March 2007
News & Resources

World of Oil


Mexico considers seismic specifications

World of Oil 
Vol. 228 No. 3 

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Mexico considers seismic specifications

The Mexican energy ministry opened a 60-day public consultation period for a bill to establish seismic exploration specifications. According to the official news agency, the bill prescribes requirements with which state firm Pemex would have to comply during the planning, design, execution and abandonment of such activities. The law would define the maximum allowable vibration amplitudes to achieve oil and gas exploration objectives without damaging existing infrastructure in a given area. This bill would apply to onshore and offshore activity that uses vibrators, explosives and pneumatic pistons as seismic energy sources.

CNOOC begins output at smallest offshore field

China National Offshore Oil Corp. said that it has begun output from the Bozhong 34-5 field, China’s smallest offshore oil field. This field is notable, because the recoverable reserve is estimated at only 1.8 million cubic meters (12.6 million bbl). Chinese officials had previously believed that any offshore field with less than 3.0 million cubic meters of recoverable reserves would be too costly to be developed.

Senegal seismic begins

First Australian Resources Limited (FAR) said that the MV Symphony vessel is acquiring seismic in the Rufisque,
Sangomar and Sangomar Deep blocks offshore Senegal. As part of an exploration program that FAR and operator Hunt Oil are conducting, this will be the largest 3d survey executed
offshore Senegal. In all, 2,050 sq km of 3D seismic will be acquired to validate several potentially significant prospects. The survey is based on a number of leads identified from existing 2D seismic data.

Chilean drilling slated 

Canadian firm March Resources submitted an environmental impact assessment to Chilean environmental agency Conama for a $20 million exploration program in Region II. The operator said it will drill two wildcats on its Pica Norte Block in the Tamarugal basin, and possibly a third well, depending on results. The wells are slated to be drilled to a depth of about 4,200 m (13,780 ft).

Studies show upward creep in E&P costs

Upstream costs have risen 53% during the past two years, according to the new Upstream Capital Costs Index assembled by Cambridge Energy Research Associates. According to this compilation of nine primary items in the E&P sector, the costs for everything from drilling rig charters to wellheads to manpower continue to escalate. This group of costs has been rising since 2000, said Richard Ward, senior director of CERA’s upstream research, but it jumped dramatically in 2005. This means, added Ward, that operators are getting less value for their E&P money, despite high oil and gas prices. Furthermore, with oil prices closer to $60/bbl than last year’s record peak of $76.70, some companies may consider delaying or canceling select projects. Beginning with 100 as a base in 2000, the CERA index rose to 125 in 2005 and 148 by last November. The largest component increase during the last year was for leasing offshore rigs, where the cost jumped 309.2%. On the natural gas side, rising rig costs and a labor shortage will support prices, said Michael Zenker, CERA’s head of global gas. He predicted an average Henry Hub spot price of $6.56/MMbtu for 2007 and $6.32/MMbtu in 2008, as LNG imports increase. Higher prices have enabled operators to drill marginal gas wells, added Zenker, which has prompted a record number of US gas wells to be drilled while production remains flat. Meanwhile, a crack in the endless parade of rising costs may be developing. After several years of drilling contractors playing gas producers against each other for rig hires, it appears that their rates are beginning to decline from a combination of new rigs entering the market and a growing glut of gas in storage. According to Banc of Americas Securities, the two biggest land drillers, Nabors and Patterson- UTI Energy, revised fourth-quarter 2006 earnings lower, due to a small decline in rig rates. For these firms, “earnings growth in 2008 will be muted, even as the drilling cycle rebounds,” said the securities firm.

Crude prices remain highly volatile

In mid-February, crude oil futures gained strength on worries of supply reliability from Nigeria, reapproaching $60/bbl. In addition, prices firmed on news that OPEC members were adhering better to their most recent production cut. “Supply and demand are running neck and neck at around 86 million bpd,” said new OPEC Secretary General Abdullah Salem el-Badri to Dow Jones Newswires. “Adherance to the cuts is excellent at 66%, which is good.” However, some of the ground gained in prices was eroded by traders’ worries over warming weather in the US, which was expected to lessen oil and gas consumption in the short run. In the longer term, analysts expect prices to firm again, as the US diverts more oil to its Strategic Petroleum Reserve in a multi-phase program over a number of years.

