Securing a future for petroleum development topped the agenda when the North Sea oil industry gathered in Aberdeen last week for the Offshore Europe conference.
Keynote speakers spread the message that, with oil prices expected to remain low for the foreseeable future, North Sea operators must rein exploration, development, and operating costs to make future projects viable.
Critical questions
John J. O'Connor, chief executive officer of BHP Petroleum Ltd., said while world energy demand is expected to continue growing, two questions cast doubt over how well the petroleum industry will fare during the next few decades.
O'Connor asked:
- Will finance be available in the volume required to allow the industry to undertake the major investment in production which is essential if global demand for energy is to be satisfied?
- Can companies make a sufficient return out of projects in an era in which margins are essentially going down?
At an average cost of $2.20/bbl of oil equivalent to produce hydrocarbons and taking into account maintenance and infrastructure costs, O'Connor reckoned more than $550 billion in worldwide capital investment will be required during the next 10 years.
He blamed falling margins on declining oil prices, smaller reserves, more hostile operating environments, and unresponsive host governments.
"A company producing 1 million b/d of oil must find a Liverpool Bay once a year, every year, and own 100% of the reserves to remain static on a production basis," O'Connor said.
"It is no wonder that the emphasis within the industry is for projects which enhance recoveries from existing reservoirs or focus on development of undeveloped reserves."
Most important for the petroleum industry, however, undeveloped reserves are in the wrong place.
"Investment in the industry must be made in relation to reserves owned by producing countries," O'Connor said.
"Many of the countries which own the reserves are challenging candidates for even the most imaginative financiers, as are a number of emerging consumer nations in the developing world."
Of the "problem" countries, O'Connor said: "Russia lacks a legal or fiscal structure which can allow major investments to be made by the industry, Saudi Arabia shows no sign of opening its reserves to the West, Iran, despite its potential, remains unsupported by the western political system, and Iraq even more so."
Adapting to change
O'Connor predicted some companies will not be able to adapt to changes anticipated during the next 10 years.
"Companies which do not diversify away from oil into gas and other downstream derivatives such as liquefied natural gas, power methanol, or other petrochemicals will not participate in the major market growth of the next decade," he said.
He also warned host governments that countries which demand too high a cut from petroleum industry will be at a disadvantage: "They must compete for limited human and financial resources."
O'Connor expects oil and gas production off the U.K. and Norway to hit its peak about 2000, then slowly decline during the following 20 or 30 years.
"There is plenty of work for us all to undertake over that long period of decline," O'Connor said.
"But those of us who succeed will have recognized that skills and responses which are required are different from those which succeeded in the early growth phases of the basin's development."
U.K. issues
Michel Romieu, managing director of Elf Petroleum U.K. plc, focused on U.K. issues. He said the challenge is how to tackle the combined problem of low revenues and high costs while ensuring long term economic growth.
"Around 5,000 oil and gas wells have been drilled in U.K. waters since the first one in 1964," Romieu said.
"Large established areas of activity in the northern, central, and southern sectors of the U.K. continental shelf are mature in exploration terms. Most of the elephants' are gone, with a consequent gradual decline in discovery size.
"The attraction of alternative unexplored regions around the world is beginning to exert a pull on company exploration budgets.
"There are two critical factors which have the potential to offer a new lease on life to U.K. continental shelf exploration: technological innovation and taxation reform."
Despite the U.K. government's removal of tax relief on exploration in 1993, Romieu said, oil companies have maintained a significant, highly focused exploration effort made possible by technological advances and driven by the commercial incentive of new discoveries outside of the petroleum revenue tax regime.
Romieu said the U.K. continental shelf is estimated to have potential remaining reserves of 3-10 billion metric tons of oil and gas, compared with 2.6 million metric tons oil equivalent already produced.
He raised the issue of platform abandonment, saying that, after the controversy surrounding plans for disposal of the Brent Spar loading buoy, government and industry are committed to decommissioning platforms case by case.
"As far as the U.K. Offshore Operators Association (Ukooa) is concerned, given the emotive discussions which have taken place as a result of the Brent spar issue, the debate will continue but only on scientific grounds. The exploration and production forum needs to be heavily involved in the discussion in order to manage the issue on the continent."
Romieu is president of Ukooa.
Through standardization and common working practices, Romieu said, new fields are being developed at 30-40% lower capital expenditure on a per barrel basis than those of the 1980s.
Demand growth
Chris Fay, chairman and chief executive of Shell U.K. Ltd., said world oil and gas demand is bound to continue to grow because energy demand in developing countries is expected to increase 50% by 2020 compared with today. "Shell planners believe there are sufficient hydrocarbon reserves to meet growing demand for several decades before supplies peak," Fay said.
"By then, advances in renewable technology could enable them to make an increasingly important contribution, while new energy efficient technologies curtail demand.
"The important point is that this industry is likely to be called on to supply more oil and gas over the next half a century than it has in the whole of this one. That is some challenge, some responsibility. There is no doubt that the enterprise being shown today off Europe will be needed for a long time to come."
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