its 350,000 b/d
Gonfreville refinery in France in 2006,
while Finlands Neste started a 1mn t/y
unit at its 197,000 b/d Porvoo refinery
in 2007. These plants make Europe the
main destination for the 10mn t/y of
VGO from FSU countries, with far less
now heading to the US.
Russian VGO is an ideal feedstock for
hydrocrackers, with its low asphaltene
content. However, falling demand for
light products took a heavy toll on the
high-sulphur VGO market, which
traded at huge $12/b discounts to
North Sea Dated late last year (see
Figure 1). Although prices recovered in
1Q2009, they have since dipped
because of high stocks and a lack of US
demand. VGO exports to the US have
slowed to a trickle, despite very low
transatlantic freight rates.
Export tariffs are higher for light
products than for residual fuel oil and
VGO, offering little incentive for
Russian refiners to upgrade.
Visit www.argusmedia.com for more
details or e: info@argusmedia.com
Figure 1: VGO exports and margins
Source: Argus FSU Energy
The US House of Representatives has
introduced a bill targeting companies
involved in Irans vital gasoline imports,
in an attempt to put pressure behind
the presidential administrations recent
overtures to Iran to defuse the conflict
surrounding the latters nuclear pro-
gramme, reports market analyst IHS
Global Insight. The move was echoed by
US Secretary of State Hillary Clinton,
who said tough sanctions were needed
should Iran spurn the current Western
offer of engagement, exposing the
heavily gasoline-import-reliant Islamic
Republic to crippling measures.
The measure proposed would effec-
tively threaten to cut off the inflow of
40% of Irans gasoline consumption,
given the countrys inadequate domestic
refining capacity. Oil traders, brokers,
shippers, and insurers as well as poten-
tially banks could be punished for
dealing with Iran and Iranian companies,
by being refused export licences, access
to US export credits or US-based finan-
cial institutions, and there could be
restrictions on US companies trading
with the companies in question,
according to Agence France-Presse (AFP).
Iran imports around 25mn l/d of gaso-
line, with volumes set to rise in the next
few months due to seasonal variations
in the nations consumption pattern. At
the same time, Iran is currently organ-
ising a large-scale gasoline storage oper-
ation offshore, mooring an increasingly
large number of product tankers off its
Gulf coast full of imported gasoline. This
is not necessarily completely in anticipa-
tion of tighter US sanctions since the
threat of sanctions targeting Iranian
gasoline imports has been broached
before but is also a consequence of the
currently low global gasoline prices and
demand, allowing Iran to buy larger vol-
umes than needed at lower prices than
it believes it will see later in the year.
Looking ahead, IHS comments that: A
continuation of the US and European
Union (EU) carrot and stick strategy,
the threat could come at a bad time,
providing ammunition to hard-line
Iranian President Mahmoud Ahmedinejad
and his allies in the run-up to the June
presidential election, undermining the
recent popular goodwill created by the
US rhetoric of thaw. Meanwhile, for oil
trading companies and insurers, a move
towards spot contracts might start
immediately.
US plans may impact Irans gasoline imports
more than 50 hydrogen vehicles made
by Mazda, Toyota and Think.
Volvo is reported to have stated that
its recently introduced engine and
gearbox range cuts fuel use and emis-
sions of carbon dioxide (CO
2
) by 3%
and nitrous oxide (NO
X
) by 40% while
delivering more power and torque.
The renewal programme covers all
models of the manufacturers 7, 11 and
13-litre engines, which are now avail-
able to meet Euro 5 emission levels.
Total of France has acquired an interest
in Gevo, a Denver-based company
developing a portfolio of bio-products
for the transportation fuel and chemi-
cals markets. Created in 2005, Gevo is
developing an innovative technology
to convert sugars derived from biomass
into higher alcohols and hydrocarbons.
The company plans to start marketing
these products in 2011.
Sumitomo of Japan and Saudi Aramco
are reported to have signed a memo-
randum of understanding for the
second-phase expansion of their
PetroRabigh petrochemical joint ven-
ture in Rabigh, on the west coast of
Saudi Arabia, in 3Q2014. The expan-
sion will increase the facilitys pro-
cessing capacity at its ethane cracker
by approximately 30%, while also
adding a naphtha cracker with an
approximate capacity of 3mn t/y.
Petrobras has signed a memorandum
of understanding with Japans Mitsui
& Co under which the companies will
carry out joint studies to analyse the
feasibility of the proposed Premium 2
refinery project, which is to be built in
the Brazilian state of Cear.
L AT I N AME RI CA
ASI A- PACI F I C
NORT H AME RI CA
I N B R I E F N E W S downstream
9 PETROLEUM REVIEW JUNE 2009
&storage
Published by
A special supplement to
and
Want to find out more about recent trends in the global refining sector and the key factors
driving developments forward?
Don't miss Petroleum Review's Future Refining & Bulk Storage supplement, published in
December.
For more details, visit www.energyinst.org
Future Refining & Bulk Storage Supplement
www. energyi nst. org
UK forecourt crime fell 8% in 2008
Crime at the UKs network of some
9,283 service stations fell by 8% to
29.9mn in 2008, reversing a 13%
increase in estimated losses suffered by
forecourt retailers in the country during
the previous year (2007), according to
the latest forecourt crime statistics from
BOSS the British Oil Security Syndicate.
Driving off without paying and inci-
dents of motorists who do not return to
pay after claiming to have no means of
payment accounted for 88% of losses
and amounted to 26.3mn, 8.4 per cent
down on 2007. The BOSS figures also
indicate that, during 2008, the average
value of incidents of driving off without
paying increased from 35 in 2007 to
over 40, closely corresponding to the
increase in fuel prices.
The BOSS forecourt crime figures
show incident and loss rates per 100
sites suffered by BOSS members in 2008.
Other findings include:
The incidence of crime related injuries
rose to 1.6 per 100 sites [2007: 1.3].
There were historically high incident
levels inJanuary toJune 2008, but these
fell back in the second half of the year.
Robbery incidents fell substantially to
4.6 incidents per 100 sites [2007: 7.7]
and losses were also down at 6,909
per 100 sites [2007: 10,853].
The burglary incident rate is now
measured per 100 non-24 hour service
stations as it is at these sites that the
majority of burglaries occur. The rate
fell substantially to 24.5 incidents per
100 non-24 hour sites [2007: 38.8].
Losses were also lower at 32,280 per
100 non-24 hour sites [2007: 44,451].
The rate for weapon related incidents
fell to 3 per 100 [2007: 6.2]. Reporting
of guns fell to 0.8 per 100 sites [2007:
1.4]; the rate of incidents involving
knives fell to 1.3 [2005: 2.4] and reports
of other weapons fell to 0.9 [2006: 2.4].
Visit www.bossuk.org for more details.
The UK government announced a
number of changes affecting road
transport in its latest Budget:
On 1 April 2009, the duty rates for the
main road fuels were increased by
1.84 p/l. These rates will be increased
further on 1 September by 2 p/l, up
from 54.19 p/l to 56.19 p/l.
These rates will be further increased
on 1 April from 2010 to 2013 by an
aditional 1 p/l above indexation in
each year.
The current duty differential for bio-
fuels for road use will cease from
2010 and duty will thereafter be
charged at the same rate as main
road fuels.
From 2010 to 2013, the duty differen-
tial for natural gas will be maintained
and the duty differential for LPG will
be reduced by the equivalent of 1 p/l
of petrol each year.
The government also unveiled incen-
tives for those looking to buy new vehi-
cles, including alternatively powered
models, with the introduction of a tem-
porary vehicle scrappage scheme under
which a discount of 2,000 will be
offered to consumers buying a new
vehicle to replace a vehicle more than
ten years old which they have owned
for more than 12 months. The govern-
ment will set aside 300mn for this
scheme with funding matched by par-
ticipating manufacturers.
For a comprehensive tabulated break-
down of UK fuel duty rates, visit the UK
Petroleum Industry Associations web-
site at www.ukpia.com
UK Chancellor unveils a number of fuel
duty changes in his latest Budget
I N B R I E F N E W S i ndustry
10 PETROLEUM REVIEW JUNE 2009
Star Energy Group, a wholly owned
subsidiary of Malaysian state-owned
Petronas, has paid $180mn to acquire
Marathon Oil Ireland, the Irish sub-
sidiary of Marathon Oil. The deal
involves the acquisition of three Irish
gas fields and a gas storage project
with a current capacity of 7bn cf.
British Gas has aquired for 1mn a
19% stake in Econergy, a leading sup-
plier of biomass boilers, biomass
heaters and energy services, and wood
heating solutions in the UK.
The head of the International Energy
Agencys (IEA) energy diversification
has told a Brussels meeting of LNG
executives that high carbon prices in
emissions trading schemes will give gas
a major competitive advantage, for
instance in the UK. High carbon prices
are a very strong driver of gas-fired
power, said the IEAs Ian Cronshaw.
The US has given strong diplomatic
backing to the construction of oil and
gas pipelines from the Caspian to
Europe that bypass Russia, writes Keith
Nuthall. Visiting Turkey in April, US
President Barack Obama told the
Turkish parliament that Washington
would support [Turkeys] central role
as an eastwest corridor for oil and
natural gas. His comments were fol-
lowed by meetings between Obamas
Secretary of State Hillary Clinton and
the Foreign Ministers of Azerbaijan
and Armenia, who the US is pushing to
make peace over the Nagorno-
Karabakh issue. Azeri press agency
APA confirmed regional gas supply
issues were discussed.
Chinas CNOOC is understood to have
signed a heads of agreement with
Petromin PNG and InterOil
Corporation, allowing it to take part in
the development of the proposed LNG
project in Papua New Guinea. The par-
ticipation of CNOOC will be significant
in securing funding for the project to
go ahead.
The Gas Authority of India (GAIL) is
understood to have signed a $600mn
take-or-pay gas supply agreement with
ASI A- PACI F I C
NORTH AMERI CA
UK
EUROP E
Inspiring future engineering professionals
Dr David Brown and Louise Kingham
FEI, Chief Executives of the Institution
of Chemical Engineers (IChemE) and
the Energy Institute (EI), have been
elected as the Chair and Vice Chair of
the Engineering and Technology
Boards (ETB) new Professional Panel.
The Professional Panel is composed
of the Chief Executives of the 36 pro-
fessional engineering institutions and
will work in the same way as the ETBs
Education and Skills Panel and its
Business and Industry Panel. The
Professional Panels purpose is to advise
the ETB on issues relevant to the devel-
opment of the engineering profession.
It will also provide the 36 institutions
with a forum in which to debate and
implement matters of common interest
and benefit to the profession and
society at large.
Louise Kingham, Panel Vice Chair and
Chief Executive of the EI, said: The
ETBs new Professional Panel is a great
step forward and provides an inclusive
and wide-ranging forum through
which the institutions can work
together to inspire future generations
of engineers. I look forward to working
with all its members to maximise our
collective impact.
For more information about the ETB,
visit www.etechb.co.uk
UK Chancellor unveils carbon budget
UK Chancellor of the Exchequer Alastair
Darling unveiled a number of measures
targeting the renewables sector in what
he described as the worlds first carbon
budget, with a commitment to reduce
UK emissions by 34% on 1990 levels by
2020. The main measures include:
Up to 4bn of finance for new renew-
able energy projects in the UK will be
provided by the European Investment
Bank (EIB), responding to serious diffi-
culties in access to finance.
The number of renewables obligation
certificates (ROCs) allocated to new
offshore wind projects will be
increased to 2/MWh for 2010/2011
and 1.75 in 2011/2012, before
reverting to the 1.5 ROC/MWh level.
The government has valued this at
525mn. Project eligibility will be sub-
ject to specified criteria.
The decentralised renewables sector
will receive 70mn of new grant sup-
port to bridge the period to the intro-
duction of the new renewable energy
tariffs; 45mn for the Low Carbon
Buildings Programme and 25mn for
community heating.
In addition, the Budget offers:
Some 10mn in new grants for anaer-
obic digestion to turn organic waste
into green energy.
Authorising 4bn of networks invest-
ment by the private sector to improve
access for renewable energy (a 50%
increase on five years ago according
to the Renewable Energy Association
(REA)).
A total of 405mn to support the Low
Carbon Industrial Vision, including
250mn for advanced industrial pro-
jects of strategic importance.
Some 50mn for the Technology
Strategy Board for future growth
industries including low carbon tech-
nology.
However, as the REA points out, many
of the provisions are caveated with pre-
conditions and eligibility criteria that
need to be spelt out before industry can
be sure these measures will bite.
(See also Energy World, June 2009)
The South Hook LNG regasification terminal in Milford Haven, UK, has been fully
commissioned. It is owned and operated by South Hook LNG, a joint venture
between Qatar Petroleum (67.5%), ExxonMobil (24.25%) and Total (8.35%). With a
capacity of 15.6mn t/y, the terminal will receive LNG from the Qatargas 2 project in
Qatar, where Train B is due onstream later this year.
Qatargas 2 is the worlds first integrated LNG project, designed to deliver up to
15.6mn t/y of LNG. It comprises three offshore platforms, two 7.8mn t/y onshore
liquefaction trains, 14 super-size vessels (eight Q-Flex design and six Q-Max) and
the South Hook terminal.
Until 2004 the UK was entirely self-sufficient in gas, relying on its production
from fields in the UK continental shelf. However, with indigenous supplies now
depleting rapidly and with an annual demand of about 100bn cm of gas the UK
will need to import up to 50% of its gas needs in 2009, rising to around 75% by
2015. By 2017 it is expected that LNG will grow to around 28% of UK total supply.
South Hook LNG terminal fully commissioned
Indus Gas, under which it is committed
to acquire at least 90% of the agreed
quantity of gas supplied fromIndus SGL
field in block RJ-ON/6. Indus will initially
supply 7mn cf/d, which will commence
on or before 15 April 2010. The amount
supplied will then increase to 33.5mn
cf/d no later than 24 months after the
date of the signing of the agreement.
Indus holds a 63% interest in the field,
with ONGC holding 30% and Focus
Energy 7%. Indus has a 90% interest in
the remainder of Block RJ-ON/6.
Indias Petronet LNG is reported to
have signed a deal with ExxonMobil
for the supply of 1.5mn t/y of LNG
from the Gorgon project in Australia.
Petronet will import the LNG at its
under-construction Kochi terminal in
Kerala. Chevron is operator of the
Gorgon project, holding a 50%
interest, with ExxonMobil and Shell
holding 25% each.
TransCanada has won the contract to
build, own and operate the $320mn
Guadalajara pipeline in Mexico. The
proposed 500mn cf/d capacity pipeline
will run 310 km from a LNG terminal
under construction near Manzanillo
on Mexicos Pacific Coast to
Guadalajara, the second largest city in
Mexico. The project is supported by a
25-year contract for its entire capacity
with Comision Federal de Electricidad
(CFE), Mexicos state-owned electric
company.
Oil tankers sailing past the often
unstable shores of West Africa will be
safer in future, following the commis-
sioning of a fully-equipped regional
Maritime Rescue Coordination Centre in
Monrovia, Liberia, coordinated by the
International Maritime Organisation.
The centre will help ships in distress off
the Ivory Coast, Ghana, Guinea, Liberia
and Sierra Leone, writes Keith Nuthall.
It is reported that the International
Maritime Organisations legal com-
mittee has approved reforms to its 1996
convention on the carriage of haz-
ardous and noxious substances by sea,
creating a fund covering damage from
maritime accidents not compensated by
insurance, writes Keith Nuthall. The old
convention remains unratified fol-
lowing administrative problems.
L AT I N AME RI CA
AF RI CA
WORL D
I N B R I E F N E W S i ndustry
11 PETROLEUM REVIEW JUNE 2009
Energy industry teams fuelled up for the
BG Energy Challenge 2009 UK
Over 45 teams from the energy industry are making their final preparations ahead
of this years BG Energy Challenge which will run from 911 July. The fundraising
and networking event for the energy industry will take place in Bangor, Wales.
Monies raised will benefit CARE International, the overseas development agency,
and Sparks, the childrens medical research charity.
With the starting line up including teams from BG Group, Centrica, Hess, Nexen,
PetroCanada and Venture Production, the competition is likely to be fierce and
teams have been investing in tough training schedules. Aberdeen-based teams
from BG Group and Venture Production even held a mock event to ensure their
required skills are finely honed. Over the course of the two days, the participants
are likely to face challenges ranging from kayaking, orienteering and mountain
biking, to complex construction and code breaking.
As well as improving their fitness, the teams have all embarked on fundraising
activities to help raise the minimum 5,000 required for charity. Efforts have
ranged from online auctions, to chilli plant growing and golf competitions. With
the largest ever participating field, host BG Group is confident about topping the
190,000 raised for charity in 2008. As part of the worldwide series, this years BG
Energy Challenge UK will add to the more than 4.6mn raised over the past 14
years through events in Brazil, Egypt, India, Kazakhstan, Oman and Trinidad &
Tobago.
In addition to raising funds for deserving causes, teams will take advantage of
the unique platform the event provides for companies to network and bond inter-
nally. Colleagues will have trained together, organised fundraising events and,
come July, will face gruelling physical and mental challenges that will test their
teamwork skills in ways no other situation can. The rewards will be invaluable and
experiences unforgettable.
Petroleum Review will be posting updates and event results on the BG Energy
Challenge over the next two issues. In the meantime, to find out more about the
BG Energy Challenge 2009 UK, visit www.bg-energychallenge.com
The Western Australian Environmental
Protection Authority (EPA) has recom-
mended that the revised and expanded
Chevron-operated Gorgon project could
meet the EPAs environmental objec-
tives. The revised and expanded pro-
posal adds a third 5mn t/y LNG train to
the original two-train proposal already
approved for Barrow Island. The EPAs
decision is an important step in the reg-
ulatory process. Chevron can now con-
tinue to assess the conditions as it
works toward a final investment deci-
sion (FID) in the second half of this year.
Gorgon is Australias single largest
resource project and is being devel-
oped by Chevron (operator; 50%), Shell
(25%) and ExxonMobil (25%).
Gorgon project moves towards FID
12 PETROLEUM REVIEW JUNE 2009
I N B R I E F N E W S government
JULY
Latest developments from the EU
A shot in the arm has been provided for the European Unions (EU) Nabucco pipeline,
with Turkey, Georgia and Azerbaijan signing an agreement with the EU to back the
project, writes Keith Nuthall. In return for promising to work towards bringing Caspian
gas to western European markets by 2014, the EU has made pledges on ensuring there
is demand for gas and oil reaching Europe through southern corridor routes,
bypassing Russia and Ukraine. Crucially, the Azeris have made commitments to dedi-
cate specific volumes of oil and gas for EU markets. European Commission (EC)
President Jos Manuel Barroso said the agreement could amount to a renewed Silk
Road opening the potential for enhanced relations with the countries of the
Southern Caucasus and Central Asia. However, Kazakhstan, Uzbekistan and
Turkmenistan refused to sign the declaration.
Meanwhile, a fourth EU-Russia Permanent Partnership Council on Energy has been
staged in Moscow without diplomatic incident. The EC claimed: The sides continued
rebuilding confidence and trust following the January gas crisis. That said, Bulgarias
Foreign Minister has told a local news agency that Russia had been placing his country
under inadmissible pressure to sign commitments regarding Nabuccos rival, the
South Stream gas pipeline. Ivaylo Kalfin claimed Russia threatened a pull out by Prime
Minister Vladimir Putin of a Bulgaria-hosted energy forum, if Sofia did not back the
project.