UK competitiveness questioned by report findings

The UK Offshore Operators Association (UKOOA) is calling for governmental and industry action to address concerns that the British offshore sector is becoming less competitive and less able to attract the investment needed to sustain future production levels. UKOOA published its 2006 Activity Survey Report, which summarizes the exploration, investment and production plans of North Sea operators over the next three years. While exploration and appraisal activity remains encouragingly strong, said UKOOA, the report also shows high cost inflation, a 250,000-bopd fall in expected
production and signs of a drop in capital investment during 2007 after three years of growth. The fall could be £1.0-1.5 billion ($1.96–2.94 billion), down to a total of £4.0-4.5 billion ($7.85–8.83 billion). The association said this raises concerns that the UK could be finding it more difficult to compete for global investment. “Margins are shrinking, particularly in the Southern Gas basin and in the older Northern oil fields,” said UKOOA Chief Executive Malcolm Webb. “If steps are not taken to improve the industry’s competitiveness, the implications for future production and secure indigenous
energy supplies could be serious. Both the industry and government have their responsibilities in this.” UK oil and gas capital investment was of £5.6 billion ($11.0 billion), the highest level since 1998.

Nationalized Bolivian contracts to take effect

On March 15, 44 contracts negotiated with 12 oil companies will come into force, said Bolivian Hydrocarbons Minister Carlos Villegas. The contracts are part of President Evo Morales’ nationalization program. The process was held up by technical problems with 10 of the contracts. Morales earlier had announced a plan to send a bill to the congress, to amend the mistakes. Those errors were minimal and did not require complete renegotiation of the contracts. Within the nationalization plan, Bolivia’s income from hydrocarbon production during 2007 is expected to hit $2 billion. The figure was calculated by the national statistical institute, INE, and the economic policy analysis unit, Udape.

Senators request probe of US royalty in kind program

Two Democrat senators asked the US Government Accountability Office (GAO) to study the Interior Department’s royalty in kind program, which is administered by the Minerals Management Service. Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (New Mexico) and Forests Subcommittee Chairman Ron Wyden (Oregon) asked GAO to investigate the growth of the program, which has been criticized in regard to its cost-effectiveness in collecting royalty payments from companies in the form of oil and gas, rather than cash. The senators noted the program’s growth, the potential effect on the US Treasury and past record-keeping problems at MMS as justification for an inquiry. In past years, GAO reports showed that MMS could not provide full, accurate data on the program’s costs, total revenue or savings over cash royalties.

Alberta begins review of royalty scheme

Provincial officials in Alberta last month initiated a wide-ranging review of the energy royalty regime, which could have tax repercussions for Canadian producers. Alberta Minister of Finance Lyle Oberg said that the review is necessary to make sure that Albertans are receiving fair income from oil and gas development occurring in the province. This, he said, needs to be done “while maintaining an internationally competitive system that allows the Alberta economy to prosper.” An independent panel will examine all royalty aspects and report back to the minister by Aug. 31, 2007. At present, oil sands operators pay 1% of gross revenues until capital costs and a return allowance are realized, after which the rate jumps to 25%.

Texas Alliance index levels out 

After 41 consecutive quarters of growth, the Petro Index pubished by the Texas Alliance finally dropped in October 2006, said the association’s petroleum economist, Karr Ingham. As a measure of E&P activity in Texas, the Petro Index began in January 2005 at 100 and peaked at 219.1 in September 2006. After slipping to 218.5 in October, the index has already recovered to a new peak of 220.2 in January 2007. “Normally, every time the index has peaked, it’s taken a cliff dive,” said Ingham. “But this time, I thought the dip in October might be different, because oil prices have firmed, and gas prices have recovered somewhat. So far, this is holding true, and the index has resumed its climb. Commodity prices are just high enough for producers and just low enough for consumers.”

