• E-mail
• Print
• Comment
• Font Size
• Digg
• del.icio.us
• Discuss article

Aberdeen is Cleaning Up After Playing Host to 47,000 Oil Men and Women

Posted on: Tuesday, 13 September 2005, 12:00 CDT

FOUR citizens from the stormbattered state of Louisiana appeared among a sea of 47,000 delegates at Europe's biggest oil gathering in Aberdeen, manning a stand with a banner declaring Louisiana "open for business" despite the devastation wrought by hurricane Katrina.

There was not a bed to be had within a 50-mile radius of Aberdeen as visitors from every oil state on the globe poured GBP12 million into the local economy.

If proof were needed that $60-a-barrel oil is good for the northeast, it was in abundance last week. UK energy minister Malcolm Wicks unveiled the largest number of exploration licences to be awarded since 1964, ushering in 24 new entrants and awarding 152 licences.

"The results of the last round were like a seismic explosion. Shall I sing you Reasons To Be Cheerful, " Wicks said.

While the mood was upbeat in Aberdeen last week, underlying concerns remain over rising costs, skill shortages, and talk of a speculative bubble enveloping a growing band of oil companies listing on the alternative investment market (Aim).

Wham Energy will be the latest company to float on Aim next month and analysts reckon energy companies will constitute 10% to 15% of the market soon.

Hot money is flowing in, driven by high oil prices. Paul Jourdan, head of UK equities for First State Investments, says:

"There are some very speculative oil companies without a doubt."

Itis vital to distinguish between companies prospecting in unknown territory, companies with producing assets, and those reinterpreting seismic data in mature basins.

"Pure exploration in an unknown area is a one-in-six roll of the dice. If you get a six you hit the jackpot and can make 10 times your money - but most companies get very few rolls of the dice, " he says.

High oil prices have encouraged executives such as the Wham Energy team to leave oil majors and pursue their own fortunes.

And they are finding backers, especially if, like Wham, they have farm-out deals with established players. News of a big find could galvanise the sector further, as happened last year when Cairn struck it rich in India. But disappointing news or a drop in oil prices could prick the bubble.

Miles Newman, exploration director of Reach Exploration which snapped up 16 new licences in the 23rd round and has partners such as PetroCanada, Premier and Talisman, was in the vanguard of new UK players applying for Promote licences two years ago.

Newman warns that new entrants need to raise significant funds to pay for drilling programmes - it costs around GBP7m to drill a single well. With costs rising fast, there is not universal rejoicing over high energy prices.

The appearance of the tiny delegation from Louisiana was a sobering reminder of the far-reaching ramifications of hurricane Katrina for the global economy.

Airlines are raising fuel surcharges, consumers are paying more for petrol, and manufacturers are struggling with higher input and transportation costs.

Emergency stocks of oil are being released for the first time in more than a decade and US treasury secretary John Snow warned that Katrina would slow US economic growth by 0.5%.

The human aspect of the disaster remains uppermost in minds but among oil leaders, debate is intensifying over the fine balance between supply and demand.

Michel Benezit, vice-president, northern Europe for Total, warned that new discoveries are critical to meeting future energy needs. "If we don't renew reserves we are about to die and no-one wants to die, " he said.

He added that there was almost no growth in reserves between 2003 and 2004 reported by the oil majors.

A combination of soaring demand from developing economies such as China and India, tight global stocks, supply interruptions in major oil exporting nations such as Nigeria and Venezuela, and a shortage of refining capacity, have conspired to intensify concerns.

Luis Vierma, vice-president for exploration and production for Venezuelan oil giant PDVSA, added his voice to a growing number of experts who believe energy prices will remain high for the foreseeable future. "We believe cheap oil is gone. We don't see prices falling below $35-$40 a barrel, " Vierma said.

Hurricane Katrina which uprooted rigs in the Gulf of Mexico, sending some hurtling 60 miles away, is estimated to have damaged at least 30 offshore platforms and 12 rigs, reduced daily oil production in the region by around 57% and is estimated to have caused damage across the three states affected of some $100 billion.

Oil companies and refiners in Louisiana are working flat out to restore normal activity, but industry experts estimate it will take until December to restore normal output.

Katrina served as a grim reminder of the implications of increased consumption and production of hydrocarbons for the environment and the link between global warming and natural disasters.

These concerns were countered by optimism over remaining reserves from Saudi Aramco, the world's top oil producer. Mahmoud Abdul- Baqi, vicepresident for exploration for Saudi Aramco, said that to meet world demand in 2020 the industry needs to add 22 million barrels of oil per day.

"The challenges are phenomenal. The main one is to commit new capital investment, " he acknowledged. However, he insisted: "There is no physical shortage of oil."

He said Aramco's proven reserves amount to over 260 billion barrels in 80 fields with 300 reservoirs and that on top of this Saudi Arabia has large expanses of unexplored acreage which he said could potentially contain a further 100 billion barrels.

The magnitude of Saudi oil reserves however has been called into question by leading industry veteran Matt Simmons, founder and chairman of energy investment bank Simmons & Co, and an energy adviser to President Bush.

Saudi Arabia's ability to open the taps during a crisis is critical. Abdul-Baqi said the nation has always maintained spare capacity of 1.5 million barrels of oil per day. "We are currently at maximum sustainable capacity of 11 million barrels per day, " he said.

Aramco is also assessing the future potential of exploiting non- conventional hydrocarbon resources such as so-called heavy oil, tight gas, shale oil, tar-sands and bitumen, all of which still present technological challenges.

Abdul-Baqi said global conventional reserves of oil amount to over one trillion barrels but that non-conventional reserves are estimated at even trillion barrels. He called on the industry to come up with breakthrough technology in this area.