In other oil and gas industry news:
l Formal approval has now been secured at the European Parliament for the EUs
3.9bn in spending on energy investment projects, which includes a commitment to
spend 200mn on the Nabucco gas pipeline within Austria, Hungary, Bulgaria,
Germany and Romania.
l Environmental group Friends of the Earth has argued Europes oil and gas industry
already receives enough money from the EU, ahead of the newly approved stimulus
infrastructure spending plan. A report claimed European Investment Bank loans for
fossil fuels production and processing had generated 6.7bn over the past five years.
l Sweden has announced it wants to use its oncoming JuneDecember presidency of
the EU to push for a widening of carbon taxation on fuel in all member states,
extending it to light industry and agriculture.
l Erring oil tanker operators will have to contend with a new EU Shipping Pollution
Directive now approved by the European Parliament, which will insist that member
states regard serious and repeated cases as crimes.
l The EC has admitted that demand for fossil fuels will continue to be strong in Europe,
admitting in a progress report that the EU is unlikely to meet its goal of sourcing 12%
of its energy from renewables by 2010. It concluded that the EU would only achieve a
4% share rather than the planned 5.75% for transport, and a 19% share for electricity,
rather than 21%.
l The EU and Gulf Cooperation Council countries have agreed to cooperate in fighting
Somali piracy that threatens key oil tanker shipping lanes.
l Japan and the EC have committed themselves to deeper cooperation in research into
carbon capture and storage systems.
l The Deutsche Bank is predicting a rise in European carbon prices this year, even
though emissions will fall because of the recession. The reason is because power util-
ities are expected to start buying allowances ahead of the introduction of a new
European Emissions Trading Scheme in 2013, when pollution permit auctioning will
be introduced.
l Oil and gas infrastructure projects could get additional stimulus spending from
Europe after the EU Council of Ministers moved budgets forward for the European
Regional Development Fund worth up to 4.5bn from 2010/2011 to this year, for
investment in infrastructure and regional and local development.
l The European Parliament has now formally approved the EUs planned third energy
liberalisation package that gives gas utilities three options to unbundle either the
ownership or operation of transmission networks from their production and import
businesses. Member states have 18 months to implement the new rules.
l An EU Directive has been approved that will substantially reduce carcinogenic petrol
fumes emitted by petrol pumps and breathed by motorists. The law approved by the
European Parliament requires Stage II vapour recovery technologies at service
stations selling over 500 cm of petrol annually.
Under the Obama administrations pro-
posed government budget released last
month, the US Department of Energy
will see its funding increased by 1.6%
(to $406mn) for the 2010 spending year.
The administration has also proposed
ending unjustified tax loopholes for
oil and gas companies, which would
raise $26bn over the next 10 years. The
budget also revealed a plan to fill the
US Strategic Petroleum Reserve to its
727mn barrel capacity early next year.
Turkmenistan is expecting foreign
direct investment in its energy sector to
double this year to $4bn, the govern-
ment has said. The country is keen to
open up its oil and gas resources to for-
eign energy companies as it seeks to
diversify its economy. It currently
exports most of its gas to Russia.
The government of China is encour-
aging Chinese companies to invest
abroad and expand overseas explo-
ration of oil and gas. The financial crisis
has offered us a rare opportunity to
expand outbound investments,
Assistant Commerce Minister Wang
Chao said last month. Meanwhile, the
government is also drafting a stimulus
package to more than double Chinas
2020 output of alternative energy from
targets set in 2007, reports have said. It
originally set a goal for renewable
energy to account for 15% of Chinas
total use. The plan to boost investments
in alternative energies is set to be
announced this year.
The Australian government has said it
will push back a planned carbon emis-
sions trading scheme by a year, it has
been reported. Prime Minister Kevin
Rudd said the delay was due to the
poor economic climate. The scheme
had been due to launch in July 2010.
Last month, Venezuelas Congress gave
initial approval for state seizure of a
group of oil service companies oper-
ating in the country. The law put the
state in charge of companies previously
operatedby PdVSA, but later contracted
out to third parties. Military vehicles
were sent in to seize facilities, with as
many as 39 service providers being
expropriated in the week following the
announcement.
L ATI N AMERI CA
ASI A- PACI F I C
RUSSI A & CE NTRAL AS I A
NORTH AMERI CA
Find out more about the supplements offered
with Petroleum Review and Energy World at
www.energyinst.org
S
itting on massive reserves of light
crude found in the past two years
in fields between 5,000 and 7,000
metres below sea level, beneath layers
of sedimentary rock and the salt itself,
Petrobras is to spend $174bn on pro-
jects of all types in the next five years
$50bn more than envisaged a year
ago. The company estimates that
when the pre-salt oil starts to flow in
large quantities in 10 years time, the
price of crude will be above $100/b
again. Estimates as to how much the
pre-salt oil will cost to get out vary
from $10/b to $80/b, depending on
how large the deposits prove to be,
how much of it can be extracted and
what the flow rates are.
A spur to upping spending now is
that much of the huge amount of
equipment needed to develop fields
some of which may contain 10bn bar-
rels or more can now be bought or
chartered for far less than a year ago,
and probably much less than it will cost
in five years time.
Investment increase
Although Brazil has been affected by
the world financial crisis, the govern-
ment which largely determines
Petrobras policy has decided that the
company should keep spending up,
partly as a means of preventing reces-
sion. Despite the company having
difficulties raising finance from normal
sources and being forced to rely on the
countrys National Development Bank
for funds, a third of the $100bn allo-
cated for E&P will be spent on
developing the finds made beneath
the salt-layer, which extends for 800
km along the Brazilian coast and is at
least 250 km offshore.
Petrobras plans to invest a further
$80bn on pre-salt projects between
2014 and 2020, by which time 40 to 50
new projects should have come
onstream. The private companies that
share blocks with Petrobras also plan
to invest more than $30bn in pre-salt
projects in the next five years. Only
token amounts of pre-salt oil will be
produced during that period. Until
then, efforts will concentrate on deter-
mining the characteristics of the oil
and the deposits which contain it;
notably temperatures and pressures,
While many oil companies around the world are cutting
back on exploration, claiming the present low price of
crude makes it unviable, Brazils Petrobras is bucking the
trend and plans to invest heavily in E&P over the next few
years, writes Patrick Knight.
Brazil speeds ahead with
pre-salt development
A T I N A M E R I C A Brazi l
14 PETROLEUM REVIEW JUNE 2009
L
The FPSO Cidade de So Vicente will operate on the Tupi field, Brazil
Source: Agncia Petrobras de Notcias
what precautions may be needed to
prevent the salt crumbling, what mate-
rials will have to be used and how best
to get the oil out. This will include
determining what sort of risers will be
appropriate and how many wells will
be needed to attain the flow needed
to sustain platforms capable of han-
dling 180,000 b/d each.
The first long-term test started in
May at the Tupi field, discovered two
years ago and estimated to contain
between 5bn and 8bn barrels of oil.
Only about a dozen wells have been
drilled so far in blocks located in a
cluster 300 km from the shore in the
Santos basin, but large amounts of
30 API oil have been found in all of
them. Fields below the entire salt layer
may contain between 30bn and 100bn
barrels, so, with no need to find any
more crude for the time being, 80% of
E&P funds will be spent on developing
them.
Partly because the deposits are so
huge and partly for ideological rea-
sons, the current left leaning Brazilian
government is considering setting up a
new state company to administer all
aspects of the pre-salt area. Reflecting
the difficulties in agreeing a new
model, 18 months have passed since
the idea was first mooted, although
the model adopted by Norway is seen
as the most appropriate.
Looking ahead
With only about 40% of the pre-salt
area contracted so far, how conces-
sions to explore blocks should be
allocated in the future has still to be
decided. The government also wants a
new formula for allocating the royal-
ties resulting from the sale of the oil,
to replace one whereby some of the
proceeds go to municipalities fortu-
nate enough to be located adjacent to
where oil is found. One suggestion is
that much of the proceeds should go
towards funding pension state plans,
now getting deeper into the red.
Existing concessions and contracts
would not be altered, while the
existing model, which involves compet-
itive bidding by interested companies
at annual auctions, will probably con-
tinue for all other areas.
Development work is to slow at
some of the fields containing heavy oil,
and priority will be given to fields that
are easiest to develop. Because very
little oil will be produced from pre-salt
finds for several years (until about
2014), the majority of the new oil will
come from fields containing heavy oil
such as Marlin, Roncador and Jubarte
in the Campos basin. Many think that
light oil will soon be found beneath
the salt layer underlying the fields
found in the 1980s and 1990s at
Campos, which are now responsible
for 80% of production.
Even though only about 100,000 b/d
of pre-salt oil will be flowing by 2013,
it is anticipated that output in Brazil
will rise from the 1.84mn b/d of 2008
to 3.7mn b/d by 2013 and to 4.7mn b/d
by 2020, with up to 2mn b/d of that
coming from pre-salt fields.
Brazils proven reserves now total
14.5bn barrels, with just a few million
barrels of that in pre-salt fields, and
enough for 15 years consumption at
the present rate. Petrobras says that to
keep reserves at a level sufficient to
meet anticipated future domestic
needs, 2bn barrels of new crude need
to be found each year.
Counting the cost
Estimates vary greatly as to how much
it will cost to extract crude from the
pre-salt fields. Those in the Santos
basin are at least 6,000 metres below
sea level, in places where the water is
between 2,000 and 3,000 metres deep,
and up to 300 km offshore. Wells have
to be drilled through about 2,000
metres of sedimentary rock and 2,000
metres of salt.
The long-term tests at the Tupi field,
the first to be found, are expected to
cost about $30bn and should allow
more accurate estimates to be made.
Petrobras says that pre-salt oil will be
economic even if the crude price is
about $40/b, but given that the pre-
salt oil will only start to flow in large
quantities from 2014 onwards, even if
the price of crude remains low for a
few years yet, it is almost certain to be
above $40/b by 2020. Petrobras has
rights to about 60% of what has been
found; its partners, amongst them
British Gas, ExxonMobil, Petrogal,
Amerada Hess and Repsol YPF, control
the remainder.
In addition to spending on explo-
ration, Petrobras says it will complete
two refineries planned to process
mainly heavy oil one producing
petrochemicals in Rio de Janeiro; the
other, now probably without assis-
tance from Venezuelas PdVSA,
processing oil into a range of products
in Pernambuco state. Two other
refineries, which will refine pre-salt
15 PETROLEUM REVIEW JUNE 2009
Pre-salt exploration in the Santos basin, Brazil
Source: Agncia Petrobras de Notcias
crude and export much of the resulting
products to Europe and Asia, are
planned for the north-east region
the electoral stronghold of Brazils
current President, Luis da Silva.
Political influence
This has caused some sceptical com-
mentators to suggest that as well as
being seen as a good way of stimu-
lating a wilting economy, Petrobras
plans aim to persuade voters who will
chose a new President in 2010, to
select a successor of the same party as
President da Silva. They suggest the
overly ambitious plans will be revised
downwards once the election is over.
The favoured presidential candidate,
Dilma Rouseff, now Head of the Civil
Household, is on the Petrobras main
board and was previously Minister for
Energy.
Be this as it may, Petrobras has set
about ordering the massive amounts
of equipment which will be needed to
extract oil from the pre-salt finds and
bring it ashore. Petrobras fleet of
marine drilling rigs will be doubled
from 28 to more than 60, many of
which will be built in Brazil. It is antici-
pated that up to 10 large production
platforms each able to handle about
180,000 b/d of crude, as well as the
associated gas which forms about 20%
of the condensate found so far in pre-
salt finds will be needed for each of
the five or six fields to be developed
first. As all the fields discovered in the
Santos basin so far are relatively close
together, they may be interconnected.
If this proves to be the case, mecha-
nisms for compensating companies
whose concession is adjacent to one
being worked will have to be devised.
As the fields are beyond the current
range of helicopters, men as well as
equipment will have to be taken to
rigs by supply boat, and up to 150 such
boats able to travel at 18 knots are to
be ordered along with dozens of ships
to bring the crude ashore. The cost of
chartering, as well as constructing all
sorts of equipment, has fallen drasti-
cally in the past few months, which has
resulted in Petrobras cancelling many
existing contracts and calling for bid-
ders to cut prices by up to 20%. It is
planned for much of the new equip-
ment to be built in Brazil, with locally
made components to form at least
60% of the total.
In 2007 the Brazilian government
announced with a fanfare that the
country had become self-sufficient in
oil. But because two very large plat-
forms were delivered in 2008 between
six months and a year later than
promised when several existing rigs
had to be taken out of service for
maintenance or because of break-
downs imported crude and products
cost up to $2bn more in 2008 than
exports of heavy crude and various
fuels earned. The delayed platforms
took up station at the end of last year,
so, barring serious mishaps, output
should exceed 2mn b/d during 2009.
Gas update
With the economy booming, demand
for gas grew strongly last year.
However, as water levels in reservoirs
feeding hydroelectric power stations
fell below critical levels early in 2008
while the 30mn cm of gas normally
provided each day by Bolivia was occa-
sionally interrupted by politically
motivated disturbances Petrobras
had to reduce the amount of gas sup-
plied to industry. The price of gas for
use in motor vehicles was raised
sharply as well.
Almost a third of the 50mn cm of gas
available each day last year was deliv-
ered to gas-fired power stations, most
now owned by Petrobras, compared
with the 7mn cm average used for this
purpose in 2007. As a response to this,
two large terminals for receiving and
re-gasifying imported LNG were built
in record time by Petrobras last year,
after it was found that there was not
enough gas to allow all the existing
gas-fired plants to operate anywhere
near capacity at one time.
Due to the difficulty in obtaining
planning permission for a new genera-
tion of large hydroelectric power
stations planned for the Amazon
region, concessions have now been
awarded for the building of up to 50
new gas-fired power stations, as well
as some plants to burn diesel or fuel
oil.
As a result of this, gas will soon be
responsible for up to 20% of the
installed capacity in Brazil and, in
theory at least, Petrobras will become
Brazils third largest generator of elec-
tricity. If all goes according to plan,
more than 70mn cm of gas should be
produced daily in Brazil by 2013.
Because electricity generated at gas-
fired stations costs twice as much to
produce as that from hydroelectric
power plants, gas power is normally
only used at peak times. Although last
years water shortage meant that sev-
eral gas-powered plants ran almost
non-stop for most of 2008.
The very large Mexilhao gas field is
due to start delivering 7.5mn cm of gas
to a new processing station early in
2010, and twice that much in 2012.
Pipeline links are to be built to
Mexilhao from the nearby Meluza gas
field, and from other smaller gas fields
recently found in the area. It is still to
be decided whether a 250-km gas
pipeline to take the associated gas
from Tupi and other neighbouring
fields to the shore should be built. Or
whether the gas from the pre-salt
finds, of which 50mn cm might eventu-
ally be available each day, should be
liquefied. It could then be taken to one
of the four terminals which will be
operating by that time, allowing
Brazil to become a major exporter of
LNG. G
A T I N A M E R I C A Brazi l
16 PETROLEUM REVIEW JUNE 2009
L
www.energyinst.org
The Energy Institute will be exhibiting at
Offshore Europe, 811 September 2009.
Please come and visit us on
stand no 1568.
P
T
he recent discovery of potentially
vast oil fields buried beneath a
thick layer of salt off the coast of
Brazil has become a focus of excite-
ment among many of the worlds big
energy firms (see p14). Government
officials estimate between 80bn and
100bn barrels of reserves enough to
vault Brazil into the top ten of oil-
producing countries, potentially trans-
forming not only Brazils economy but
the global geopolitics of resources.
For major oil and gas firms the
pre-salt fields present a tantalising
opportunity for replacing their
reserves. Several western energy firms,
including Shell, ExxonMobil, BG Group
and StatoilHydro, were awarded con-
cessions before the government
realised the vastness of the reserves
these and many other companies
may soon be vying to expand their
involvement.
So, the discovery of the pre-salt
fields clearly holds promise for the
industry. But a provisional assessment
using LicenseSecure a model devel-
oped by Critical Resource to help
companies access and enhance the
value of assets through more strategic
management of stakeholder and polit-
ical issues** highlights that, for the
foreign firms, gaining and preserving
access to this oil on profitable terms
will not be easy. Nonetheless pulling
the right socio-political levers could
reduce their risk of being left out in
the cold.
Cancelled carnival
However, some wonder whether Brazil
will call off the carnival? Consider first
the uncertainty around the Brazilian
governments approach to foreign
involvement. After two years of
intense debate, it is expected that a
new set of rules (as yet unclear) will
soon replace the current system of rel-
atively open concessions that have
been in place since 1997.
Major western energy firms will
probably be needed for their technical
expertise and capacity given unprece-
dented operational challenges. But the
Brazilian government, like govern-
ments of many other developing
oil-rich nations, also has an appetite
for state control. Indeed, President
Lula wants a new 100% state-
controlled company to own and
develop the reserves in partnership
with others. A less radical proposal is
to maintain the existing system of con-
cessions but still put the squeeze on
companies through higher taxes.
Hard-liners in the government are
partly responding to popular under-
currents of resource nationalism,
particularly given an election due in
2010. With high levels of poverty and
unemployment, expectations for oil
wealth to translate into socio-
economic benefits are high, and this
could rebound on foreign companies
seen not to contribute sufficiently.
Another potential concern for
western energy firms is a recent land-
mark agreement between Brazil and
China that might, in time, give Chinese
companies an advantage over western
oil firms in gaining access to projects.
The agreement basically promises
some long-term supplies of oil to China
in return for $10bn to help Petrobras
develop the oil fields, as well as some
joint development of projects and
supply of goods and services by
Chinese companies.
Taken together, these factors sug-
gest a provisional LicenseSecure
rating for the western energy firms
looking to gain access or expand
existing access to the pre-salt fields in
Brazil of BBB to CC.*** This gives
grounds for optimism, but also
suggests the need for careful manage-
ment of socio-political issues.
Crude and refined forms
of leverage
Although the context for access clearly
will be set by Brazilian government
policies, companies may be able to
improve their chances of getting in on
favourable terms and hanging on to
such deals for the long term by
pulling the right socio-political levers.
Our analyses of past resource projects
certainly suggests this.
To provide a brief overview of the
sort of tactics that might be used, one
basic course of action energy firms
have often found effective elsewhere
is to leverage home government
support. In the early 1990s, western
firms access to the three biggest
former Soviet oil fields Kovytka,
Karachaganak and Kashagan was
unlocked at least in part with the help
of targeted support by western gov-
ernments, including high-level talks
between government officials.
Another common tactic which may
be particularly important for the for-
eign firms in the Brazilian context is to
develop an access offer tailored to the
countrys broader development needs.
Support for a countrys domestic
energy industry, national infrastruc-
ture and particular economic
requirements has certainly made offers
by foreign firms more attractive in the
past.
Finally, experience in other countries
also suggests that international oil
companies can build closer ties with
governments by engaging with them
on how to maximise the broader
economic benefits from resource rev-
enues. That Brazil is looking to other
resource-rich countries such as Norway
to help develop its approach implies
further scope for bringing together
such governance coalitions.
Clearly, all such tactics will only go so
far if Brazil decides to severely limit
foreign involvement. But at the
margin they could make the difference
for companies seeking to gain or hang
on to access and for a commercial
opportunity potentially worth billions
of dollars, even marginal advantages
may be worth pursuing with determi-
nation. G
*Juliet Hepker can be contacted at
e: Juliet.Hepker@c-resource.com
**For more information about
Critical Resources LicenseSecure
methodology to assess and
strengthen the socio-political licence
to operate resource projects, visit
www.c-resource.com
***This article provides a provisional
rating for Brazils pre-salt fields based
on publicly-available information a
full rating has yet to be calculated for
projects in this area.
17 PETROLEUM REVIEW JUNE 2009
Western energy firms
access to Brazils vast oil
fields hinges on complex
national political currents
and how well the
companies navigate
these, writes Juliet
Hepker, Senior
Associate, Critical
Resource.*
Brazils oil carnival?
A T I N A M E R I C A Brazi l L
T
he Latin American state companies
have a number of options to choose
fromas they attempt to raise the cap-
ital required to fund their oil and gas
projects:
G
Issue more debt on reluctant interna-
tional capital markets during a world
economic turndown.
