james van blaricum

james van blaricum - Senior Staff Writer

HOUSTON, May 6 -- The definition of energy security must incorporate social acceptance of technology, availability of diverse energy sources, and environmental sustainability, said speakers May 6 during a panel discussion at the Offshore Technology Conference in Houston.

Robert Fryklund, IHS vice-president of industry relations, said society in general, including the oil and gas industry, is working to figure out how to achieve a balance between energy security and climate security.

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Unfortunately, this puzzle has a couple missing pieces, Fryklund said, There is a lot that we know, but there is a lot that we don't know. In the corporate world, we ask how much is it going to cost As individuals, we ask how much more are we going to have to pay at the pump

james van blaricum - Varied definition

Amy Jaffe of Rice University's Baker Institute, said the concept of energy security varies over time and also varies depending upon where one lives. For instance, Europeans generally are talking about natural gas when they discuss energy security while US citizens generally are talking about gasoline, she said.

So, different parts of the world are not even talking about same commodity, Jaffe said.

The definition of energy security also changes over time given perceived threats to energy supplies. Current threats include political instability and civil unrest in some producing countries, severe storms, and work stoppages.

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On top of that, we have to worry about a new producer climate. National oil companies feel empowered by oil supply shortages, and this will tempt them to flex their geopolitical muscle, Jaffe said.

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Not all types of energy are well received, she added, noting that oil sands are perceived by some as being good for energy security but bad for climate security.

Saying that she does not view energy security and climate security as two sides of the same coin, Jaffe acknowledged a growing sense of urgency about climate change and security of supply. New fuel efficiency standards will reduce US oil demand and emphasize greater fuel diversity, she said.

Trade offs will have to be made when determining the future energy mix, she said, adding that she questions whether many people yet realize the ramifications of such decisions.

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If we move to greater use of natural gas, what is that going to mean for US energy security, Jaffe asked. In a carbon-constrained scenario, LNG becomes quite more dramatic. It makes the US more dependent on imported LNG.

james van blaricum -  MMS view

Randall Luthi, director of the US Minerals Management Service, said he believes environmental security needs to be considered along with energy security and climate security.

The price of gasoline is only part of our energy equation, Luthi said. Without increased domestic production, imports will have to increase.

US energy production must be increased from all sources, including alternative and renewable energy, he said.

We do have to look at all possibilities new sources of energy as well as more efficient use of existing sources, Luthi said. It needs to be a worldwide effort. The US is a key part but other emerging economies need to be a part as well.

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Kevin Leahy, Duke Energy managing director climate policy and economics, said climate change will rework the energy supply and distribution system in the US, particularly for transportation fuels.

He believe the electric-generation business is going to drive carbon dioxide prices in a global carbon-trading scenario. He believes power also will drive natural gas prices.

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Regarding the future role of hydrocarbons, Leahy said, I could see where electrons would become the energy carrier for wealthy countries, and liquid fuel would still provide the energy in countries with emerging economies.

Key considerations for expanding the role of clean energy involve more than cost, said Robert LaCount of Cambridge Energy Research Associates. Other factors are scale, reliability, timing, integration, and unintended consequences.

When we look over the next couple decades, we would recommend keeping our eye on many different aspects to see how different energy sources develop, LaCount said.

james van blaricum - International perspective

Fatih Birol, chief economist for the International Energy Agency, sees a new world energy order with some new actors entering and some others leaving.

China and India are transforming global energy markets, Birol said, adding those two countries are expected to contribute almost half of the increase in global energy and 60% of CO2 emissions by 2030. China's oil imports are expected to reach 13 million bd in 2030, and car ownership there is forecast to jump to 140 vehicles1,000 people compared with 20 vehicles1,000 people today.

Carbon capture and storage would be good for energy security and climate security, but we are not yet there, Birol said

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OTC Nigeria invites investors to implement Gas Master Plan

james van blaricum - International Editor

LONDON, May 6 -- Nigeria is seeking $20-25 billion of private investment to build natural gas pipelines, processing plants, and other infrastructure under its Gas Master Plan, which has just been approved by the federal council.

The plan will help Nigeria become a major gas consumer and monetize its 182 tcf of proved gas reserves, said David Ige, group general manager at Nigeria National Petroleum Corp. Ige told delegates at the Offshore Technology Conference May 6 in Houston that the plan would help connect the resources to Nigeria's domestic and export markets.

The US Geological Survey puts undiscovered reserves at 600 tcf and our gas reserves are those found so far in exploring for oil. We have had any gas exploration program on its own, Ige added. The commercial framework and the lack of infrastructure have made it difficult to bring the resources to market.