Cyprus opens up offshore areas 

Cypriot officials have opened a bidding round to license offshore exploration, despite strong objections voiced by Turkey. The move could renew tension in a region, where Greece and Turkey are already feuding over contested sea boundaries. The first round of exploration licensing involves 11 areas offshore Cyprus that total about 60,000 sq km (23,165 sq mi) to the south, southeast and southwest of the island. The bidding deadline is July 16.

Dutch development work plans updated

Northern Petroleum plc has clarified its schedule for developing six oil and gas fields onshore in the Netherlands. The firm said that first production has been delayed and now targeted to come onstream in stages between the end of 2007 and March 2008. However, projected output levels have been increased, due to concentration of efforts on three fields initially. Those fields include Brakel, Ottoland and Papekop. The gross production target is now 2,300 bopd and 10 Mw of electrical generating capacity by the end of March 2008.

Heritage succeeds further in Uganda

Heritage Oil (operator/50%) and partner Tullow Oil (50%) said that they will test deeper intervals in the Kingfisher 1A deviated exploration well in Uganda’s Block 3A. The firms will test three intervals totaling 44 m between 2,260 and 2,367 m (7,415 and 7,766 ft). Last November, a shallower interval was tested successfully at a 1,783-m (5,850-ft) depth in the Kingfisher 1 well, producing 4,120 bpd of 30°API sweet oil. Flow data indicated extremely high permeability of over 2,000 mD. Kingfisher 1A was drilled to a 3,195-m (10,482-ft) TD.






In the global petroleum market at present, two factors seem to be in overabundance—greed and ignorance. The first item is a trait of certain exporting countries. The second item is displayed often by US officials. On the greed side, OPEC members since October have twice implemented output cuts totaling 1.7 million bopd. And, said OPEC’s new secretary general, compliance with cuts is at a nearly all-time high of 66%. Obviously, OPEC grew accustomed to dizzying revenues spawned by $60-plus/bbl prices, and members didn’t like it when rates sagged into the $50s as demand slackened. Looking unusually unified, they now seem more determined to keep prices high than at any time in recent memory. Some producers’ reasons go beyond buying extra airplanes or building another palace. Venezuelan President Hugo Chávez painted himself into a corner by promising to use the industry as a cash cow to fund all sorts of social spending. His nationalization plan is discouraging investment by operators, and also service companies. The latter may be more crucial—witness negative comments by Halliburton’s CFO, as well as state firm PdVSA running around, trying to keep more rigs from leaving the country. PdVSA hopes to rely on Chinese companies and start up a domestic oil services industry to avoid dependence on Western firms—dubious, at best. Saudi Arabia has its own problems with spiraling costs tied to social spending. In effect, officials have discouraged political activism and violence by buying off the citizenry through such spending—an open-ended policy that requires great sums of cash.

Then there is the amazing ignorance of US officials about how the global petroleum market works, and the thinking that goes on in larger producing/exporting countries, as in the Middle East, FSU and South America. At a Houston conference, US Energy Secretary Samuel Bodman called for all nations to embrace a “new paradigm of energy security” that includes open markets for energy trading and investment. What parallel universe is this man living in? Most countries in the regions cited consider reserve figures, and select other upstream data, to be state secrets on a par with military assets. Without the unfettered flow of such data, one cannot have a completely open, free market. Come to think of it, the global oil and gas industry has never been a truly free market, despite the delusions of several Republican administrations. Yet, the Bush administration seems compelled to continue to push this false notion of a free market in petroleum. Also, Bodman and other Bush officials need to quit whining about exporters charging too much for their oil. Whether right or wrong, exporting nations are “free” to ask whatever price they think is fair. If US officials don’t like producers’ prices, then they ought to work feverishly to develop alternative energy sources, so that they can begin shutting off the flow of cash to such countries.



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