G
Tapdwindlingnational foreignexchange
reserves.
G
Alter legal and fiscal terms for foreign
investors, obliging them to finance an
ever greater portion of a progressively
larger state participation in projects.
G
In the case of part-privatised companies,
issue more equity andthus dilute existing
shareholders.
G
Reciprocal investment agreements with
major hydrocarbon-producing or with
hydrocarbon-importing governments
such as Russia, China and Iran.
Argentinian situation
Local experts warn that Argentinas energy
situation is critical. There have been no
major oil or gas discoveries onshore or off-
shore over the past two decades and there
is a lack of government policy about further
exploration. The fear is that Argentina
stands to lose its oil self-sufficiency. Oil pro-
duction fell for the seventh year in succes-
sion to 630,000 b/d in 2008, while gas
output droppedto4.84mncf/d. Analysts do
not see a chance for this trend to be
reversed given the world economic slow-
down and the lack of interest by private
sector companies in exploration.
Repsol-YPF has been criticised for its lack
of investment, even though one third of its
Argentine operations are owned by a local
conglomerate. The company now accounts
for just 33% of Argentine oil production
compared with 43% in the 1990s. North
American independents are pulling out of
the Argentine market in favour of invest-
ment in Peru or Colombia, where the
returns are believed superior. In April, eight
former energy secretaries issued a state-
ment calling for the closing of state energy
company Energia Argentina (Enarsa) and
its replacement with a government oil
industry regulator.
The government of President Cristina
Fernandez has boosted political and eco-
nomic ties with Russia. As a result of an
agreement signed in December 2008,
Russias Gazprom and Lukoil plan to invest
in oil exploration in Argentinas southern
offshore regions. By way of reciprocity, the
Russian government has upheld Argentinas
claim to sovereignty over the Falkland
Islands that it disputes with the UK.
Bolivias slim prospects
Financing prospects for Bolivias near
nationalised oil and gas sector look slim
following the Caracas-based Andean
Development Corporations (CAF) an
international development bank owned by
the Andean states refusal to provide a
$100mn loan for gas pipeline construction.
CAF charged that corruption in the state
energy company, Yacimientos Petroliferos
Fiscales Bolivianos (YPFB), mitigates against
such a loan. One former YPFB president has
been arrested on charges of corruption
relatedtothe use of his positioninthe com-
pany to create a private sector firm, Sipsa.
This company was to recondition bottled
gas containers for YPFB in return for a
$1.8mn contract.
YPFB is also locked in a dispute with
Argentina-Bolivian consortium Catler
Uniservice over lack of payments for ser-
vices. The consortium signed a $86.3mn
contract with YPFB in 2008 for the con-
struction of equipment in a gas separation
plant in Rio Grande, Santa Cruz, and for
which the Bolivian state provided YPFB a
$35mn credit. Today, YPFB reportedly has a
As the privatisations and economic liberalisation of the 1990s
are rolled back and the participation of state companies in
the national energy sector expands further, Latin Americas
state companies face a growing financial dilemma if they
are to maintain, or even increase, oil and gas production.
Maria Kielmas reports.
Seeking finance as the
states role expands
A T I N A M E R I C A Fi nance
18 PETROLEUM REVIEW JUNE 2009
L
All that glitters is gold The Muisca raft, housed at the Museo del Oro, Bogota. The
votive (ex-voto, offering) figure in the shape of a raft with people on it has been
interpreted as the representation of the investiture ceremony of the chieftain in the
village of Guatavita and a possible source of the legend of El Dorado
Source: Banco de la Republica (the central bank that runs the Museo del Oro)
$60.7mn unaccounted for black hole in its
finances. Former hydrocarbons regulator
and petroleum engineer Carlos Miranda
Pacheco has called the management of
state oil and gas finances as comparable
with the storyline from the US crime series
The Sopranos, while local journalists are
writing instant books about energy
industry corruption scandals during the
three years of the presidency of Evo
Morales. In2006, before the nationalisation
process initiatedby President Morales, YPFB
acted as an auditor of upstream contracts
signedby the state withforeignandprivate
sector investors. Today, the company
employs 1,500 people, most of whom are
administrators in La Paz.
The lack of exploration and producing
field workovers by YPFB has led to fears
that Bolivia will not be able to satisfy its gas
export obligations. There is also concern
about the future of gas exports to Brazil, as
that country moves to develop its new off-
shore discoveries. This year, Petrobras cut
Bolivian gas purchases from 24mn cm/d in
2008 to 19mn cm/d. Gas export prices are
also falling. Argentina is paying $4.60/mn
Btu for Bolivian gas. Previously, the price
had been $7.8 compared with $5.7 for gas
shipped to Brazil.
YPFBs financial problems may be eased
by the provision of a $1bn guarantee from
the Bolivian central bank, assuming that
the international capital markets express
confidence in this guarantee. Bolivias total
foreign exchange reserves amount to $7bn.
Russias Gazprom is also standing in line.
The company states on its website that it
plans to buy a 20% to 24% stake in
PetroAndina, a joint venture betweenYPFB
(60%) and Venezuelas PdVSA (40%).
Chilean operations
GNL Quintero, Chiles first LNG regasifica-
tion plant, is expected to begin operations
inmid-2009. Constructionat the 10mncm/d
facility which is located in Quintero Bay,
region V, some 155 km north-west of
Santiago began in 2006 and is a joint ven-
ture between Endesa Chile (20%), state oil
company ENAP (20%), local gas distributor
Metrogas Chile (20%) and BG Group (40%,
operator). Regasification volumes will rise
to 15mn cm/d and these, in turn, will be
sold to local distributors at an initial rate of
6.5mn cm/d. The project was conceived in
2004 in response to the cut back in gas sup-
plies from Argentina following that
countrys economic crisis in 20012002.
Chiles national energy commission (CNE)
has reduced its estimate for the cost of
imported LNG from $13.40/mn Btu to
$7.20/mnBtu. Constructionof asecondLNG
terminal further north at Mejillones began
last year. This gas will be directed mostly to
mining operations.
State oil company ENAP is to be restruc-
tured following a net loss in 2008 of
$958mn after its refining division lost
money on fuel sales. A combination of
drought at home and the restriction of gas
supplies from Argentina meant that it had
to import expensive diesel for utilities. This
was left stockpiled once the rain returned.
The government plan now is to abolish
ENAPs separate subsidiaries Sipetrol for
foreign exploration and production, and
ENAP Refinerias in refining and bring
themunder the same central management.
Colombian acquisitions campaign
Colombias part-privatised state oil com-
pany Ecopetrol has launched an aggressive
national and international acquisitions
campaign. In March, the company reached
an agreement with Paris-based Maurel &
Prom for the acquisition of Colombian oil
company Hocol. Ecopetrol agreed to pay
$580mn in cash in addition to $168mn in
working capital. There will be an additional
payment determined on the basis of WTI
futures as well as exploration results from
the Huron well on the Niscota block in the
Piedemonte/Llanos region. This Talisman-
operated joint venture, which includes
Total, announced the well tested 3,500 b/d.
It was drilled to a total depth of 18,000 ft
and cost a reported $85mn. The block was
previously operated by BP and had been
relinquished in 2005.
Hocol, which holds acreage in the Upper
Magdalena and Llanos basins, produced
15,000 b/d in 2008 and expects to produce
22,000 b/d in 2009. Production comes
mainly from the San Francisco, Balcon,
Palermo and La Hocha fields in Huila
department. The Ecopetrol acquisition also
includes Hocols 36.1% stake in the
Oleoducto de Colombia (Ocensa) oil
pipeline, but none of Hocols assets in
Venezuela or any other country. Ecopetrol
has also purchased Canadian-based
Enbridges 24.7% stake in the Ocensa
pipeline for $418mn, bringingits total stake
in the pipeline to 60%. Ocensa has a
capacity of 650,000 b/d and extends 829
km, carrying Cusiana crude to Covenas. The
remaining 40% stake in the project is held
by BP and Total.
Inafurther acquisition, Ecopetrol will pay
Swiss-based Glencore $540mn for its 51%
stakeintheCartagenarefinery. Meanwhile,
in Peru, Ecopetrol teamed up with the
Korean National Oil Company (KNOC) to
buy gas producer Petro-Tech, a division of
Houston-based Offshore International
Group, for a total of $900mn. In Brazil,
Ecopetrol and US-based Anadarko will
jointly explore in the shallow waters of
the Campos basin, while in the US Gulf
of Mexico, Ecopetrol has been awarded
a total of 26 blocks, 11 of them in joint
venture with Repsol.
To pay for the acquisitions Ecopetrol
plans to issue up to $8.1bn in debt to fund
its business plan through 2011. The com-
pany currently carries no debt. It has
shareholder permission to issue up to $4bn
in non-convertible bonds and government
permission for a 9% rights issue. However,
Ecopetrols expansionstrategy inthefaceof
spending cuts by other oil companies has
been questioned. Its supporters claim that
the company is buying good assets cheaply
and that this will fulfil its hopes to become
one of the 27 largest oil companies in the
world and to have oil production of over
1mn b/d. (The company is modelling itself
onPetrobras.) Ecopetrols productiontarget
for this year is 531,000 boe/d. Nevertheless,
independent brokers in Colombia say that
the companys decision to sell bonds is
madness since it should have used its earn-
ings from last year for future capital
investment rather than paying interest
from future cash flow. The quality of its
new domestic acquisitions has also been
questioned.
Foreignoil investment is fallingalongside
other direct investment. Planned invest-
ments in2009are$3.25bn, down11%from
2008, according to Alejandro Martinez of
theColombianPetroleumAssociation. Total
oil production in 2008 was 588,000 b/d, its
highest since 2002. Production is expected
to rise to 660,000 b/d this year, although
export revenues are expected to fall along
with oil prices, down from$12.2bn last year
to about $5.2bn in 2009. Royalty earnings,
half of which pass to local authorities, are
expected to reduce this year between 47%
and64%, comparedwith2008 levels, down
to $984mn.
Cuban relations
Cuban government officials are once more
expressinghopes that US energy companies
19 PETROLEUM REVIEW JUNE 2009
Oil pump jack in the Argentinian desert
will invest in oil exploration should the
Obama administration in Washington ease
relations with Havana. Cuba has used the
notion of improved relations with the US at
regular intervals over the past decade anda
half to boost the apparent prospectivity of
its offshore economic zone.
There has been little exploration success
to date, despite investment by Canadian,
Latin American, European and Asian com-
panies. Geological complications have been
compounded by the political difficulties of
doing business with the government.
Canadian companies Sherritt International
and Pebercan finally quit Cuba in early
2009. State oil company Cuba Petroleo
(Cupet) ceased paying for the oil produced
by the foreign investors. It was not made
clear whether this was due toaninability or
an unwillingness to pay on the part of
Cupet. Pebercan received a net lump com-
pensation payment fromCupet of $140mn,
of which approximately $60mn was trans-
ferred to its joint venture partner Sherritt.
Ecuador cuts production
Just as foreign investors complete yet
another contractual renegotiation, they
nowhave toface productioncuts tocomply
with Ecuadors reinstated OPEC member-
ship. The country quit OPEC in 1992, citing
that it was marginal to the predominantly
Middle East-based cartel, but returned in
late 2007. A total of 40,000 b/d will be cut
from its recent 504,000 b/d production;
22,000b/dwill becut by privatesector oper-
ators and 18,000 b/d by state company
Petroproduccion. Conflicting views on the
wisdom or otherwise of a renewed OPEC
membership have resurfaced. Former
Energy Minister Jorge Pareja claims the pro-
duction cutbacks will reduce state revenues
in 2009 by $400mn.
The government has been seeking to
renegotiate oil exploration contracts with
five oil companies since early 2008. The con-
tracts will change from an effective
production sharing system to a fee-based
service contract. So far, Chinas Andes
Petroleum has been the first to sign a fee-
for-service contract, while Petrobras and
Repsol have negotiated one-year transition
agreements after which the fee-for-service
contract will apply. US-based City Oriente
quit Ecuador with $69mn in compensation
rather than accede to the new rules.
Peruvian gas supplies
The future of gas supplies to Perus
domestic market has become a hot issue. It
revolves around the contract the state
signed with a Pluspetrol-operated consor-
tium for the development of the Camisea
gas field. Questions are being asked about
why all of the gas is to be exported to
Mexico without previously supplying the
domestic market. Critics are pointing fin-
gers at former President Alejandro Toledo
andhis teamwho, in2003, changedthe gas
regulations. These rules moved from ones
which stipulated that investors had an
obligation to supply the domestic market
before gas exports were permitted, to ones
which stated that the domestic supply
should be assured for a minimumperiod of
years stipulated (but not made public) in
the contract.
According to operator Pluspetrol,
Camisea holds 14.1tn cf up from 11.1tn cf
a fewyears ago (in blocks 56 and 88). This is
being exported at a rate of 650mn cf/d
under contract with Peru LNG. However,
the gas transportation pipeline capacity is
insufficient to supply the domestic market
as well as exports. Should exports in 2010
start at the rate agreed originally, there is
no possibility of supplying the domestic
market until the pipeline is expanded in
2012. Peru is facing a potential energy
supply disaster, says former Petroperu
President Cesar Gutierrez.
Exploration is set to expand, however.
Regulator Perupetro awarded 13 new con-
tracts worth$650mnininvestment over the
contract periods. Another exploration
round is scheduled for July this year for a
further 12blocks. Thegovernment hopes to
attract $10bn to double oil and gas output
over the next decade. Exploration spend-
ing in 2009 is scheduled at $1.4bn, with
11 exploration wells planned.
Venezuelan plans
Venezuelas state-owned PdVSA has cut its
2009 investment plan by almost 40% to
$12bn. The company is maintaining its
existing policy of spending 10% of its
investment onsocial projects, Vice President
EulogoioDel Pinosays, while the remaining
90%will go mostly to the modernisation of
two refineries. This means oil production
capacity is expected to fall further.
According to PdVSA, the companys total
debt as of September 2008 was $14.82bn,
half of which was owed to suppliers and
sub-contractors.
PdVSA is facing more debt problems as
the face value of its 30-year bonds, placed
in 2007, have dropped by half. Initially,
these were quoted at 74% of nominal
value. By April 2009 this had dropped to
35%. A suggestion by some analysts that
PdVSAcould repurchase its bonds has been
discounted as the company is not in any
financial positiontodoso. Instead, PdVSAis
planning to set up a guarantee fund for
buyers of its bonds on the international
markets.
Venezuelan oil production remains diffi-
cult to quantify, although most industry
analysts suggest a total figure of around
2.1mn b/d, compared with over 3mn b/d
according to sources favourable to the gov-
ernment. Crude exports to the US rose to
1.17mn b/d in January 2009, according to
the US Energy Information Administration
(EIA). These are the highest levels for over
six months and were revealed at a time
A T I N A M E R I C A Fi nance
20 PETROLEUM REVIEW JUNE 2009
L
Macchu Pichu Inca ruins near Cusco, Peru
continued on p29 ...
E
nill is particularly bullish about the
prospects of a fifth LNG train, a pro-
ject his government refers to,
mysteriously, as Train X. His confidence is
based on the results of a feasibility study
conducted in late 2008 by his Ministry in
conjunction with British Gas Trinidad &
Tobago (BGT&T) which is likely to be a
major player in any new train complex.
The results from the study have proven
that Train X is feasible, Enill told
Petroleum Review. Plant capacity
would be between 500mn to 850mn
cf/d, considering the capacity available
and construction of multiple trains, he
added. Size will also be determined by
how we put together the project and
resources.
He sought to allay fears over the exis-
tence of sufficient gas reserves to service
the new complex, but could not be spe-
cific about which reserves would be
utilised. The study identified existing
and potential resources, and concluded
that there were sufficient resources to
supply a new train when that invest-
ment is made. The government of
Trinidad and Tobago has not identified
any particular source at this time there
are several possibilities still to be looked
at and, as a result of that, we have not
made an investment decision.
However, two major gas discoveries
by Canadian Superior (3.3tn cf in block
5c) and Petro-Canada (1.2tn cf in block
22) have made the project more likely.
Yes, a new train is more likely, said
Enill. Any new discoveries would
enhance the likelihood and desire to
approve the Train X investment deci-
sion. With the recent economic
changes, the conclusion for the feasi-
bility study may change. The study
being used was completed in the last
quarter of 2008.
On financing, he was less candid: At
this stage, there is no definite answer
[on timing]. However, we do know that
the production process takes approxi-
mately four years to complete. There
are several interested parties willing to
provide equity and loan financing from
entities that can be involved in any
aspect of the value chain.
BGT&T President Derek Hudson had
recently thrown his hat into the ring,
backing the Train X project after he too
concluded that Trinidad and Tobago
held sufficient gas reserves based on
the results of the feasibility study.
Words of caution
Train X would fulfil a number of roles
allowing the Trinidad and Tobago gov-
ernment to become part of the LNG
value chain (Trinidad & Tobago LNG
Company was established in 2005 to
facilitate this), providing an outlet for
Expansion plans continue
despite economic gloom
A T I N A M E R I C A Tri ni dad & Tobago
22 PETROLEUM REVIEW JUNE 2009
L
Atlantic LNG Train 4 (to left of picture) the precursor to any Train 5 or Train X
Source: Atlantic LNG Company of Trinidad and Tobago
Trinidad and Tobago Energy Minister
Conrad Enill
Source: MEEI
While the global recession is hitting profits in the oil and gas
sector worldwide, the Caribbeans key producer Trinidad and
Tobago remains bullish about the industry bringing it long-
term financial and economic stability, writes James Fuller, in
Port of Spain. Indeed, the twin-island countrys Minister of
Energy and Energy Industries Conrad Enill said in April that
both a fifth LNG train and a new oil refinery are projects
which are still firmly on the table for the Caribbean energy
powerhouse.
major new gas discoveries and incorpo-
rating new shareholders not currently
represented in the four existing trains.
However, some industry watchers
may still be cautious. The 2008 Ryder
Scott report the nations annual audit
of proven, probable and possible gas
reserves does not appear to back
Enill and Hudsons declarations of
ample gas. It places reserves at 30.7tn cf
a drop of 0.270tn cf year-on-year;
although it should be noted that figure
did not include Canadian Superior and
Petro-Canadas two recent major new
discoveries.
Furthermore, although confident,
Hudson has advised caution, saying any
future train must take into account that
there would be other avenues, such as
emerging competitors in the domestic
market, for new gas.
Emerging competition
These emerging downstream competi-
tors include a proposed $2.3bn, 460,000
t/y polypropylene plant. Its construction
status is presently unclear, although the
main international partner (with a 60%
share) LyondellBasell, filed for Chapter
11 bankruptcy protection in January for
its US operations and one of its
European holding companies amid a
heavy debt load and plunging sales.
Similarly, the construction launch of a
$1.2bn iron and steel plant, proposed by
the Mumbai-based Essar group, is
uncertain. The plan for a plant to be
located at Pranz Gardens, Claxton Bay,
has been the subject of heated local
protest.
Minister Enill blamed the economic
downturn for delays to the projects.
The global financial crisis has caused
delays in the proposed start of con-
struction for the Essar iron and steel
complex, and the Lurgi/LyondellBasell
GTPP project, he said.
However, on a more positive note, a
downstream project that is continuing is
the Methanol Holdings (Trinidad)
ammonia/urea ammonium nitrate/
melamine (AUM) complex, located at
Point Lisas Industrial Estate. The
ammonia plant within the complex has,
in fact, already begun production in
mid-April 2009. The urea plants first
production is scheduled for October,
while the melamine plant will begin
production in December. The complex
will manufacture 4,272 t/d (1.48mn t/y)
of urea ammonia nitrate (UAN 32)
solution and 180 t/d (60,000 t/y) of
melamine powder as the primary
products.
