Archives for posts with tag: field operators

Over the hill; past its peak; long in the tooth: like a worn-out old racehorse, the North Sea E&P sector is sometimes discussed in disparaging terms. In recent years however, it has been making something of a comeback, gaining ground when it comes to exploration and at least holding steady-ish when it comes to production. The question is, can this pace be sustained in the current oil price environment?

Saddling Up

The UK and Norway have long been the front-runners when it comes to offshore activity in the North Sea. In the 1970s, an average of 187 offshore wells were spudded per year in UK and Norwegian waters. As the graph shows, in the years 1970-76, more than 50% of these were exploration wells. Production was low (0.85m boepd in 1975), as few of the discoveries made since the first find in 1965 had been developed. But then in 1976, Brent started up, with Ekofisk following in 1977. During the course of bringing these and other large fields onstream, appraisal and development drilling raced ahead of exploration; from 1990, the number of exploration wells drilled each year began falling too. Field operators were now focusing on production over exploration. The two countries’ offshore production peaked in 2002 at 8.64m boepd from 337 fields. This year was also the nadir for exploration drilling: of 503 wells spudded, just 32 (6.4%) were exploration wells.

Second Wind

Oil companies therefore found total production falling just as reserves were being replaced at the slowest rate since North Sea exploration began. The more prudent then applied the spur to exploration once more, even as they tried to stop production decline using EOR. Exploration in the years 2003-14 in the central North Sea met with some notable successes, like the giant Johan Sverdrup discovery in 2010, with 2P reserves of 2.2bn bbl oil and 394bn cf gas. Operators also began venturing into the mostly unexplored Barents Sea and west of Shetlands waters. Hence, in 2014, 27% of wells spudded in UK or Norwegian waters were for exploration, a share similar to the late 1980s. Production, meanwhile, fell by only 0.8% y-o-y, versus the average y-o-y decline over 2002-14 of 3.9%.

The Final Furlong?

The area’s offshore sector was thus moving at a relatively good pace. However, 2014 exploration campaigns and most incipient development projects were conceived in a more robust oil price environment than the present: E&P economics in frontier areas like the Barents Sea are highly uncertain while the oil price is less than $80/bbl. Perhaps then, with oil company spending cuts, the recovery in exploration will be stopped in its tracks and production decline may resume. On the other hand, some smaller operators are taking advantage of low rig and OSV day rates to increase exploration. Falling EPC costs could also help to reduce development project breakevens, flogging North Sea E&P onwards once more. And if the oil price were to return to $100/bbl+, then there is the potential for further upside.

So there you have it. The weaker oil price has made some oil companies pull on the reins, but there is still potential for the second burst of North Sea E&P activity to run on, in the right conditions. The area may no longer be the fiery colt of offshore E&P, but it probably has some way to run yet before being put out to pasture.

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The North Sea is home to a dispersed mass of steel and concrete, namely: 509 active fixed platforms with a combined weight exceeding 8 million tonnes; 1,440 subsea structures; 9,370 active wells and their completions; and over 45,000km of pipeline. Under the provisions of the OSPAR Convention, field operators will be obliged to decommission and clean all this up one day. And that day is approaching.

Diamonds And Rust

Decommissioning entails plugging wells, removing platform jackets, topsides and subsea structures, and, ultimately, complete site remediation. Oil companies in the North Sea are now having to contemplate this process at fields as recoverable reserves approach depletion. Since first oil in 1967, approximately 54.1bn bbls of oil have been produced in the area. However, production in 2015 is forecast to stand at just 2.86m bpd, compared to the 2000 peak of 5.9m bpd. The value of offshore field infrastructure consists in its ability to assist in the extraction of oil and gas; for the 47% of fixed platform tonnage installed on North Sea fields that began production more than 25 years ago, the point at which this is no longer the case is getting closer. But only 88 platforms in the area have been decommissioned so far, and for good reason.

Worth Fighting For

Decommissioning can be money and time-intensive. The decommissioning of the Brent facilities is expected to take ten years. Even small projects are expected to take two years and more than $300m in CAPEX. Hence, operators are trying to stave off decommissioning through enhanced oil recovery (EOR) to extend field life, or by tying new field developments to existing structures. For example, while the 12 wells on Heimdal are being abandoned, the platforms are being kept to process gas from Vale and other fields.

However, it is thought that in the current oil price environment, OPEX is encroaching on profits at a rising number of fields. Operators striving for fiscal discipline are between the hammer and the anvil: either run fields at a loss, or shut fields down and book the decommissioning costs.

Pain And Pleasure

This choice might be painful for oil companies but there is potential upside for many vessel owners. Drilling rigs and well intervention vessels will be needed to plug many of the wells. Crane vessels, self-elevating platforms and heavy lift vessels will be needed to remove and transport topsides and jackets (indeed, part of the rationale of the “Pioneering Spirit” is that it is one of very few units capable of lifting massive structures like the 42,500t topsides of the “Gullfaks A” gravity base platform). MSVs, DSVs and ROV Support vessels can be used to assist throughout decommissioning and will be especially important for removing subsea structures and for site remediation, when dredgers will also have a part to play. These various vessels will need to be assisted throughout the process by OSVs and utility support vessels.

Oil companies active in the North Sea might prefer not to charter all these vessels just to exit dead fields. But sooner or later (quite possibly sooner) they will have little choice. This could potentially benefit many different owners, with decommissioning becoming an important driver of North Sea vessel demand.

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