It is an area on which other oil-rich nations such as Venezuela, the fifthlargest world oil exporter, are also focusing .

PDVSA's Vierma claimed that successful exploitation of non- conventional reserves could catapult Venezuela into world number one in terms of global hydrocarbon production.

However, several industry veterans questioned this claim privately.

But technology is advancing rapidly in the areas of seismic and drilling.

John Constable, chief economist at ExxonMobil, said that in the 1940s drilling took place in depths of 50 feet whereas now rigs can drill in over 10,000 feet of water. Such advances make higher recovery factors possible - a vital consideration for mature oil basins.

Fields discovered in the 1970s in the UK Continental Shelf (UKCS) such as Shell's Brent field are still producing today, thanks to technology breakthroughs.

Tom Botts, executive vice-president for Europe for Shell International exploration and production, said it is important to retain a sense of perspective about the continuing importance of mature fields.

He said Brent is producing at less than one-quarter of its peak capacity but in 2002 still produced more energy than solar, wind and renewable sources in the entire world.

He added that work being done by Shell across the globe today would have been impossible five years ago.

Dave Blackwood, director of BP's developing assets business unit said the company's Valhalla field in the North Sea is a field of the future, remotely operated with onshore operational control.

He also reminded delegates that the UKCS also has 30 million barrels of reserves still in place. "If you pull together the remaining UKCS reserves we are building a new business the same size as the whole Azerbaijan energy industry, " Blackwood said.

The UK remains the fourth biggest gas producer in the world and the 13th largest oil producer.

Independent consultant Philip Lambert of Lambert Energy Advisory, said that $1.4 trillion of oil capital remains in the North Sea, but he believes even 30 million barrels is not enough to justify keeping that amount of capital in the region.

A stable regulatory regime had encouraged majors to stay but Lambert said a process of "seduction" should commence so that more assets are transferred to independent operators.

Paul Blakeley, head of Talisman's operations in the North Sea said a shift is taking place. He said that in 1997 some 18% of the global capital of oil majors was invested in the North Sea compared to 5% in 2005 and he added that independents such as Talisman are playing a key role in extending the life of fields such as Buchan which was destined to cease production in 2003 but will remain operational to 2020 and beyond.

Pent-up demand for UK assets remains, according to John Crum, head of Apache's operations in the North Sea.

Apache was awarded 22 blocks in the latest licensing round but Crum is frustrated that the high oil price is making it hard to strike deals, while rising costs mean promising projects remain economically marginal.

Apache took over the huge Forties field from BP, Crum said: "We're keen to expand and develop an even bigger business here."

Rising costs for drilling rigs and a manpower crisis as the oil workforce ages are constraining opportunities for oil companies across the globe and industry leaders vowed to redouble efforts to plug a skills and recruitment gap.

A major concern is that young engineering graduates in particular view oil and gas as a sunset industry but projections of world energy demand growth show that oil and gas are expected to continue to be the primary sources of energy at least until 2030, accounting for 60% of energy supply, according to ExxonMobil's long-term forecasts.

Chief economist John Constable said there is a fundamental linkage between economic growth and energy usage and that transportation will account for increasing energy consumption.

He forecasts world economic growth of some 2.8% per annum to 2030, with the US economy doubling in size and China emerging as the largest Asian economy.

Last year soaring energy demand for these two nations accounted for the lion's share of growth in global consumption.

Increasing prosperity in nations such as China and India is expected to result in significantly higher energy consumption.

"If you think of commercial energy consumption in China for example as equivalent to one 100 watt light bulb - what are the implications of two or three light bulbs?" he asked.

Constable says income thresholds of $1000 per capita begin to trigger greater vehicle ownership.

As income levels rise to $3600 in parts of the developing world, people will begin to turn away from kerosene lamps, dung fuel and firewood and spend on lighting, fridges and second-hand cars.

Constable identifies vehicles as a key driver of energy consumption. "India and China's GDP is generated by truck movements - it's the Chinese equivalent of white-van man, " he said.

Car ownership in China is just eight per 1000 people but Constable says this could rise to 50 per 1000 and he forecasts increasing emphasis on energy-efficient vehicles with low pollution levels such as Toyota's Prius.

A complex interplay of forces affecting energy market forecasts includes a push to lower greenhouse gas emissions; increased interest in renewable energy sources such as solar, wind, wave and biomass fuels; revived interest in nuclear energy; and a push for energy efficiency.

Total world energy demand is expected to grow by 1.7% per year from about 215 million barrels of oil equivalent per day today to 335 million in 2030.

Constable predicts that oil and gas will remain the dominant sources of energy supply. He assumes declining nuclear capacity, hydro growth of just over 2% per year and limited growth in biomass. Wind and solar energy growth will be high at 10%, but will still account for only 1% of total supply by 2030.

Against this backdrop, it is easy to understand why every drop of oil extracted from the battered rigs in the Gulf of Mexico and the ageing platforms in the North Sea counts.

It also explains why Katrina not only shook the devastated citizens of the United States to their core, but put global energy supplies back at the top of the political agenda from Washington to Beijing, Riyadh to Caracas and all the way to the heart of Aberdeen last week.

THE 23RD OIL & GAS LICENSING ROUND

Highest number of licences awarded since 1964

152 licences covering 264 blocks offered to 99 companies

24 new entrants to North Sea

70 Traditional licences

76 Promote licences offered at 10% of cost of traditional licence

6 Frontier licences offered for West of Shetland acreage

ExxonMobil gets 1.2 million acres - largest single licence award in UK history

Source: Department of Trade & Industry

Source: Sunday Herald

More News in this Category