Another major downstream project is
Alutrints 125,000 t/y aluminium smelter
project at Union Estate, La Brea. A
$400mn construction loan was recently
secured from the EXIM Bank of China,
and Chinese contractor CEMEC has
begun preparatory groundwork on site.
The construction timeframe is 22
months, with a target of full production
starting by mid-2011 and first metal no
later than 3Q2011.
These downstream competitors are
not the only problem on the immediate
horizon for the proposed Train X;
drilling activity for the gas reserves that
would potentially supply any new plant
are at a virtual standstill. Of course pro-
jects like this are based on 20-year
projections and activities, and not 12-
month ones, but currently there has
been a real drying up of exploration,
commented Dr Thackwray Driver, CEO
of the South Trinidad Chamber of
Industry and Commerce (STCIC; which
styles itself the Energy Chamber).
The number of rigs operating in
Trinidad and Tobago has decreased
quite dramatically over the past year or
so. In terms of offshore drilling rig
activity it has decreased by around 75%
and there are two main reasons for
that. First, theres the overall environ-
ment. A lot of peoples investment
decisions have been pushed back. That
is in the context of continuingly high rig
lease rates, at a time when oil and gas
prices have come right down. Second,
weve had delays in our previous bid
rounds and we havent got the acreage
out to companies to explore. The bid
round we had at the end of 2007, for
the deep Atlantic blocks, only yielded
one company bidding for that acreage.
There are, in fact, currently no major
new exploration and development pro-
jects in Trinidad and Tobagos upstream
sector, with the only prospect of signifi-
cant continued development drilling
coming from BGT&Ts new north coast
platform, Poinsettia, later this year.
Added to which it is still unclear, at
the present time, how the vaunted gas
finds from Petro-Canada and Canadian
Superior are going to be developed,
added Driver.
Not only that, as an export plant,
Train X would also face the problem
that its primary market, the US, is cur-
rently oversupplied with LNG. Theres a
lot of new LNG capacity coming
on[stream] currently from the Middle
East, particularly from Qatar, and some
from Nigeria and a few other places as
well, explained Driver. Indeed, in late
2008, Bruce Aitken, President and CEO
of Canadas Methanex Corporation (the
worlds biggest methanol trader) said
that there had even been talk of LNG
plants being constructed in the US for
export due to the discovery of large
amounts of unconventional (shale)
natural gas.
You would have to determine
exactly where your LNG would go and
what contracts you could make. The
23 PETROLEUM REVIEW JUNE 2009
Dr Thackwray Driver, CEO of the South
Trinidad Chamber of Industry and
Commerce
Source: South Trinidad Chamber of
Industry and Commerce
Date for the diary
Process safety management for power generation
Thursday 15 October 2009, Energy Institute, 61 New Cavendish Street, London
This conference will examine how power generators can respond to
the drive for improvement in process safety performance.
A pre-conference dinner will also be held on the night of 14 October.
Confirmed speakers:
G
Marc McBride, Group Head of Process Safety, Centrica
G
Andy Geddes, Group C&I Eng, Scottish Power Alloa
G
John Pond, Chief H&S Officer, EDF Energy
G
Graeme Ellis, ABB Engineering Services
For more information contact the events team on:
t: +44 (0)20 7467 7174 e: events@energyinst.org.uk
www.energyinst.org.uk/events
In partnership with
commercial case would need to be
sound, said Driver. It goes back to the
question of the current investment cli-
mate. I think the government would
want to see some different economics
than that of the current climate.
A bumpy ride
The prospects for the construction of
a new oil refinery in Trinidad and
Tobago have endured a similarly
bumpy ride in recent years. In 2002,
the government granted conditional
approval for the construction and oper-
ation of a 224,000 b/d full-conversion
export oil refinery and ancillary infra-
structure, with an expected cost of
between $2bn and $3bn, and a com-
pletion date of 2005. Had it been
constructed, the refinery proposed
by Bahamas-based Soreco would
have been one of the largest in the
world, with a 17.4mn b/y terminal and
port facilities.
Plans for this refinery did not come to
fruition. However, plans for another,
estimated at a cost of between $3bn
and $4bn, located within the existing
state-owned Petrotrin refinery, at
Pointe-a-Pierre, are still very much alive.
The Ministry of Energy and Energy
Industries is currently evaluating two
proposals for the establishment of a
250,000 b/d oil refinery, which will be
located at Point-a-Pierre, said Enill.
Feedstocks for the refinery would be
heavy fuel oils produced by the
Petrotrin refinery, as well as foreign
crudes.
Dr Driver, who has been STCIC CEO
for six years, gave some background to
the project. Pointe-a-Pierre is a very old
refinery and its been going through an
upgrade. Petrotrin have been doing
that in such a way as to clear some land
within the confines of the existing
industrial estate with a view to building
a major new oil refinery. They would
make the land available to an interna-
tional company to build the new oil
refinery, which would be run mostly on
imported crude to service the US
market.
One of the international companies
deemed most likely to be involved is
Brazils Petrobras. Enill seemed to con-
firm this in July 2008, when he alluded
to ongoing discussions between
Petrotrin and Brazil, and emphasised
that some elements of Petrotrins
operations would benefit from a rela-
tionship with the Brazilians.
As Driver explained, the project is
viable. There have been no new
refineries built in the US for decades
and they look unlikely to be built
because of environmental concerns.
There is the potential for it [the new
facility at Pointe-a-Pierre] to go ahead
at some stage because there is contin-
uing demand for transportation fuel in
the US. That is the major market that
would be targeted. You have to pro-
duce the fuel to the right specifications
for the American market, so you have
to have a refinery that can meet US
specifications.
Enill concluded by stating that more
news on the proposal is imminent.
Discussions are still in the preliminary
stages, but we expect that a position
will be taken by the end of 2Q2009. By
this time, the feasibility of the pro-
posals would be determined. G
A T I N A M E R I C A Tri ni dad & Tobago
24 PETROLEUM REVIEW JUNE 2009
L
Date for the diary
Asset integrity management optimising future performance
Wednesday 21 October 2009, The Marcliffe Hotel, Aberdeen, Scotland
Following on from the huge success of last years Offshore Safety conference, the
Energy Institute is pleased to announce another conference on the importance of
maintaining asset integrity. The programme will aim to disseminate good practice
guidance in the field of asset integrity with topics drawn both from the EI Technical
programme and selected industry professionals alike.
Topics to include:
Performance indicators for external corrosion protection
KP3 programme current status and plans for the future
Development of KPIs for ageing SCEs
Designing for integrity assurance of subsea installations
Life extension of rotating equipment
Design and operation of normally unattended installations
Knowledge sharing and learning for asset integrity assurance
To register your interest please contact Vickie Naidu, Events Organiser:
t: +44 (0)20 7467 7179 e: vnaidu@energyinst.org.uk
www.energyinst.org.uk/events
Sponsored by
Petrofins oil refinery in Trinidad, by night Source: James Fuller
I
n Mexico kidnappers will abuse you,
torture you with possible mutilation
and beheadings are common. This is
the stark assessment of a kidnap consul-
tant, an expert who has negotiated the
safe release of many hostages held for
ransominLatinAmerica. Mexicos Attorney
General has recently gone to unprece-
dented lengths to publicise the appalling
level of kidnappings by publishing the
names and photographs of over 4,000
people who have gone missing in the past
year mainly at the hands of the drug
gangs resulting in Mexico being labelled
as the most dangerous and violent country
to live in or visit.
Actual numbers of kidnappings are
impossible to calculate. However, the
US Embassy in Mexico City accepts that
an estimate of 10,000 in 2008 for
express kidnappings, which can be set-
tled very quickly, and other episodes
that need much longer negotiation are
well on the low side. Across the border,
the outgoing CIA Chief, Michael
Hayden, believed that Mexico could
rank alongside Iran as a challenge for
the Obama administration, as the
Mexican drug barons have expanded
their range to make Phoenix, Arizona,
the kidnap capital of America.
Never show any company branding
or draw attention to yourself when you
are away from your workplace, says
one kidnap consultant. That also
applies to families of employees of
foreign-owned companies that operate
in the country, especially in the oil
sector, that always wear plenty of com-
pany branding, he concluded. Such an
ever-present threat of kidnap can leave
the consultant in grave danger as in
the case of the disappearance of the
highly experienced Felix Batista, who
worked for Houston-based ASI Global
and was taken in December last year
whilst in a restaurant in the northern
Mexican state of Coahuila. Consultants
like Batista, who had more than 100
cases of hostage negotiation in Latin
America behind him, run enormous per-
sonal risks by operating in Mexico.
To date, the majority of kidnappings
in the border cities of Jurez and
Tijuana, in Mexico City and
Guadalajara, and in the international
holiday resort centre of Cancun on the
Yucatan peninsula, have been of
Mexican nationals but there are indi-
cations that foreigners will increasingly
become targets. In Cancun, several for-
eign businessmen have been taken,
including some who have financial
interests in the leisure industry.
However, it is in the north of the
country where the risk is worse. One
American hostage was found in Tijuana
in February decapitated. A French
businessman was killed outside the
citys international airport, a busy area
under constant surveillance by the
gangs, with visitors expressly warned
not to take taxis and only use pre-
ordered vehicles.
Attempts by the government to end
the grip of the drug barons have
been well publicised with Mexican
military on the streets of Juarez,
where the bodies of the victims are
openly dumped. Tijuana has long been
favoured by teenagers and students
from California, who are banned from
Your money or your life
A T I N A M E R I C A Ki dnap & ransom
26 PETROLEUM REVIEW JUNE 2009
L
Latin American pipeline Of the eight countries worldwide rated in 2009 as 'very
high risk' for kidnapping and ransom, five are oil and gas producers, including
Mexico and Venezuela (see box on p28). Colombia is now ranked under 'high risk'
given the aggressive government measures to tackle its long-standing problem
Photo: G4S
Nigel Bance, who writes on the growing worldwide
problems of kidnapping for ransom and piracy, examines
the spiralling rise of violent kidnapping in Mexico that is
now spilling out across its border with the US. He also
assesses the very real dangers now encountered in
Venezuela, and the growing trend of express
kidnappings experienced throughout Latin America.
drinking in their state if under 21 years
of age. These young people appear
oblivious to the risks they incur, despite
the extensive media coverage in the
US of the violent and deadly situation
in Tijuana.
Corruption control
Mexico has several state agencies trying
to control the high level of kidnapping,
but all are hampered by corruption in
their ranks. There have even been
numerous reports of officers from the
FBI-trained Anti-Kidnapping Force (cre-
ated in September 2008) committing
the actual kidnapping before handing
over the victims to the gangs to handle
payment and release. The trouble with
this agency, said one kidnap consul-
tant, is that its officers are very lowly
paid and they view kidnapping as a
highly lucrative sideline with a negli-
gible chance of being caught.
Discipline is another issue. In February,
12 members of the Anti-Kidnapping
Force were arrested in Cancun for the
killing of one of its senior officers.
Understandably, the international
companies that negotiate hostage
release prefer to keep the Anti-
Kidnapping Force at a distance if they
possibly can.
Ransom negotiations
Hostage release can take between four
to six weeks of negotiation, but the risk
of torture or mutilation to victims
swiftly ratchets up the level of anxiety.
The main kidnapping groups have
established a structure in their opera-
tions, with gang members given
responsibilities for the actual kidnap-
ping, the warehousing of victims in
safe-houses, and ransom negotiating.
In the safe-houses, which can be
shared by a number of gangs, hostages
are often bartered. Those victims who
have been safely released talk of the
sheer terror in such places, experiencing
and witnessing torture and mutilation.
Severed fingers and ears are sent to
families and if a negotiation is botched
the result is death. Beheading has now
become one sanction if ransoms are not
paid.
Ransoms vary considerably. For
express kidnappings the payment can
be rapidly settled by the victim being
taken to an ATM to obtain funds.
Outside this particular growing trend in
criminality, the gangs go for high net
worth targets there have been many,
with payments in excess of $1mn often
the norm. In one recent case, $8mn was
paid and demands have been even
higher. An alternate hybrid approach is
becoming common, explained a kidnap
consultant with many years experience.
Past victims who have been released
after payment are being contacted with
further extortion demands and threats
of repeat kidnapping if monies are not
forthcoming, he said.
Venezuela a country where 10 years
ago kidnap for ransom was unknown
is rife with express kidnappings, with
even university students forming gangs
to supplement their incomes. Officially,
the Venezuelan authorities only admit
to low numbers, but there are daily
occurrences of kidnap in the eastern
area of Caracas (where the wealthy
have their homes), across Zulia State
and in areas that border Colombia. The
kidnappers sometimes carry fake police
IDs, even wearing police uniforms and
riding police motorcycles, setting up
roadblocks and grabbing their victims.
Wives of businessmen in Caracas are
targeted in the car parks of busy shop-
ping malls, often after being followed
from their homes. Any children are sep-
arated from the wife, giving the
kidnappers even greater leverage in
taking bank debit cards with PIN num-
bers and extracting funds before
everyone is released. Maiquetia inter-
national airport in Caracas is another
popular location for express kidnap-
pings, where airside baggage handlers
contact the gangs outside with the
name and company tags of the target.
Waiting to collect the targeted traveller
is the driver with a name card. Once
the visitor is bundled into the car by the
kidnappers he is driven to an ATM
machine, and then dumped.
For some kidnappings in Venezuela
release can take months as hostages are
held in the jungle camps near the
Colombian border, making logistics very
difficult for the kidnap consultants. In
recent years, many such episodes have
been orchestrated by the Revolutionary
Armed Forces of Colombia (FARC), but
27 PETROLEUM REVIEW JUNE 2009
Drill rig in Latin America Oil industry employees in a number of Latin American oil
provinces have been warned to keep a low profile and avoid wearing clothes with
company branding when away from the workplace, given the proliferation of
'express kidnappings' across the region and the increased targeting of expatriates
by kidnappers, especially in Mexico Photo: G4S
increasingly the Colombian cross-border
involvement has fallen as the number
of purely Venezuelan gangs has risen.
Ineffective powers
The three state agencies in Venezuela
empowered to control kidnapping have
all proved ineffective. The once dis-
banded Anti-Extortion and Kidnapping
Group (GAES), which is a special forces
detachment of the Venezuelan military,
was re-established in 2005 to bring the
kidnappers to book aided by the
Intelligence and Prevention Services
Administration (DISIP) and the anti-
kidnapping division of the Scientific,
Penal and Criminal Investigations organ-
isation (CICPC). However, there have
been loud demands for a tougher gov-
ernment response and for one unified
task force to tackle the problem that is
now endemic in several parts of the
country. The CICPC reported 144 express
kidnappings in Caracas during 2008, but
confesses that the unreported figure for
the capital is nearer 600. A high profile
kidnapping occurred in April when a
bank chief from Banco Venezolano de
Credito was snatched from his car on his
way home, despite his own security
arrangements.
Under present legal conditions in
Venezuela the firms of international
kidnap consultants are not required to
cooperate with the state agencies. That
situation could well change if the laws
are amended, as they might. This would
place the consultants in a difficult posi-
tion and could render them liable to
criminal prosecution. The payment of
ransom in Venezuela is not illegal but
that too is scheduled to change, placing
the country in a small group (which
includes Italy) whose citizens are pro-
hibited from taking out special risk
insurance that includes kidnapping.
There are ways around that difficulty,
however, with Italian citizens and com-
panies obtaining such insurance outside
Italian jurisdiction, in the Channel Islands
and other such centres where these
black policies, as they are referred to,
are underwritten.
Elsewhere in Latin America, in coun-
tries such as Argentina, kidnappings are
on the rise which is usually the case
when the economy falters. Recently, a
14-strong gang that included two
women was arrested. This group was
responsible for numerous cases in and
around Buenos Aires, and it had an
extensive series of safe-houses.
Episodes of kidnap in Brazil have risen by
30% in 1Q2009, accompanied by a high
death toll of hostages given the prefer-
ence by the authorities for shoot outs. A
number of former FARC guerrillas now
operate in Ecuador, where kidnappings
have proliferated in the past year in
Honduras, the 2008 figure of 100 kid-
nappings will be easily surpassed before
long. In the Caribbean, Haiti provides its
usual extreme danger to both residents
and visitors, and should be avoided if
possible. Throughout Latin America
the problem of express kidnapping
has proliferated.
Colombia the country which turned
kidnapping into a long-standing
industry and exported the brand to its
neighbours and elsewhere remains a
serious threat to foreigners. However,
aggressive action by the government
towards both FARC and the National
Liberation Army (ELN) is certainly paying
dividends. During 2008, there were 437
officially recorded kidnappings in the
country, a huge reduction from a level of
3,572 in 2000.
The use of scopolamine, the home-
grown drug that abounds in Colombia,
remains widely used by kidnappers.
Known as the Zombie Drug or Devils
Breath this colourless, odourless and
tasteless powder causes extreme drowsi-
ness and memory loss, amongst other
effects, lessening the chance of later
identification of kidnappers by released
hostages. Manufactured scopolamine
also comes in from Ecuador, so it is now
freely available. In the past year a
number of high-profile hostages have
been released from the jungle camps,
but FARCs figure of only nine economic
hostages remaining is hardly credible.
The governments own Defense Ministry
has reviewed its figures of the missing,
reducing the number of 1,173 down to a
lowly 66 but even that is way off the
mark according to the Colombian for
Peace movement, which fiercely argues
that nearer 400 remain captive in the
camps, many held for more than five
years.
Mexico is highly dangerous and that
danger often violent and murderous
increasingly will be felt by the expatri-
ates as this community comes into the
monetary sightline of the drug barons.
For those who do have either insurance,
or wealth, there are a number of inter-
national kidnap firms who will try to
negotiate a safe release. US-based
Clayton Consultants, with 22 kidnap con-
sultants worldwide, has a strong track
record of success in Mexico and
throughout Latin America. Neil Young
Associates, part of the G4S group in the
UK, is another with Mexican experience,
as is London-based Control Risks, with its
long traditions in the area, and ASI
Global.
For anyone taken hostage in Mexico
the advice, however, is unequivocal, says
one consultant: In Mexico, always pay
up it could save your life. G
A T I N A M E R I C A Ki dnap & ransom
28 PETROLEUM REVIEW JUNE 2009
L
Dates for the diary
Energy Institutes Reservoir Microbiology Forum (EI/RMF)
2425 November 2009, Energy Institute, 61 New Cavendish Street, London
Dinner on 24 November venue TBC
The Reservoir Microbiology Forum(RMF) is the only annual event dedicated specifically to microbial issues in the oil industry. It will mainly
focus on upstreamrelated issues such as souring, biocorrosion, MEOR, biomonitoring/detection and upgrading of unconventionals.
For more information regarding the topics go to www.energyinst.org.uk/events
To register your interest please contact Vickie Naidu, Events Organiser:
t: +44 (0)20 7467 7179 e: vnaidu@energyinst.org.uk
www.energyinst.org.uk/events
All rates frozen at 2008 prices!
m
Kidnapping hotspots
in 2009
Very high risk
Afghanistan, Haiti, Iraq, Mexico,
Nigeria, Somalia, Pakistan, Venezuela
High risk
Algeria, Brazil, Colombia, Ecuador,
Georgia, Honduras, India, Indonesia,
Israel and Palestinian territories,
Philippines, Russian Federation (City of
St Petersburg, Chechnya, Dagestan,
Ingushetia and North Ossetia), Sudan,
Yemen
Medium risk
Argentina, China, El Salvador,
Guatemala, Kenya, Lebanon, Saudi
Arabia
Source: Clayton Consultants
when President Hugo Chavez was making
great efforts to seek alternative markets in
China and Japan.
The government and aspiring foreign
oil investors are at odds over the latest
Carabobo bidding round for seven heavy
crude blocks. Some 19 companies pur-
chased $2mn data packages for the blocks.
The legal and fiscal terms provide for a
minimum 60% PdVSA participation in the
blocks and that the investor should finance
at least 30% of PdVSAs participation.
Companies have argued that they cannot
accept these terms because of current
market conditions, but none so far has
announced a decision not to participate.
Most companies participating in pre-
vious heavy oil upgrading projects have
accepted Venezuelas more stringent terms,
with the exception of ExxonMobil and
ConocoPhillips. These continue with their
compensation claims at the World Banks
arbitration tribunal, the International Court
for the Settlement of Investment Disputes
Exploration in Venezuela continues
apace. InMay the government passeda law
allowing PdVSA to take over 39 oil service
companies, many of which are subsidiaries
of foreign companies. G
29 PETROLEUM REVIEW JUNE 2009
W
hat is clear is that central to
the solution is the establish-
ment of a competent Somali
government. The fact that there was an
almost complete cessation of piracy
during the rule of the Islamic Courts
Union in Somalia in the second half of
2006 lends strong support to this. By
comparison there has been a marked
reduction in reported attacks in recent
years in Indonesia and the Malacca
Straight. This was made possible by the
International Maritime Bureau and the
International Maritime Organisation,
but was also certainly assisted by the
fact that there are established govern-
ments in Indonesia, Malaysia and
Singapore. This is a significant differ-
ence to Somalia and it helps to illustrate
the benefit that internal stability could
have on the prevalence of piracy in and
around the country.
The rehabilitation of Somalia is neces-
sary to deal with the problem perma-
nently, since the current state of affairs
provides fertile ground for piracy to
thrive but there is also a need to
look at short- and medium-term solu-
tions. In the medium term it is
necessary, under the authority of the
UN, to increase the concentration of
foreign warships patrolling the area. In
the absence of a national coastguard
in Somalia it is essential that countries,
in conjunction with the Somali authori-
ties, carry out coordinated blockades,
ship recoveries, and hostage search
and rescues.
Concerted response
Indeed, there has been a concerted
response by the international commu-
nity. The UN Security Council has played
an important role, by passing resolu-
tions consented to by the Somali
government such as that passed in
June 2008, permitting states to enter
Somalia to use all necessary means to
repress acts of piracy and armed rob-
bery that are permitted under
international law. However, the fact
governments might have the legal
authority to take a heavy handed
approach does not necessarily make it a
good tactical option.
By arming crew members this could
increase the chances of the pirates
themselves using their firearms. The
inclusion of armed crew members
aboard vessels will also have a signifi-
cant impact on insurance contracts and
the cost of premium. The escalation of
hostilities has certainly had an effect on
the attitude of the pirates. Following
the killing in April by the US Navy of
three of the bandits responsible for the
kidnapping of Maersk Alabama Captain
Richard Phillips, attacks against US ves-
sels have increased exemplified by the
reprisal attack carried out on the Liberty
Sun. French military action, including
the killing and capturing of pirates fol-
lowing an attack on a French yacht in
September 2008, has provoked a similar
reaction in the past by Somali pirates.
Many Somali pirates believe that
they are merely protecting their coast-
line and that the ransoms represent
rightful compensation for the depletion
of fishing stocks. That there is dubious
merit in such justifications should not
detract from the fact that the criminals
will be willing to fight fire with fire.
Therefore, this ramping up of hostilities,
whilst having legal approval, is unlikely
to solve the underlying problem.
Similarly, the prospect of being put
on trial outside Somalia may equally
fail as a disincentive. The pirates have
too much to gain and the potential
for loss of life or prosecution is not
enough of a deterrent. Nonetheless,
such measures can provide some
assistance. Additionally, as proposed by
US Secretary of State Hilary Clinton in
the aftermath of the Alabama incident,
measures should be taken to freeze
the assets gained by piracy and pro-
secutions conducted against the per-
petrators. If successful these would help
suppress the industry.
These medium- and long-term solu-
tions represent the most likely path to
eradicating piracy in this area. But
whilst political and strategic measures
are crucial, short-term solutions, such
as ship security, are of paramount
importance during the heat of the crisis.
The use and development of non-lethal
self-defense mechanisms such as electric
fencing, sound cannons and high-pres-
sure fire hoses the latter in particular
having been used to good effect by
the crew of the Alabama must be
continued. The negotiation process
with pirates and, ultimately, how to
secure the safety of ships, cargoes and
crew, take priority when a ship is at
sea and a threat is imminent. The
psychological impact on the crew from
a hostage situation can be a very
serious, so the need for post-event care
for the victims and their families must
not be overlooked.
In order to bring an end to marine
piracy a multi-disciplinary approach is
required. There is a need to improve the
unstable domestic conditions that
enable piracy to thrive, increase mea-
sures that prevent piracy from taking
place, reduce the incentives on the
pirates to continue with the practice,
and finally, when piracy does occur, to
deal with its effects as efficiently and
sensitively as possible. G
The increased frequency in
incidences of marine piracy
attacks of late, particularly in
the Indian Ocean off the
coast of Somalia and in the
Gulf of Aden, have led to a
divergence of views of how
best to tackle the problem.
To find effective solutions we
need to keep one eye on the
underlying causes of piracy in
this region, writes Bernard
Wainstein, Solicitor at els
International Lawyers.
Preventing piracy
H I P P I N G Pi racy S
... continued from p20
T
he Arabian Sultanate of Omans two-
year long talks with Iran to jointly
develop LNG projects and establish a
company to market LNGexports have yet to
bear fruit. However, while talks are still
ongoing, Omanis developingits West Bukha
field (off the Musandam Peninsula at the
mouth of the Persian Gulf) in partnership
with the United Arab Emirates (UAE) Ras Al
Khaimah Petroleum (RAK). It is also rolling
out an enhanced oil recovery programme,
which includes a thermally assisted gas oil
gravity drainage (GOGD) facility, thought to
be the first of its kind in the world.
In 2007, the state-run Oman Oil
Company signed a memorandum of
understanding (MoU) with the National
Iranian Oil Company that allows for Iran
to export up to 1bn cm of LNG, and for
the two companies to develop gas fields,
including West Bukha and Hengam. The
agreement also proposed the establish-
ment of a joint Omani-Iranian company
to market LNG exports. Field develop-
ment was originally estimated at
$200mn, including the construction of a
100-km pipeline to the port of Sohar
(north-west of the capital Muscat) and
on to Sur (south-east of Muscat), slated
to be online by 2011.
There have been several rounds of
discussions with the Iranians about the
development of joint fields at Hengam
and West Bukha. However, we havent
reached any agreement, Ali Bin Thabit
Al Battashi, Director General of Planning
and Studies at Omans Ministry of Oil
and Gas, told Petroleum Review. Asked
about US sanctions on Iran, which cover
the sale of specialised equipment for
extracting LNG, and the potential impact
on the joint venture and the distribution
of LNG to the west the US in particular,
Al Battashi said it was not a concern.
The world is big enough to not have to
deal with the Americans, he added.
West Bukha plans
Although the joint project with the
Iranians is still under review, Al Battashi
said Oman has decided to develop the
West Bukha block with RAK. Production
started the first week of February and is
still under the commissioning process for
the platform and pipelines. We expect
the field can produce 10,000 b/d and
estimate reserves of some 50mn barrels
of very light crude oil and around 500bn
cf of gas, he noted.
The field is planned in two stages
phase one will be over three years, with
the fuel produced by a RAK gas pro-
cessing plant offshore the UAE. There
will be six platform slots and a 32-km
pipeline connecting the new platform
with the existing platform at Buqafi,
said Dr Zaid Bin Khamis Al Siyabi,
Director General of Oil and Gas E&P at
the Ministry. The government has
decided to construct a processing plant
onshore, near the Musandam area, with
phase two starting in 2012 but we are
still finalising the bidding.
The development will fall in line with
plans to boost production at Petroleum
Development Oman (PDO), the E&P
company that is 60% owned by the gov-
ernment and 40% by Shell, Total and the
Partex Oil and Gas Group of Panama.
We have a strategic view and are imple-
menting that in terms of b/d, the target
is to plateau at 550,000 b/d for PDO and
for all the projects to achieve this pro-
duction and have some cushion as
A number of oil and gas
fields are quickly being
developed in the Middle
Eastern country of Oman, as
Paul Cochrane, in the capital
Muscat, reports.
E&P development in Oman
I D D L E E A S T Oman
30 PETROLEUM REVIEW JUNE 2009
M
Oman LNG headquarters, Muscat, Oman
Source: Paul Cochrane
A 100-km LNG pipeline is to be constructed from Sohar to Sur on the Eastern coast,
Oman Source: Paul Cochrane
well, said Al Siyabi. Production at that
plateau is to continue for the next 10
years, he added.
Investment in technology
However, to achieve this plateau, Oman
will have to bring difficult fields
onstream and heavily invest in new
steam, gas and polymer technology. To
develop the onshore Marmul field in the
south-east of the country, Oman is
piloting a polymer injection technology
that is to be brought onstream this year,
while at the Harweel field in the same
region, a municipal gas injection system
is being implemented to enhance oil
flow.
The massive onshore Mukhaizna oil
field in central Oman is another difficult
field to develop, according to Al Siyabi,
requiring steam injection to enhance
recovery. Production at Mukhaizna is
expected to reach 85,000 b/d by year-
end, up from the current 46,000 b/d.
We will ramp up to that level and rise
to 150,000 b/d by 2012, said Al Siyabi.
One of the biggest projects underway
is the $1.4bn Qarn Alam project in cen-
tral Oman, which is expected to come
onstream by 2010. We will enhance
heavy oil production through the use
of carbonated water, and it will be
the worlds first thermally assisted
GOGD facility of this size in a fractured
carbonate reservoir, said Al Siyabi.
However, with oil prices lower than last
year and Omans budget based on
$45/b, projects are dependent on oil
prices staying around that mark. If oil
prices go down to $30/b we would
have to revisit projects, he noted. That
said, the recently reduced costs of raw
materials which had trebled in price
over the past five years in the Middle
East could benefit the roll out of
projects. G
31 PETROLEUM REVIEW JUNE 2009
Qalhat LNG plant near Sur, Oman
Source: Shell
www.energyinst.org
EI Autumn Lunch and Executive Briefing
Tuesday 13 October 2009, Institute of Directors, London
Autumn Lunch Guest Honour and Speaker
Peter Voser, CFO and CEO Designate,
Royal Dutch Shell
We are delighted to announce Peter Voser as our Guest of
Honour and speaker at our forthcoming EI Autumn Lunch in
what will be his first speaking engagement for the Energy
Institute after becoming CEO of Royal Dutch Shell.
To register your interest or for further information please contact Gemma Wilkinson, Events Officer, Energy Institute,
61 New Cavendish Street, London, W1G 7AR t: +44 (0)20 7467 7174 e: gwilkinson@energyinst.org
12.15 for 13.00 14.45
EI Executive Briefing: Managing change in an uncertain world
Tuesday 13 October 2009, Institute of Directors, London
08.30 - 12.00
The briefing will consider the opportunities and challenges presented by current global financial
insecurity. Speakers will deliberate the issues of oil price fluctuations, the future for exploration
and its effect on production, financing projects as well as the implications of peak oil.
A
T
he issue of decommissioning plat-
forms is an increasingly pressing
one. According to consultant Wood
Mackenzie up to half of the North Seas
600 installations first installed nearly 40
years ago are scheduled for decommis-
sioning by 2021, while more than 4,000
are scheduled for removal worldwide. UK
government estimates put the cost of
removal at 20bn over the next 25 years
in the North Sea alone.
Of the 470 offshore installations
currently present in the UK sector of
the North Sea, Oil and Gas UK estimates
that 10% are floating structures, 30%
are subsea, 50% are small steel structures
and 10% are large steel or concrete
facilities.
When it comes to decommissioning in
the North Sea, newtechnology will play a
key role as there has never been a major
programme of platform dismantling in
the region. The segment is in its infancy,
says Roy Aspden, who heads up decom-
missioning for Europe and West Africa
for energy services provider AMEC. We
are developing the knowledge and tech-
nology if you lined up 100 oil and gas
engineers, very few of them would have
experience of decommissioning.
Current thinking identifies three ways
in which platforms are dismantled
single lift operations, which are generally
practical for smaller installations; reverse
installation, where a platform erected in
modular form is dismantled the same
way; and the piece-small approach,
whereby a set of excavators and a demo-
lition team applies positional logistics
operations to dismantle the facility piece
by piece.
Over the past decade the classic
method has been reverse installation,
explains Aspden. Crane barges are
effective, but they are a 30-year-old tech-
nology. New thinking allows us to
remove the topsides in a single unit
such as the twin marine lifter concept
developed by SeaMetric thats a
quantum leap. The twin lifter involves
two vessels on either side of the platform
that lift it onto a transport vessel,
reducing the time involved to an order
of weeks, according to Aspden.
One of the main challenges is the
different types and designs of structure,
which mean that there is no single tried
and tested method for removal. Most of
the structures were designed to suit
particular development and field condi-
tions. Reverse engineering and removal
of whole modules to shore is probably
the most common or traditional ap-
proach offshore, but it depends on
the nature of the job it depends on
the platform, its age, how it was as-
sembled and its structural integrity,
says James Johnson, Decommissioning
Manager for energy logistics specialist
PetersonSBS and Shetland Decommis-
sioning. Which particular approach is
used is determined by the platform
operator or removal contractor.
New technology
Recent technological developments have
focused on five areas. Alternative
removal methods, looking to develop
new vessels attempting to remove top-
sides in one go or in the floating removal
of jackets; underwater cutting, where
there have been advances through the
use of abrasive water-jets (which use
high pressure water and gritty materials,
and are faster than earlier cutters),
diamond wire cutters and shaped explo-
sive charges; drill cuttings removal;
lifting, back-loading and sea-fastening
methods; and well abandonment
without platforms.
Companies such as AMEC are drawing
on their work in the nuclear industry, par-
ticularly in relation to handling
hazardous materials, while other
research is developing diverless opera-
tions underwater.
People have had a lot of technical
challenges to overcome, and ways of
decommissioning have improved, notes
Paul Dymond, Operations Manager for
Oil and Gas UK. Theres been a lot of
development of tools and capabilities.
Despite such advances, hazardous
materials continue to be treated in a
traditional, safety-first manner. In our
experience inventories are generally
well prepared, but you have to treat
the situation as if you have not got an
inventory, says Johnson. During the
tendering phase, estimating and evalu-
ating the items, and the sheer volume
of hazardous materials, such as asbestos,
can be difficult.
Under current regulatory require-
ments, offshore structures must be
completely removed from their marine
sites and brought to shore for re-use,
recycling or other disposal means. Under
Platform dismantling
poses the oil and gas
industry immense legacy
difficulties and costs,
write Mark Rowe and
Suzanne Koelega.
Counting the cost
of dismantling
E C O M M I S S I O N I N G E&P
32 PETROLEUM REVIEW JUNE 2009
D
Wellhead of abandoned North Sea platform being removed and ferried to land for
recycling
Source: Oil and Gas UK
some platforms there are large mounds
of drill cuttings, deposited when the
wells were drilled, which are also the
subject of new thinking. Some piles
weigh over 10,000 tonnes, are up to 10
metres high and extend hundreds of
metres from the platform which they
originate from. Options include removal
of the cuttings through down-hole injec-
tion, or via ship-to-shore transfer for
processing or disposal; covering the pile
with a protective layer and allowing
the cuttings to biodegrade in situ; or
introducing bacteria to accelerate biore-
mediation of the cuttings.
As for costings, any offshore work is
generally more expensive than removing
the platform to onshore floating plat-
forms. Support structures for temporary
staff dismantling a platform can cost
hundreds of thousands of pounds per
day. Pricing the decommissioning of a
platform is like asking for the average
price of a car, comments Dymond. The
large structures can be the equivalent of
a Rolls Royce you are looking at hun-
dreds of millions of pounds; at the
bottom end, the small subsea wells may
cost 1mn to 2mn. In between there are
structures that might come in at 10mn.
The 38 largest structures in the North Sea
have been priced for decommissioning
at more than 100mn each. All costs are
met by the licence holder.
In order to drive down overheads, the
industry seeks to share new technology.
Sharing knowledge in the industry
is key, continues Dymond. Decom-
missioning is not really competitive. Its a
non-production cost, so everybody bene-
fits by reducing those costs.
The problem is much wider than the
North Sea. For example, up to 1,000
structures have been removed from the
Gulf of Mexico to date although those
platforms typically stood in waters up to
50 metres deep, whereas those in the
North Sea can be up to 200 metres deep.
There are also up to 60 oil platforms in
Australian waters that are due to be
decommissioned in the next decade.
Most are in the Bass Strait between
Tasmania and mainland Australia. The
future of Australias ageing oil platforms
is due to be scrutinised, with the
countrys federal Department of
Industry, Tourism and Resources to
release a discussion paper in the next
two months. Professor David Booth, of
the Sydney Institute of Marine Science
and University of Technology, Sydney,
has suggested that the shells of oil
platforms could become hubs for
marine-based businesses such as coral
harvesting for aquariums.
Recessionary impact
However, the global recession appears to
have put paid to one technological inno-
vation to clean up oil platform scrapping
at least for the time being. This initia-
tive was called the Heavy Lifter and
would have been the worlds largest
heavy transport lift platform designed to
dismantle and transport decommis-
sioned offshore structures. Aprototype is
now being taken to pieces. Construction
work stopped in June 2008, shortly
before the Heavy Lifters Norwegian
owner MPU Offshore Lift filed for bank-
ruptcy in July 2008.
The U-shaped hull structure, mea-
suring 87 metres in length and 110
metres in width, had already been com-
pleted, and one of the four 25-metre
towers was finished, when the project
based at a dry dock in Rotterdam, the
Netherlands was halted. The second
tower was under construction, according
to a spokesperson of Keppel Verolme, a
wholly owned subsidiary of Keppel
Offshore and Marine, headquartered
in Singapore.
The semi-submersible Heavy Lifter was
designed with a lifting capacity of 15,000
tonnes for topsides or 28,000 tonnes for
jackets. The structure would have
allowed the removal of the complete
topside and jacket of offshore oil and
gas platforms, both in a single lift. The
Heavy Lifter was a unique project in that
it would have been able to lift, transport,
dismantle and also install the biggest
and heaviest offshore constructions. The
idea was that because of its effective-
ness, it would have considerably
shortened the dismantling process com-
pared to conventional decommissioning
methods. The Heavy Lifter distinguished
itself from other removal vessel designs
by its use of special lightweight concrete
technology, which gave the structure
greater robustness and less motion on
the sea.
North Sea decommissioning was one
of the original considerations of MPU to
construct the Heavy Lifter, stated MPUs
Managing Director Kolbjrn Hyland in
April 2007. At that time he said that the
market for offshore lifting and installa-
tions was very promising, with more
platforms retiring over the years.
The ill-fated single lift crane devel-
oped in Rotterdam could yet work for
the industry. Some installations were put
up in a single lift operation, so the prin-
ciple of lifting a structure weighing up to
30,000 tonnes has been established.
However, as Dymond notes: Heavy lift
contractors will tell you that their
approach is the only way forward, but it
isnt. Its one option. Heavy lifts are pop-
ular in construction because it helps keep
offshore costs down, but those dynamics
dont apply in decommissioning.
Partly driven by the commercial
problems faced by operators such as
MPU Offshore Lift, UK regulations on
insolvency have been revised by the
2008 Energy Act. In practice, this
means that creditors cannot get hold of
money put aside by the industry into
its Decommissioning Security Agreement
money that is ring-fenced for decom-
missioning.
Demand [for decommissioning ser-
vices] is not changing dramatically,
although we saw an increase last year,
concludes Johnson. But the industry is as
affected as any other market by the cur-
rent economic situation and were now
seeing both small and large programmes
being deferred. G
33 PETROLEUM REVIEW JUNE 2009
SeaMetrics twinlifter can remove the jackets of decommissioned oil and gas platforms (left); close-up detail of removal of topside
of decommissioned oil platform (right) Source: SeaMetric
A
mere 12 months ago, the capital
estimate for new pipelines in
Canada in the next five years was
well over C$24bn ($20.2bn). Some promi-
nent projects included:
G
Over C$2bn in new regional pipelines
and expansions to add 1mn b/d of
capacity to carry bitumen and refined
crude south from Fort McMurray to
the main liquids transportation hub in
Edmonton.
G
At least C$6bn earmarked to expand
the existing TransMountain crude
pipeline running from Edmonton to
Vancouver, and to build the Greenfield
Gateway project heading west from
Edmonton to Kitimat, British
Columbia, a deepwater port on the
Pacific coast.
G
The Mackenzie gas project, a C$16bn
greenfield pipeline that would carry
up to 1.9bn cf/d of stranded natural
gas from the Arctic to the southern
markets.
Now, however, a heavy pall has been
cast over the sector due to a combination
of falling commodity prices, decreasing
demand, the drying up of the credit
market and overall uncertainty in the
oil and gas sector. We are very busy
right now completing work that has
already been put out there, says Barry
Brown, Executive Director of the Pipe
Line Contractors Association of Canada,
which represents the majority of the
largest unionised contractors in the
country. But we have no idea what will
happen after the end of 2009; its a
huge question mark.
Hand me that sackcloth
A significant amount of Canadas
pipeline expansion in recent years has
been driven by the oil sands. Over 170bn
barrels of bitumen sit beneath the
muskeg (an acidic soil type common in
Arctic and boreal areas) in north-east
Alberta, near Fort McMurray. Oil compa-
nies have invested billions of dollars in
mining and in-situ projects in order to
boost current production to approxi-
mately 1.2mn b/d. Since 2005, however,
capital costs and royalties have risen and
new greenhouse gas emission legislation
has come into effect. But the most impor-
tant aspect is the precipitous drop in
crude price from $147/b in mid-2008, to
below $50/b in 2009.
As a result, oil sands operators are
scaling back. Total has suspended the
in-situ portion of its 100,000 b/d Joslyn
project; the SAGD (steam assisted gravity
drainage) pilot project that was aiming
for 10,000 b/d did not reach potential
and has been mothballed. Nexen and
OPTI, which officially launched their
70,000 b/d Long Lake in-situ project in
October, will hold off the decision on a
70,000 b/d planned expansion until later
this year. Suncor is scaling down its
Voyageur expansion; whereas it once
expected to spend C$9bn annually on
its capital budget until 2012, the figure
has been cut to C$3bn/y. Plans for several
upgraders (which turn bitumen into
sweet synthetic crude) have been sus-
pended, including BA Energys C$2.9bn,
160,000 b/d Heartland upgrader; Totals
C$8bn, 295,000 b/d Synenco upgrade;
and Petro-Canadas Fort Hills upgrader.
In all, over C$30bn of oil sands develop-
ment has been taken off the books in
the last few months. The Canadian
Association of Petroleum Producers
has reduced its 2020 outlook for oil
sands production from 4.6mn b/d to
3.3mn b/d.
Naturally, crude pipeline operators,
which have been in expansion mode
building major lines to carry the oil sands
crude to market are wary. Currently,
the building and expansion of regional
pipelines designed to carry output
from Fort McMurray to Edmonton are
reaching completion. Inter Pipelines
C$1.8bn expansion of the Corridor
pipeline system, which currently trans-
ports 300,000 b/d of diluted bitumen
from the Athabasca project, is almost
finished the expansion adding
165,000 b/d of capacity when completed
in 2010. Enbridges new Waupisoo line
is now onstream. The 30-inch diameter,
380-km pipeline will transport blended
bitumen crude and diluent from Fort
McMurray to Edmonton. The C$600mn
pipeline will have an initial capacity of
350,000 b/d, with a maximum capacity
of 600,000 b/d.
However, the C$2bn pipeline that
was expected to carry bitumen from
Petro-Canadas Fort Hills mining and
in-situ project is unlikely to be built. In
March, Suncor acquired Petro-Canada in
an C$18bn friendly merger, and any
production emanating from Fort Hills
would likely be carried in pipelines that
are already in existence. The Fort Hills
[pipe]line was huge, says Brown. We
were looking at 12 to 15 spreads running
from late-2010 to 2012. [A spread is a
standard measurement of new pipeline
construction, consisting of roughly 500
workers and equipment assigned to
100-mile sections of right of way (ROW)].
Our membership is at around 5,000
workers right now. They are used to
layoffs. But if the layoffs become pro-
longed, like they did in 2001, then they
start to find work in alternative indus-
The Canadian pipeline
sector faces uncertain
times ahead, writes
Gordon Cope.
Feast or famine?
A N A D A Pi pel i nes
34 PETROLEUM REVIEW JUNE 2009
C
The Athabasca oil sands project driving pipeline expansion in Canada
Source: Shell
tries. You could lose 30% of your trained
workforce, Brown says.
Riches still abound
Muchis still beingdone. FromEdmonton,
oil sands crude moves to market in
several directions. To the west, Kinder
Morgan Canadas TransMountain system,
which transports 260,000 b/d of crude
from Edmonton to Vancouver, is nearing
completion of a 40,000 b/d expansion.
Enbridge, with an eye to dirty oil con-
cerns south of the border, has put its
C$4bn Gateway project back on the
front burner. The 1,200-km greenfield
pipeline would carry 400,000 b/d west
to the deepwater port at Kitimat, and
to markets in Asia when completed.
Enbridge has formally announced a
two-year process that will see consulta-
tion with communities and Aboriginal
nations along the proposed route,
and submission to the National Energy
Board and the Canadian Environmental
Assessment Agency for regulatory
approval. Enbridge is keeping the via-
bility of the project open by seeking
timely regulatory approval so that
they can match its construction to
supply demands, says Brenda Kenny,
President of the Canadian Energy
Pipeline Association.
To the south, many refineries in the US
Midwest are making deals with oil sands
producers to convert to heavier sour
crude feedstocks. Construction is well
underway on the expansion of
Enbridges Southern Access system to
Superior, Wisconsin, and the company is
adding a new 400,000 b/d pipeline to
Illinois. Enbridge has also launched the
Alberta Clipper, an additional 36-inch
crude oil pipeline from Alberta to
Superior, Wisconsin, to increase capacity
of the Enbridge system by 450,000 b/d
(see Figure 1). TransCanada has also
begun its C$5.2bn Keystone project,
which will convert part of its under-
utilised gas mainline to crude. The
3,500-kmpipeline will carry upto590,000
b/d from Hardisty, Alberta, to a major
hub in Cushing, Oklahoma.
Canadas natural gas pipeline network
is also expanding into north-east British
Columbia and north-west Alberta. For
the last several years, the remote,
forested region has been home to an
immense shale gas play. Geologists esti-
mate the Horn River Muskwa and the
Montney shale formations hold over
600tn cf of gas in place. Using sophisti-
cated horizontal drilling and fracturing
techniques, petroleum companies
boosted gas production from the region
to around 600mn cf/d at the end of 2008.
Over C$2bn in drilling in 2009 could
increase production to 1.8bn cf/d by
2010. To meet that output, Spectra
Energy is expanding its natural gas pipe-
line network capacity in the Fort Nelson
region from 900mn cf/d, to between
1.5bn cf/d and 1.8bn cf/d by 2010.
Back to rags
Look beyond the current major projects,
however, and prospects look dim. Only a
year ago, several proposals were being
floated to extend the delivery of oil sands
output from the current Oklahoma
region terminal into the Gulf coast,
where over 7mn b/d of refinery capacity
nestles. Thanks to lower oil sands
production expectations, however,
Enbridge and ExxonMobil were obliged
to shelve plans for their Texas Access
Pipeline, a 1,236-km, 400,000 b/d pipeline
fromPatoka, Illinois, to Nederland, Texas.
Even Enbridges alternative, phased
approach, called Trailbreaker, in which it
proposed to reverse an Ontario/Quebec
crude pipeline and send 200,000 b/d east
to Maine, where it can be shipped to the
Gulf Coast by tanker, has been scrapped.
In terms of the next two years, the
industry is adjusting to match up to com-
modity prices and the recession, says
Kenny. These factors flow into plans and
capital requirements. They are always
adjusting to conditions.
No tale of Canadian pipeline woes
would be complete without mentioning
the Mackenzie gas project. Since 2003,
Imperial Oil, Shell, ConocoPhillips,
ExxonMobil and the Aboriginal Pipeline
Group have struggled valiantly to build a
1,200-km pipeline to transport up to
1.9bn cf/d from the Arctics Mackenzie
Delta south to Alberta. Since 2007, the
project has been confined to a regulatory
35 PETROLEUM REVIEW JUNE 2009
Figure 1: The proposed Alberta Clipper crude oil pipline is expected to increase Enbridges
capacity by 450,000 b/d Source: Enbridge
Spectra Energy is expanding its natural gas pipeline network capacity
Source: Spectra Energy Corporation
and socio-economic review, with no deci-
sion expected until the end of 2009.
During the intervening period, the price
tag has more than doubled, to C$16bn.
We are disappointed that the delibera-
tions are taking an extremely long length
of time, says Kenny. Were now looking
at five years. You need to raise a lot of
capital for a project this size, and the
uncertainty makes it very difficult. This is
a real basinopener. There are a lot of jobs
and investment opportunities. To think it
could be thrown off the rails by indeci-
sion is a real shame.
A silver lining
No cycle stays down forever, as bad as
the near future may look from here, it
may not be as parlous the closer one gets.
For starters, conventional gas (that is,
from the old sort of permeable reser-
voirs) still makes up the bulk of
production in North America, and it is
shrinking at the rate of 20% annually.
Even the boom in shale gas cannot
reverse that trend for long, and the
overhang in production could begin to
deplete as early as next year, once
again putting the Mackenzie gas project
(and the Alaska natural gas pipeline)
back on track. Also, traditional Gulf Coast
crude suppliers, such as Mexico and
Venezuela, are having production prob-
lems of their own which is limiting the
amount they can export. Refiners in
Texas and Louisiana may soon be beg-
ging for express pipelines from Alberta
full of reliable oil.
Credit accessibility also remains good
among the larger pipeliners. Enbridge,
with over C$12bn in projects on the
drawing boards, has been able to finance
the Southern Access and Alberta Clipper
through lines of credit, and has publicly
stated that it sees no difficulties in com-
pleting the projects. TransCanada
successfully issued over C$1bn of stock in
2008 to cover acquisitions and construc-
tion, and will issue a further C$1bn to
finance its Keystone project. Anybody
who has needed credit has been able to
get it so far, says Kenny.
Labour and materials costs are also
falling. Enbridge, for instance, recently
announced that the price it pays for steel
has dropped over 35%, resulting in sav-
ings to its Alberta Clipper project.
According to the Construction Owners
Association of Alberta, construction costs
within the oil and gas sector could fall by
as much as 65% due to the global reces-
sion and the cancellation of competing
projects.
Finally, while the Energy Information
Administration (EIA) predicts that crude
demand in North America may fall as
much as 1mn b/d in 2009, demand is still
growing in Asia. Even if US consumers
abandon their road behemoths for elec-
tric carts, there are billions of citizens in
China and India aspiring to the likes of
the Tata Nano. Major projects such as the
TransMountain expansion and the
Gateway pipeline could quickly advance
to the construction stage.
In conclusion, while the current inter-
national malaise may lead to short-term
pain for the Canadian pipeline sector, the
longer term looks bright. Fifteen years
out, the demand for new pipeline
capacity is still solid, says Kenny. Its close
to C$40bn over the next 15 years for
south of the 60th parallel, and up to
C$80bn when you include Mackenzie
and Alaska in the Arctic. The pipeline
industry is long term; our projects create
wealth and opportunities for genera-
tions. Im optimistic the industry will
come through and play a vital role in the
needs of Canadians. G
A N A D A Pi pel i nes
36 PETROLEUM REVIEW JUNE 2009
C
TEAMWORK SKI L L I NGE NUI TY COMMI TME NT
The BG Energy Challenge UK takes place from 9-11 July. A mix of physical, mental and strategic stages
over two days, the event will challenge you to the best of your ability whilst raising money for charity.
To find out more about the industry's largest networking and team building event and to keep in touch
with all the action from Bangor, log on to www.bg-energychallenge.com/uk
Fancy being a part of it? Venue and dates for 2010 will be announced next month!
Are you up for the challenge?
S
ome recent high-profile enforce-
ment cases in the energy sector
include:
G
BPs record $303mn settlement with a
number of agencies, including the
CFTC (Commodities Futures Trading
Commission), for a range of violations.
Not all of the behaviour involved
energy trading, but the settlement
covered an alleged scheme to try to
control the market in TET propane.*
G
Marathon Oils settlement of CFTC
allegations that it tried to manipulate
West Texas Intermediate (WTI) crude
futures by gearing trades to drive
down the Platts market assessment, in
order to reduce the price Marathon
would have to pay to fill existing phys-
ical oil orders.
G
The simultaneous investigation by the
CFTC and FERC (Federal Energy
Regulatory Commission) of the col-
lapsed hedge fund Amaranths
trading in gas futures and the over-
the-counter (OTC) natural gas swaps
market. The enforcement action,
while not yet completed, has taught
the important lesson that in todays
environment regulators with over-
lapping jurisdiction but materially
different standards may simultane-
ously engage in related energy
trading investigations, with poten-
tially significant results for the
investigated entity.
G
The CFTC and FERCs investigation of
Energy Trading Partners for late day
trading in physical natural gas in the
Houston Ship Channel for the alleged
purpose of influencing the value of its
short positions in the ICE electronic
futures market.
Crowded field
Traditionally, federal oversight of
energy market abuse was divided
between the exclusive jurisdiction of
the CFTC over trading in on-exchange
futures contracts in any energy com-
modity and certain related markets and
FERCs jurisdiction over certain aspects
of the physical markets for natural gas
and power. However, FERCs jurisdiction
did not extend to regulating market
manipulation in the physical market
until the Energy Policy Act of 2005.
The new Act, and particularly FERCs
implementing regulations, blurred the
lines between the roles of the CFTC and
FERC, by giving the latter expanded
jurisdiction to investigate and prevent
market abuse that occurs in connec-
tion with the purchase or sale of
natural gas or electricity terminology
broad enough, FERC has asserted, that
the regulation permits it to investigate
and enjoin abuses in any market that
has a price-determinative effect on the
physical gas and electricity markets that
are FERCs actual responsibility.
More recently, the 2007 Energy
Independence and Security Act gave
FERC jurisdiction to prevent market
manipulation in the previously unregu-
lated petroleum industry. The FTCs
(Federal Trade Commission) draft imple-
mentation rules indicate that it intends
to take an expansive approach to those
powers similar to FERCs.
Because there has not been a corre-
sponding increase in the number of
areas on which regulatory attention can
be focused, all three agencies, to a
greater or lesser extent, seek to curb
market abuse by concentrating on the
same types of activity. The difference
lies in the elements they are looking for
and the scope of their powers. As a
result, market participants face an
increased risk that the same activity
may result in two, or even three, inves-
tigations, each measured by different
standards.
Different standards
The statutory definitions and regulatory
guidance that frame each agencys
market abuse jurisdiction differ in ways
which become more important as their
application overlaps.
The CFTCs market abuse regulations
concentrate on acts that are inherently
capable of causing an artificial price and,
to be guilty, traders must meet four
requirements including that they
intended to influence prices with the
result that an artificial price actually
occurred (except in cases of attempted
manipulation). This is a high standard
the CFTC must show, by a preponder-
ance of the evidence, that the trader
actually intended to create the artificial
price.
By comparison, the FERC manipula-
tion violation regulation merely requires
a trader to be reckless as to whether an
artificial price may occur. It does not
require actual harm to have affected the
market as a result of the manipulation.
The recklessness standard is substantially
lower than the CFTCs requirement
that a trader must have purpose-
fully intended to distort the price
recklessness merely requires FERC to
demonstrate that the trader displayed a
level of disregard as to whether an arti-
ficial price would arise as a consequence
of the trading.
The two agencies show a similar diver-
gence of approach to wash trades,
where a trader executes opposing trades
in the same or similar commodities at
about the same time and price. The CFTC
prohibits wash trades generally as a
form of market abuse, irrespective of
whether the trader intended to create a
misleading impression of depth or liq-
uidity or otherwise to manipulate prices.
By contrast, FERC does not prohibit wash
trades unless they are executed for an
improper purpose. Given the overlap-
ping oversight of the agencies, a firm
could easily fall foul of the CFTCs regu-
lations for trading patterns that would
be permitted by FERC.
As a result of FERCs new powers, in
2007, Amaranth a hedge fund that col-
lapsed under the weight of giant
natural gas trading losses was investi-
US energy regulators have been provided with new
enforcement powers and heightened sanctioning
authority to police critical energy markets that Congress
believes to be vulnerable to abuse and manipulation. The
regulators are responding by vigorously investigating
pricing irregularities and aggressively prosecuting alleged
wrongdoing. This article by David Yeres, Partner at
Clifford Chance, and Gareth Old, an Associate, provides
an overview of the types of conduct which have been
prosecuted, the agencies involved, the scope of their
powers and the types of activity on which they focus.
Traders under scrutiny
N E R G Y T R A D I N G Regul ati on
38 PETROLEUM REVIEW JUNE 2009
E
gated simultaneously by both the CFTC
and FERC for the same allegedly manip-
ulative activity in the NYMEX gas futures
market and the OTC natural gas swaps
market. The CFTCs jurisdiction was
founded on the basis that the activity in
question took place in a regulated
futures market. FERC, however, argued
that it too had jurisdiction, on the basis
that, while neither of the markets in
which the abuse allegedly took place
was regulated by FERC, the activities
affected wholesale natural gas prices,
and that is a FERC regulated market. As
a result, Amaranth found itself being
held to two different standards by two
agencies, where hitherto it might rea-
sonably have been expected to be
answerable to only the CFTC.
The FTCs market manipulation regu-
lations have yet to take effect, but the
shape is fairly clear. In April 2009, fol-
lowing a period of public comment, the
FTC published a revised draft rule for
preventing market manipulation in the
wholesale petroleum market. In many
ways the draft rule mirrors FERCs rule
covering the natural gas and electricity
markets, and contains the same expan-
sive scope. It prohibits the use of any
manipulative device in connection with
the purchase or sale of crude oil gasoline
or petroleum distillates at wholesale.
The rule focuses particularly on market
participants obligation to give accurate
pricing and volume information. It not
only prohibits untrue statements, but
also the intentional omission of material
facts that, in the circumstances, render
statements the market participant actu-
ally makes misleading, as long as the
omission distorts or tends to distort
market conditions. This rule is similar in
scope to long-standing rules for disclo-
sure in the securities markets that have
proven to have very broad scope.
The ultimate effect on the petroleum
market remains to be seen, but petro-
leumtraders, as well as traders in related
futures contracts, will need to be as
aware of the FTCs jurisdiction as gas and
electricity traders must be of FERCs.
Suspect activities
Broadly, market manipulation investiga-
tions follow the same pattern,
regardless of which agency is involved.
First, an anomalous price is observed
most commonly a spike in a particular
market, but sometimes aberrant move-
ments in two correlated markets. Then,
the agency starts looking for evidence
that the observed price was artificially
created. There are three general ways in
which that could happen:
G
Abuse of a dominant market position
to control the supply of the under-
lying commodity at a critical time. The
most prominent recent example of
this is BPs settlement with the CFTC
for using its market position to corner
the market in TET propane and
thereby influence the market price.
Even though the price changes were
short-lived and BP may in fact have
suffered a loss, taped records of the
traders calls provided the CFTC with
evidence that they intended to test
their ability to create artificial prices.
G
By the use of false information, typi-
cally relating to either pricing or
trading volumes, in order to give
incorrect price signals to other market
participants. This often takes the form
of reporting fictitious trade data, for
example to an index publisher, or
alternatively of executing wash trades
to give the impression of market
depth where in fact none exists. A
common regulatory attitude of all
three agencies is that price trans-
parency is critical, and false reporting
is probably the most commonly prose-
cuted form of market abuse.
G
By gaming the markets, through the
use of orchestrated transactions, in
one or several markets, to influence
the price of a target commodity or
contract. A common example is
banging the market, or executing
repeated transactions in the same
direction (ie all sell, or all buy) during
the period prior to the market close,
to change the price of some other
contract whose pricing is based on the
closing price or on average reported
trade prices. Recent alleged violations
include the Marathon and Amaranth
cases referred to above, and the
CFTCs enforcement action against
Optiver for alleged manipulation of
NYMEX oil and gas contracts daily set-
tlement prices by placing strategic
orders near the end of the trading ses-
sion. The CFTC and FERC are both
bringing actions against Energy
Trading Partners for similar behaviour
by selling physical natural gas at the
Houston Ship Channel hub at below-
market prices to increase the value of
short financial positions in the ICE
futures market whose prices are cor-
related to prices in the physical
market.
These cases teach that no matter how
many regulators get involved in policing
market manipulation in the energy
sector, they all look for the same behav-
iour and indicators of abuse. Many, if
not all, of the potential regulatory vul-
nerabilities of an energy trading house
could be met by a compliance regime
that is designed around a pro-active
awareness of the suspect trading pat-
terns and the regulatory standards of
the various agencies claiming market
jurisdiction, as well as regular training
for traders and compliance personnel
alike.
In addition, there is a clear need for
prompt, clear and timely record-keeping
and situational awareness of the risk
that a coordinated trading strategy may
be scrutinised by regulators to deter-
mine the legitimacy of the underlying
business purpose.
The nuance of the differences
between the various agencies rules cer-
tainly creates additional exposure, but a
well-designed compliance programme
will be a strong first step to avoiding any
market abuse charge regardless which
agency has jurisdiction. G
*The TET propane market refers to
propane that is deliverable at the
TEPPCO storage facility in Mont Belvieu,
Texas, or anywhere within the TEPPCO
pipeline system. The TEPPCO pipeline
runs from Mont Belvieu, Texas, through
Illinois, and into Ohio, Pennsylvania and
New York. The TEPPCO pipeline is the
only pipeline that transports propane
fromMont Belvieu to the north-east and
mid-west regions of the US.
39 PETROLEUM REVIEW JUNE 2009
FERC, the CFTC and the FTC all, to a greater or lesser
extent, seek to curb market abuse by concentrating
on the same types of activity. The difference lies in
the elements they are looking for and the scope of
their powers. As a result, market participants face an
increased risk that the same activity may result in
two, or even three, investigations, each measured by
different standards.
B
ecause different parts of this lifecycle
address information needs at dif-
ferent times, it is essential to ensure
that the data represented within the ETRM
system is well connected to the realities of
price and credit risk management, trading
andoperations, accountingandlegal func-
tions. This article examines how a
multi-function ETRM system is essential to
integrate information between the four
lenses for viewing the hydrocarbon mole-
cule in any given trading position:
G
The physical view.
G
The legal view.
G
The financial view.
G
The logical view that ties the other
elements together.
The physical view
From a reserve or capacity number, a
physical position is initiated when it
becomes a forecast or is traded into a
real position. Tracking the real move-
ment and transformation of the
molecule starts at this point in the
ETRM system. Even before then, how-
ever, there are valuation needs,
accounting needs, planning needs and
scheduling needs that help trading
functions set the levels of volume, price
and capital that will guide or limit
trading activities. Whether for a pro-
ducer, processor or consumer of the
hydrocarbon, or a trader in between,
the need to track the real state, loca-
tion, quality, quantity and plan of a
movement is universal for the energy
industrys physical operations. Physical
forecasts and scheduling, logistics,
managing production at refineries or
other processing points, managing
blending and inventory positions all
these become the baseline functions
for an ETRM to handle flexibly to meet
the needs of trading organisations.
While considering the physical mole-
cule, it is necessary to value it both in
terms of replacement value and in
terms of the transformed value to react
to opportunity. The same molecule of
crude that represents a replacement
value in terms of delivery risk simulta-
neously represents a transformed value
into its possible yields. A physical
volume also represents a series of costs
to unlock the value that it represents. It
becomes a challenge to accurately rep-
resent these views of the same
molecule without losing any of the
details that change between the views.
Tackling the operational risk in the
mismatch of the timing of information
in the ETRM system and the real world
is a challenge that, if effectively
addressed, leads to much greater confi-
dence to handle the position to its
liquidation. Having the ETRM provide
details on market position and daily
inventory position helps both the opti-
misation of market opportunity and
the effective hedging of the balance
exposure, and can make this a signifi-
cantly smoother process. Only the most
sophisticated ETRM systems can handle
the role of correlating management of
the oil asset at the trading, shipment
and refinery levels.
The key is the allocation of physical
data to the financial portfolios relevant
to the primary parts of the transac-
tional lifecycle. This requires that the
operational and performance indica-
tors of the inputs (purchases and
inventories), the operation costs and
leverage opportunities, and the trans-
formed outputs (marketing and
trading of refined products) need to be
captured and managed effectively.
Doing this takes an accurate attribu-
tion of the profit and loss (P&L)
changes at all three stages of opera-
tion. Breaking out the performance
into groups inputs, operations and
outputs allows comparative analysis
of the individual pieces versus their
own benchmarks. Managing positions
by the spread to their yields by asset
scenario gives greater visibility to both
the trading groups and the operations
versus the market spread. It also high-
lights favourable scenarios given
current market conditions, supporting
faster reaction to changes in market
conditions. An ETRM system that
reflects the real costs associated with
the hydrocarbon molecule and realisti-
cally manipulates the yields and
inventory levels supports better deci-
sions, both on the trading floor and in
operations, by becoming the glue inte-
grating the two.
The legal view
The movement of the hydrocarbon
molecule through its lifecycle creates
various legal exposures. Equity splits,
royalties in cash or kind, ownership,
operational responsibility and title start
the existence of the legal molecule. As
it progresses through its lifecycle, con-
tract concerns become the next
challenge. In documenting payment
and delivery terms, title transfer, distrib-
ution responsibilities, dispute resolution
and jurisdictional considerations, con-
tract language needs to be managed as
part of the position lifecycle. Applying
appropriate templates to workflows
and tying indicators from the physical
molecules lifecycle to related events in
the legal lifecycle facilitates risk man-
agement in this phase.
Legal requirements imposed on the
accounting of the molecule as it is trans-
formed or transported can best be
managed by integrating the physical
and legal views. Documenting and
maintaining an audit trail of communi-
cation is another requirement. Finally,
any paper trades surrounding the phys-
ical molecules lifecycle add another
layer of complexity into the legal repre-
sentation. As more paper contracts get
The complexity of moving hydrocarbons from a forecast
to final consumption in an energy trading and risk
management (ETRM) framework requires a convergence
of the various views of the actual hydrocarbon molecule,
writes Rana Basu, Vice President of the Center of
Expertise (CoE) at Amphora [formerly TradeCapture*]. An
ETRM system that brings trading operations closer to the
physical asset must adequately represent the
transformation within that asset by presenting various
views of the same molecule through the lifecycle of its
existence.
Bringing traders
closer to the asset
N E R G Y T R A D I N G Ri sk management
40 PETROLEUM REVIEW JUNE 2009
E
standardised through clearing on the
exchange platforms, direct exchange
trading, or subscribing to industry
organisations such as ISDA (Inter-
national Swaps and Derivatives
Association) or LEAP (Leadership for
Energy Automated Processing) the
multiple combinations that need to be
managed are reduced. New CFTC (US
Commodity Futures Trading Commis-
sion) regulatory policies may well
require going beyond the current legal
documentation requirements, which
will mean that ETRM systems must have
new levels of reporting transparency.
Another legal issue, and one increas-
ingly important, is counterparty risk.
Once a trade has been executed, there
is an element of uncertainty between
all parties on the status of the trade.
Country risk factors, the quality of risk
in a counterpartys credit rating and
the rating of the bank offering credit
security for a movement all need to be
factored into ETRM models to bring
added credibility to the number pre-
sented. Just as prices and actuals need
real time response for position and P&L
updates for risk management, todays
increased market complexity calls for
new measures, including real time cur-
rency and credit ratings into the
statistical model of risk.
As the lifecycle of the hydrocarbon
position comes to an end there are tax
considerations, LC (letter of credit)
terms, LOI (letter of indemnity) terms,
invoice standards and terms, and com-
pliance requirements. In each of these
considerations that combine physical
and legal molecules, an ETRM can
proactively support decision making
and highlight possible risks through
this aspect of the trade lifecycle.
The financial view
In the hydrocarbon markets the life-
cycle of a position takes on incredible
complexity in pricing far beyond stan-
dard cost versus value considerations.
This initiates a new set of views to
manage the pricing risk on a position.
As hedging activities are undertaken to
manage this risk, the financial view of
the position needs to reflect the paper
lifecycle associated with the physical
molecule. Various physical events
impact the pricing risks which must be
synchronised to avoid incorrect deci-
sions. Costs are also representative of
cash flow and credit considerations,
which are two other financial views
that an ETRM needs to support.
Linking the legal molecule and the
financial one will ensure that the two
critical risks of cash flow and credit, so
important in the current global finan-
cial situation, are mapped and
measured in real time and can be
addressed should catastrophic condi-
tions arise. Key value considerations in
the financial molecule are mark-to-
market P&L and forward curve
management. Mark-to-market impacts
the credit exposure, the identification
of threat or opportunity, and most
importantly the daily control of the
trading position. The quality of the for-
ward curves and management of the
costs on the physical molecule will sig-
nificantly reduce the spikes in the P&L
curve through the position lifecycle
and indicate financial control to out-
siders, which translates into positive
impacts on cost of capital, market per-
ception and credit ratings.
Other financial views that enable
control include statistical interpreta-
tions such as VaR (value at risk), CFaR
(cashflow at risk) and PFE (potential
future exposure), which represent the
link between the financial and physical
molecules in an actionable format.
Looking at foreign exchange risks or
interest rate or fixed price exposures
and having in place clear policies on
limits and actionables on breaches
allow the financial molecule to have a
real impact on the bottom line of the
trading operation. A good ETRM
system should incorporate a dynamic
set of limits which react to changes in
market price levels, changes to volatili-
ties and other factors such as currency
rates, interest rates or credit ratings
would provide an acceptable solution.
The ETRM would behave like a hub col-
lecting updates on such factors and
providing predictive estimations for
the measures as well as estimations of
modified limits that would adhere to
the risk philosophy and levels that the
organisation could adopt.
The logical view
The logical molecule of the ETRM
system coordinates all the lifecycle
information. The challenge lies in
providing the capability to view infor-
mation in various contexts, while
retaining necessary links and account-
ing for the asymmetry of when
information is received by the ETRM
functions. It takes a creative combina-
tion of business process and system
capabilities to combine the physical,
legal, financial and logical molecules
for a comprehensive risk management
function within a trading operation,
while still supporting independent
workflows related to supply and mar-
keting, hedging, operations and
logistics, accounting and credit.
The logical constructs to represent
the hydrocarbon molecule require a
combination of detailed information
and easy data aggregation. Addition-
ally, the ability to calculate the P&L and
position and credit exposures to the
lowest level of detail and expose the
components of the calculations in
actionable formats is important to sup-
port the decision-making during the
process. Finally, the logical molecule
must be capable of a transformation
that takes into account the ability to
consider what if scenarios and also to
allow projection of trends in history to
shape the decisions along the timeline
from the planning to the consumption
of the hydrocarbon molecule.
Certainly, its essential that this be
combined with the ability to accurately
attribute P&L changes to changes in
curves and their impact on trade cost or
trade value, as well as P&L changes due
to delivered specifications, outturn
losses, timing or other factors (changes
in additional costs, changes due to new
trades, changes in hedges or pricing
events, and so on). The complete com-
bination allows companies to drill
down and better understand where
the money is being made or lost.
Similar functions involve easily testing
what if scenarios for roles such as
trading, risk, scheduling, accounting
and credit, and the specific require-
ments of each of those roles from a
position, P&L or cost basis. Other
requests in a reporting framework
include hypothesis testing mode.
Examples would be to estimate
changes in quality on supplies from a
vendor or P&L trends on particular
blending transactions or yield matrices
or trends in P&L caused by flexibility in
credit terms to certain counterparties.
Delivering real returns
Deriving real returns from an ETRM
implementation would be relatively
difficult without considering the ability
to manage the various views of the
physical, legal and financial lifecycle of
the commodities traded. Having the
logical constructs to accurately repre-
sent the realities along these
dimensions and the business processes
to implement controls, exploit opera-
tional efficiencies and measure or
promote organisational effectiveness
will support best practices across the
trading function.
An ETRM system constructed to
these parameters creates a conver-
gence of transactional control,
flexibility and clarity. It accurately sup-
ports decisions for trading/marketing,
risk management, refining and
accounting participants through the
complete lifecycle of the asset transac-
tion. This is the definition of effective
risk management. G
*For more information, visit
www.amphorainc.com
41 PETROLEUM REVIEW JUNE 2009
G
lobal financial turmoil has con-
tinued into 2009, with job losses,
massive government support of
banks andinsurancecompanies, andbank-
ruptcies at hundreds of firms. As economic
growth slowed there was an inevitable
knock-on effect into energy demand. Oil
demand, standing at around 85,000 b/d in
2007, declinedin2008andwill declineeven
further in2009 the first time this has hap-
pened for two years running since 1983.
However, retained profits have
helped to soften the blow for oil and
service companies although many
smaller firms are now finding it difficult
to raise capital for drilling. Oil and
globally traded gas prices rose at
unprecedented rates during 1H2008,
partly as a result of price speculation
but primarily due to a lack of supply to
meet relatively modest demand
growth. After year-on-year price
increases from a low of $13/b (for Brent
in 1998), oil rose to an average of $85/b
in 2008. But these averages show only
part of the picture. The spot price for
Brent crude spiked at $143.95/b on
3 July 2008 but had tumbled back to
$36/b by the end of the year.
In such an environment, offshore
drilling activity, which usually requires
long lead-in times, is bound to be
volatile. But how long and how deep
will the decline be? Two reports from
Energyfiles and analyst Douglas-
Westwood The World Offshore
Drilling Spend Forecast 20092013 and,
soon to be published, The World
Offshore Oil and Gas Production and
Spend Forecast 20092013 try to
answer this question. Their findings are
summarised below.
World drilling
Global drilling is forecast to rise 6%
over the period 20092013 compared
with 20042008, despite a sharp decline
in 2009. Approximately 18,300 offshore
wells were drilled over the last five
years. Numbers picked up in 2004 as the
oil price rose, reaching a peak in 2007,
before dropping slightly in 2008. The
forecast is of a decline in 2009, followed
by consistently rising numbers,
including a sharp jump in 2011, to total
19,570 over the period.
Shallow water exploratory drilling,
due to a lack of opportunity, was on
a declining trend from 2000 to 2003,
followed by a modest price-led
resurgence, especially in 2006 and
2007. Drilling levels declined in 2008
and decline is forecast to continue
through 2009, followed by a period
of recovery and then a flattening
off. Shallow water exploratory drilling
levels are not expected to return to
their 2007 peak.
Meanwhile, deepwater exploratory
well numbers have grown more rapidly,
supporting total exploratory drilling
levels. By 2013, deepwater wells are
expected to reach 40% of all
exploratory wells. The steady growth is
a result of new ultra-deepwater targets
becoming increasingly viable, as the
capability of deepwater production sys-
The short-term outlook for the drilling industry has changed dramatically. Lower oil prices
have led to exploratory wells being deferred or cancelled, development projects being
delayed and layoffs from both oil and service companies. Last year seemed to be never so
good for the industry, but there is now huge uncertainty and, in some quarters,
despondency. However, the downturn will be short-lived and will serve only to make growth
even sharper in subsequent years, writes Dr Michael R Smith, Chief Executive, Energyfiles.
R I L L I N G Offshore
42 PETROLEUM REVIEW JUNE 2009
D
Declines are happening but
they should be short-lived
Figure 2: Offshore drilling spends, 20042013
Source: The World Offshore Drilling Spend Forecast 20092013
Energyfiles Ltd
Figure 1: Offshore wells exploratory vs. development drilled 20042013
Source: The World Offshore Drilling Spend Forecast 20092013
Energyfiles Ltd
continued on p44 ...
tems is improved, giving additional
encouragement to explorers to take
these expensive risks. After 2011, how-
ever, there will be few remaining
options to locate substantial reserves in
shallow or deeper waters, except in
exceptionally remote areas such as the
Arctic, environmentally sensitive areas
and within the distant reaches of the
South China Sea and Atlantic Ocean.
Such drilling will have to rely on higher
oil prices than in early 2009.
With surging oil prices, shallow water
development drilling grew rapidly in
2005 and 2006, before flattening off in
2007 and 2008. A decline is now fore-
cast 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. Total development
drilling levels will be supported by rapid
growth in deepwater drilling from
2010, especially in West Africa and
Brazil, so that numbers will continue to
increase rapidly with big deepwater dis-
coveries of recent years, some of which
have been delayed, coming onstream
by 2013.
World spending
Global spending is forecast to rise 32%
compared with 20042008, despite
reduced spending in 2009 and 2010.
Approximately $278bn was spent over
the last five years on offshore drilling.
Spends surged from 2005 to 2007 as a
result of high oil prices that inflated all
well costs. There was global tightness in
the availability of high technology
equipment (especially rigs) and per-
sonnel, and wells took longer and were
more costly to drill.
By the beginning of 2008, significant
new capacity had begun operating or
was under development, but few had
forecast the events of 2H2008. The pre-
sent capacity overhang is likely to
be brief as average oil prices remain
above project hurdle rates, except for
the most expensive projects. Further-
more, order backlogs are still at high
levels which will carry through many
service companies, especially with the
reduced materials and labour costs
that are now being realised. The fore-
cast for 20092013 is of lower spends
in the first two years followed by a
return to previous levels of growth,
totalling $367bn over the period.
Much of this spending can be ascribed
to increased costs while well numbers
grow at a slower rate. This results from
more expensive well types in both
shallow and deeper waters as well as
general inflation.
All cost sectors have shown similar
patterns of growth, although rig costs
have surged most rapidly since 2005
and are consequently expected to fall
more in 2009. In 2006 and 2007 there
was a disproportionate surge in rig
costs as the high specification, high day-
rate rigs most required were in short
supply. A wave of new rigs are now
entering the market and modest
declines in rig utilisation are expected
over the next two or three years.
In broad terms the cost of the rig may
be between 20% and 40% of the total
well cost. Because of the need to
deviate wells, the rig costs, as a per-
centage of total costs, are generally
higher for development wells. In 2008,
rigs are estimated to have represented
an average of 37%of total well costs, of
which 42% was spent on semi-
submersibles and 35% on jack-ups. A
little under 40% of rig costs were used
to drill deepwater wells. Global rig
spends had been increasing dramati-
cally since 2004 both as a proportion of
well costs related to deepwater drilling
increases (where the rig costs command
a greater proportion of total costs) and
due to inflationary effects. However,
spends stabilised in 2008 and are
expected to decline in 2009.
From2010, a return to oil price-driven
increases in spending is forecast, espe-
cially directed at deepwater develop-
ment projects. The big expansion in the
number of rigs available for these pro-
jects 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 at the end of the period from
continuing to rise as wells become ever
more costly and oil prices surge again.
Regional activity
Global drilling spends have increased
over the last five years but there is dis-
parity across the regions due to a
shortage of shallow water exploration
prospects and expanding installation of
production systems in deeper waters.
Perhaps only 20%of sedimentary basins
with shallow water production also
have deepwater potential.
North American spends have been
maintained almost entirely by deep-
water development drilling in the Gulf
of Mexico. A rise of 20% over the
period 20092013 compared with
20042008 is forecast, although well
numbers are expected to decline by
10%. The region is vulnerable to hurri-
canes making prediction uncertain.
Asia took the largest share of
spending, but relative spends flattened
in 2008 due to a lack of drilling oppor-
tunities in its mature shallow water
acreage, except off China. Spends are
forecast to decline in 2009, remain flat
in 2010 and then begin increasing again
as new deepwater opportunities are
exploited off India and in the South
China Sea. Malaysia and Indonesia have
significant ongoing deepwater projects
and India is developing deepwater gas
fields off its eastern coast. The Asian
market will return to strength by
mid-2010 with a wide range of oppor-
tunities, especially as China, India and
Vietnam look to exploit their more dis-
tant offshore shelves.
Western European spends declined
significantly from 2002 to 2004, but
increased activity in the North Sea led
to a surge in spending from 2005.
Spending is expected to generally be
R I L L I N G Offshore
44 PETROLEUM REVIEW JUNE 2009
D
Figure 3: Offshore rig sector spending shares in 2008
Source: The World Offshore Drilling Spend Forecast 20092013 Energyfiles Ltd
... continued from p42
lower through to 2011 as prospects con-
tinue to diminish, but recover a little
after tax relief and higher oil and gas
prices impact the commerciality of
smaller projects. After a sharp decline in
2009 spending is forecast to rise 5%
over the forecast period compared with
20042008, although well numbers
reduce. Deepwater spending is modest
due to a lack of deepwater basins out-
side limited areas of Norway, the UK
and the Mediterranean.
In Africa, progressive exploitation of
deeper and deeper waters has driven
growth. However, a dip occurred in
Africa in 2008 and this is expected to be
repeated in 2009 before steady growth
returns up to 2013. Steady growth is
also expected in Latin America, after a
small drop in 2009, with Brazil and
Mexico most active. The three
remaining regions are less significant,
although in percentage terms all three
(Eastern Europe and the FSU, the
Middle East and Australasia) saw big
increases in spends up to 2007. In 2008
only the Middle East continued to grow,
but a dip is expected in 2009. Growth is
forecast to return through to 2013, with
low cost drilling in field developments
dominating in the Persian Gulf and
higher cost deepwater or environmen-
tally difficult wells dominating
elsewhere. The market in these regions
is expanding but there are relatively
few operators.
Global outlook
The 2008 oil price spike had a huge
effect on oil demand in countries where
oil prices are not fixed or subsidised.
Supply is now well above demand.
Meanwhile, gas supplies are also ample,
although regional imbalances remain,
with some markets in Europe, North
America and Asia poorly connected to
supply sources in Central Asia, the
Middle East and North Africa. Major
new gas projects, from being certain
money earners, have suddenly become
commercially risky.
There have been severe repercussions
in prices for offshore drilling services. In
early 2008, high oil prices and a global
shortage of drilling opportunities had
ensured that even the most expensive
offshore drilling projects went ahead.
However, the costs to drill these wells
have increased dramatically. In 2008, a
typical shallow water exploratory well
in the North Sea could cost over $30mn
a price that had nearly doubled in a
decade, whilst the growing number of
expensive deepwater wells was making
actual inflation in spending even
greater. In 2009 we have across-the-
board deflation in prices and delays in
both shallow and deepwater projects.
How long will this last? Historically,
global economic recessions have led to
declining energy demand, but the resul-
tant 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 wors-
ening recession. For the offshore
drilling industry the numbers point to a
return to stability in 2010 and, in 2011,
a return to growth is forecast.
With or without the downturn there
remains a global shortage of good
prospects to drill and develop except in
extreme environments. New offshore
oil supplies outside deepwaters and the
Persian Gulf are scarce, whilst output is
declining from almost all the older
producing regions. The industry must
explore and spend in every far-
flung part of the world. Decisions on
where to go and what to do are as
critical as ever. G
For more information or to order a
report visit www.dw-1.com/products
Alternatively e: publications@dw-1.com
or t: +44 (0)1227 780999.
45 PETROLEUM REVIEW JUNE 2009
SpeciaIist lnspectors exceIIent + benehts
A safer future for peopIe. Because you're going to use your in-depth industry knowIedge to
safeguard those peopIe's Iives. Join a team that makes a vitaI contribution to the success of the
UK's industry and economy. A better future for you too. Because you're going to enjoy a more
varied and rewarding career.
lnterested7
visit www.safefutures.co.uk
CIosing date: 11 June 2009.
SAFE FUTURES.
Marine Engineer - Aberdeen & BootIe
ReguIatory SpeciaIist - Aberdeen or Norwich
Process lntegrity/Fire & ExpIosion ORA -
Aberdeen & BootIe
ControI & lnstrumentation - South & South East
of EngIand & ScotIand
Risk Assessment SpeciaIist - BootIe
WeII Engineering & Operations lnspectors -
Aberdeen
StructuraI/CiviI Engineering - Aberdeen & BootIe
ExpIosives - BootIe
MechanicaI Engineers - Aberdeen & BootIe
Diving - Aberdeen
EIectricaI & ControI Systems - Aberdeen or BootIe
MechanicaI Engineering - Various Iocations
across the UK
Process Safety - Various
Mines - Various
EIectricaI & ControI Systems SpeciaIist (CSD) -
Edinburgh or BootIe - other Iocations may
be considered
EIectricaI & ControI Systems Software SpeciaIist
(CSD) - BootIe
Process Safety (CSD) - BootIe
E
ther oxygenates such as MTBE
(methyl tertiary butyl ether), ETBE
(ethyl tertiary butyl ether), TAME
(tertiary amyl methyl ether) and DIPE
(di-isopropyl ether) can be added to
gasoline as octane enhancers. Their
use has facilitated the desired replace-
ment of lead and a decrease in the
benzene content of gasoline. In addi-
tion, the presence of oxygen in the mol-
ecules improves combustion of
the gasoline, thereby improving the
quality of engine exhaust emissions to
the atmosphere.
Following leaks or spills of gasoline
into the ground, ether oxygenates are
more mobile in groundwater than
gasoline-range hydrocarbons (GRH),
because they are more soluble in water,
less biodegradable and sorb less
strongly to the aquifer matrix than
GRH. The potential to reach a down-
gradient drinking water well is thus
greater for ether oxygenates than GRH.
The risk posed by ether oxygenates
to potable groundwater resources is
one of taste and odour rather than
human health. Reported taste and
odour thresholds of gasoline ether oxy-
genates (GEOs) in water are low
(10200 g/l) and approximately four
to five orders of magnitude below the
levels at which health effects have been
observed in laboratory animals.
1
There
is relatively little difference in the
drinking water risk potentials of MTBE,
ETBE, TAME and DIPE.
In 1999/2000, Komex (now
WorleyParsons), carried out a study
on the occurrence of GEOs in UK
groundwater to assess the risk to
potable water resources on behalf of
the Environment Agency (EA) and
the Soil, Water & Waste Working Group
of the Energy Institute (EI), previously
the Institute of Petroleum (see
Environment Agency, 2000
2
and
Petroleum Review, November 2000).
The study was initiated following sev-
eral states in the US banning the use of
MTBE in gasoline, because of its occur-
rence in groundwater and the per-
ceived risk to drinking water resources.
The 1999/2000 study concluded
that MTBE did not pose a widespread
risk to potable groundwater resources
in the UK and modelling predicted
that the risk was unlikely to change
in the future so long as there was
not a major increase in MTBE usage.
However, the project team recom-
mended that the study be repeated
in approximately five years time to
monitor the situation and test the
predictions. Consequently, the study
was repeated by WorleyParsons in
2007/2008.
Major findings
The same basic approach used in
1999/2000 was used in the 2007/2008
study, albeit with some modification to
take account of the learnings from the
original. In particular, more detailed
information on hydrogeology at petrol
filling stations was gathered to
improve the quality of the modelling.
Data on the occurrence of GEOs in
groundwater and the analytical
methods used were obtained from
questionnaires sent to the major oil
companies; regulatory authorities,
including the EA, the Scottish
Environmental Protection Agency
(SEPA), Northern Ireland Environment
and Heritage Services (NIEHS); and 30
water companies.
The major oil companies provided
data on the use of ether oxygenates
in gasoline in the UK, GEO occurrence
in groundwater at potential point
sources (primarily petrol filling stations)
and the hydrogeology at sites with
GEOs in the groundwater for modelling
purposes. The regulatory authorities
provided GEO concentration data
from their national monitoring well
networks designed to monitor regional
groundwater quality away from
potential point sources, while the
water companies provided GEO con-
centration data from some potential
receptors, namely public water supply
(PWS) wells.
There has been little change in the
use of ether oxygenates in gasoline in
the UK since the 1999/2000 survey.
Ether oxygenates are by no means pre-
sent in all gasoline sold in the UK. Only
one of eight refineries in the UK rou-
tinely manufactures gasoline con-
taining ether oxygenates. Both MTBE
and TAME are added to regular gaso-
line in this refinery at average concen-
To address possible concerns regarding the potential risk from gasoline ether
oxygenates (GEOs) in groundwater, to the taste and odour of UK drinking
water, a joint Environment Agency and Energy Institute (EI) study, first
carried out in 1999/2000, was repeated in 2007/2008. Industry and
government data indicate that GEOs do not pose a widespread risk to the
quality of potable groundwater resources in the UK. Incidents where public
water supply wells are adversely affected are seldom reported and likely to
be rare events. Gordon Lethbridge, a member of the EI Soil, Water & Waste
Working Group, summarises the findings of the recent study.
Gasoline ether oxygenates
in UK groundwater
I T E C H N I C A L Envi ronment
46 PETROLEUM REVIEW JUNE 2009
E
trations of 3.4% (v/v) and 0.9% (v/v)
respectively. Regular gasoline accounts
for approximately 90% of the gasoline
sold in the UK. Premium grade gasoline
may contain higher concentrations,
ranging from 10% (v/v) up to the
legally permitted maximum of 15%
(v/v) total ethers. The other seven
refineries occasionally buy in ether
oxygenates to meet octane shortages,
such as during plant shutdowns and
maintenance. The eight refineries
manufacture approximately 90% of
the gasoline consumed in the UK.
The remaining 10% of gasoline is
either imported or blended outside
the eight refineries.
No information was available on the
ether oxygenates present in imported
gasoline. MTBE is likely to be the pre-
dominant one, but TAME, ETBE and
DIPE cannot be ruled out. ETBE is
starting to replace MTBE in some
European refineries outside the UK a
change driven by the EU Biofuels
Directive, which defines ETBE manufac-
tured from bioethanol as a biofuel, so
it may start to appear in the UK.
In contrast to MTBE, ETBE and TAME,
DIPE is not manufactured by choice,
but is a byproduct of isopropyl alcohol
production by the hydration of propy-
lene. Refineries with such plants may
add it to their gasoline.
Oil company data
MTBE was reported in the groundwater
at 70% of 524 sites (predominantly
petrol filling stations) where it was
looked for. This is similar to data
reported in the US.
3
This 70% occurrence could not be
extrapolated to the whole network of
petrol filling stations in the UK (9,271
in 2007 and 9,283 in 2008, compared
to 13,716 in 1999 and 13,043 in
2000*), because the data from the
524 sites is likely biased towards sites
with known incidents.
In the 1999/2000 study, MTBE was
reported in groundwater at 30% of 837
petrol filling stations for which data
were provided. This data set was also
biased towards sites with known inci-
dents. The two datasets are not directly
comparable, because neither of them
represented random site selections and
the criteria for identifying sites for
investigation may vary from company
to company, so it does not necessarily
mean that there has been a doubling
of the occurrence of MTBE in ground-
water beneath petrol stations. The
higher occurrence of MTBE in ground-
water in the 2007/2008 study can be
partially attributed to a decrease in the
detection limits for MTBE in ground-
water as laboratories have improved
their analytical capabilities.
In 2007/2008, TAME was only
reported in the groundwater at 10
sites, but the total number of sites
where TAME was monitored is not
known. Given that the one refinery
regularly manufacturing gasoline
containing MTBE also adds TAME to
the same gasoline (albeit at a quarter
of the concentration of MTBE), the
low reported occurrence of TAME in
groundwater probably reflects that
monitoring for this chemical is not
yet routine.
There were no reports of the pres-
ence of ETBE or DIPE in groundwater,
but as with TAME, they are not rou-
tinely looked for. However, based on
information on their usage, their fre-
quency of occurrence in groundwater is
likely to be minimal.
Groundwater quality
The EA has a network of approximately
4,000 regional groundwater quality
monitoring wells. The most recent
dataset made available for the
2007/2008 study came from 2006. MTBE
was detected in 19 of the 2,080 wells
routinely monitored for MTBE during
this year. A total of 18 contained con-
centrations between 0.515 g/l, none
had concentrations between 1550 g/l
and one contained >50 g/l. Data were
provided back to 1992 and there are
no obvious trends in the occurrence
of MTBE in the EAs monitoring well
network over the 14 years. In the
1999/2000 study, MTBE was reported
as being detected in 13% of 940
wells monitored by the EA, but the
vast majority of concentrations were
<1 g/l.
In the 2007/2008 study, MTBE was
reported transiently in five out of 100
wells monitored by the Geological
Survey of Northern Ireland (on behalf
of NIEHS) at concentrations ranging
from 0.210 g/l. It was not detected in
23 wells monitored by SEPA (Scottish
Environment Protection Agency).
In the 2007/2008 study, TAME was
reported in six wells monitored by the
EA at concentrations <0.2 g/l, while
ETBE and DIPE were not reported in
any wells.
GEOs in regional groundwater
quality monitoring wells are unlikely to
have originated from oil industry facili-
ties, because such wells are typically far
removed from potential point sources,
beyond the distance over which plumes
may travel. The presence of GEOs in
such wells may reflect small unreported
local spills by end-users (one was
known to be attributable to a gasoline
spill/leak at a nearby farm), atmos-
pheric washout in rainwater (unburnt
fuel may be emitted to the atmos-
phere, especially from poorly main-
tained vehicles) and/or road run-off,
although there was no obvious correla-
tion between MTBE detections and
urban locations.
Public water supply wells
Completed questionnaires were
received from 26 out of the 30 water
companies approached for informa-
tion. Four of these routinely monitor
public drinking water supplies for
MTBE. Three public water supply (PWS)
wells were reported to have contained
MTBE for a period of one to four
months. The concentrations were
below the taste and odour thresholds
quoted by the World Health
Organisation (WHO) (15 g/l).
4
Given the low taste and odour
thresholds of MTBE, it is reasonable to
presume that the other 22 water com-
panies would be aware of any signifi-
cant concentrations in their wells. In
the 1999/2000 study, three PWS wells
were reported to contain MTBE at con-
centrations >5 g/l. The anonymity of
the data means that it is not known
whether it is the same three wells in
both studies. In summary, these results
imply little change in the occurrence of
MTBE in the 3,616 licensed PWS wells in
England and Wales between 1999/2000
and 2007/2008.
The risk to PWS wells from the entire
network of 9,283 operational and 3,044
closed sites listed in the Experian
Catalist database was modelled based
on reported MTBE concentrations using
conservative assumptions for ground-
water transport and biodegradation.
The modelling results predict that
out of the 3,616 licensed PWS wells in
England and Wales:
G
Between two and eight wells could
potentially contain concentrations of
MTBE >50 g/l either now or in the
future.
G
Some eight to 16 wells could poten-
tially contain concentrations of
MTBE between 1550 g/l either
now or in the future.
G
In the region of 60 to 80 wells could
potentially contain concentrations of
MTBE between 0.515 g/l either
now or in the future.
These results are consistent with
actual occurrences, even though the
predicted number of affected wells is
likely to be overestimated because of
the conservative assumptions in the
model. Only five instances of PWS wells
containing MTBE at concentrations
close to or exceeding 15 g/l have been
reported since the introduction of
MTBE into gasoline sold in the UK
approximately 25 years ago.
Data from the US shows a similar pic-
ture. In a survey of 1,100 public wells
and 2,400 private wells by the US
47 PETROLEUM REVIEW JUNE 2009
Geological Survey, MTBE was detected
in approximately 5% of public drinking
water wells and 3% of private drinking
water wells at concentrations ranging
from 0.26.5 g/l. Only one (private)
well in the whole survey contained a
concentration (30 g/l) that exceeded
the US EPA drinking water advisory for
MTBE of 2040 g/l.
5
The modelling results also predict
that if ether oxygenates were widely
used in all gasolines sold in the UK at
the legally permitted maximum of 15%
v/v, then hypothetically, the number of
PWS wells affected could increase by an
order of magnitude. This scenario
seems unlikely given that ether oxy-
genate usage in gasoline has changed
little in the UK over the last 10 years.
Conclusions
Despite approximately 25 years usage
of MTBE in gasoline in the UK and the
relatively high-recorded incidence of
MTBE detection in groundwater at oil
industry facilities, instances of detec-
tion in PWS wells at concentrations
above the taste and odour threshold
are rare. The impact is limited by nat-
ural attenuation processes in ground-
water such as dilution, dispersion and
biodegradation and by dilution at
drinking water abstraction wells.
Modelling results predict that this situ-
ation is unlikely to change in the future
if ether oxygenate usage remains sim-
ilar to what it is today, which seems
likely, given that little change has taken
place over the last 10 years.
Considering that the one refinery
regularly manufacturing gasoline con-
taining MTBE in the UK also adds TAME
to the same gasoline and that ETBE may
start to replace MTBE in response to the
EU Biofuels Directive, it would be advis-
able for TAME and ETBE, along with
DIPE, to be added to the list of chemi-
cals routinely looked for during soil and
groundwater investigations at sites
manufacturing, storing or retailing
gasoline. Additionally, this study reveal-
ed that some oil companies are still
using gas chromatography with flame
ionisation detection to measure ether
oxygenates despite the risk of false pos-
itive identification (recording presence
where absent) by this method. GC-mass
spectrometry provides superior identifi-
cation and quantification of GEOs.
A decade on from initiation of the
original study, the UK remains the only
country in Europe to have carried out
and published such an extensive project
on the occurrence of GEOs in ground-
water and the potential risk to public
drinking water supplies. G
*These figures are taken from
Petroleum Reviews Retail Marketing
Survey 2009 which is compiled with the
help of Experian Catalist.
References
1. Drinking water advisory: Consumer
acceptability advice and health effects
analysis on methyl tertiary butyl ether
(MTBE), Advisory EPA-822-F-97-009,
42 pp and fact sheet, 4pp, US
Environmental Protection Agency,
Office of Science and Technology,
Office of Water, Health and Ecological
Criteria Division, Washington DC, 1997.
Available at http://www.epa.gov/oust/
mtbe/index.htm
2. Review of current MTBE usage and
occurrence in groundwater in England
and Wales, R&D Report P406,
Environment Agency, 2000.
3. Investigation of MTBE occurrence
associated with operating UST systems
Santa Clara Valley water district
groundwater vulnerability pilot study,
Levine and Fricke, 1999.
4. Methyl tertiary butyl ether (MTBE) in
drinking water: background document
for development of WHO guidelines
for drinking-water quality, WHO/SDE/
WSH05.08/122, 18 pp, WHO, 2005.
5. The quality of our nations water:
volatile organic compounds in the
nations groundwater and drinking
water supply wells, Circular 1292, 112
pp, US GS, 2006.
I T E C H N I C A L Envi ronment
48 PETROLEUM REVIEW JUNE 2009
E
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