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The plan anticipates an aggressive demand increase of 20-25% in the midterm because of domestic projects such as methanol plants, gas-to-liquids plants, fertilizer plants, independent power projects, and other LNG export plants such as Brass LNG.

Nigeria aims to have a market-driven gas sector by 2014 where the domestic and export market will come together, Ige said. We did the mistake with oil where exports were preferred over the domestic market and we don't want to make that mistake with gas. President Umaru Yar'Adua has called on companies to set aside gas production for local use and Ige told OGJ that the new domestic market supply obligation launched in February would see 1 bcfd of natural gas directed to consumers in Nigeria. This would rise to 4-5 bcfd over the next 5 years.

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By January 2011, Nigeria hopes to see a commercial domestic market and commercial pricing for gas to power. By January 2013, it expects to have a GTL market. Nigeria will give presentations in May in Abuja, London, and Singapore to provide more details on how investors can become involved in its gas development.

MARKET WATCH Crude hits new high; $200bbl predicted

james van blaricum - Senior Writer

HOUSTON, May 6 -- Crude futures prices hit an intraday high May 5 in the New York market as traders worried about the falling US dollar and supply disruptions in a tight market.

Prices continued climbing in early trading May 6 after Goldman Sachs Group Inc., the world's largest securities firm, predicted crude costs could escalate to $150-200bbl within 2 years. The front-month price for benchmark US crudes soared past $120bbl in intraday trading May 5 from $62bbl a year ago, indicating a continuing super spike in crude futures market, said Goldman Sachs analyst Arjun Murti.

He headed a Goldman Sachs team that in 1985 predicted a super spike of crude prices to $50-105bbl at some point within a few years because of continued unexpected strength in world oil demand and economic growth, especially in the US and China. The group also said at that time that retail gasoline prices could hit $4gal during the multiyear spike period until high prices force a reduction in oil consumption. Oil was then trading at a record level of $58bbl (OGJ Online, Apr. 5, 2005). Late last year, Goldman Sachs raised its 2008 oil price prediction to $95bbl from $85bbl for benchmark US crude and predicted crude might hit $105bbl before 2009 (OGJ Online, Dec. 17, 2007).

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The market-making strength of Goldman Sachs in the oil futures market is something to be never fully discounted, said Olivier Jakob at Petromatrix, Zug, Switzerland.

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The recent rally in oil futures prices has been so extreme (up $10bbl since May 1) that momentum indicators are hard to define as it took 2 days to do what previously took 10 days, said Jakob. Energy prices rebounded May 2 and May 5 from a brief but sharp decline in the middle of last week. The front-month benchmark crude has broken $120bbl in intraday trading but still needs to confirm that new mark by closing above $120bbl, said Jakob. There is no clear resistance level above $120bbl before $125bbl, he said.

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Energy stocks advanced yesterday, as both crude oil and natural gas [futures prices] increased. Crude eclipsed the $120bbl mark on concerns of supply disruption and signs of increased US demand. A report yesterday showed that US service industries increased in April, signaling higher energy use, said analysts in the Houston office of Raymond James & Associates Inc.

Meanwhile, Royal Dutch Shell PLC confirmed May 6 that a May 2 attack on a flow station in southern Nigeria forced the company to reduce exports by 170,000 bd (OGJ Online, May 5, 2008).

james van blaricum - Energy prices

The June contract for benchmark US sweet, light crudes hit an intraday high of $120.36bbl before closing at $119.97bbl, up $3.65 for the day on the New York Mercantile Exchange. The July contract gained $3.68 to $119.47bbl. On the US spot market, West Texas Intermediate was up $3.65 to $119.97bbl. Heating oil for June delivery advanced 8.78¢ to $3.31gal on NYMEX. The June contract for reformulated blend stock for oxygenate blending (RBOB) increased by 8.65¢ to $3.05gal.

The June natural gas contract shot up 40.1¢ to $11.18MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated by 39.5¢ to $10.88MMbtu.

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In London, the June IPE contract for North Sea Brent crude gained $3.43 to $117.99bbl. The May gas oil contract jumped up $23 to $1,099.50tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes increased by $4.61 to $111.50bbl.

OTC Technology key to Mexico's future oil production

james van blaricum - International Editor

HOUSTON, May 6 -- Technology is key to unlocking Mexico's petroleum resources and enhancing production, said Mexican Petroleum Institute Chief Executive Heber Cinco Ley at the Offshore Technology Conference in Houston May 5.

With subsalt plays and poor recovery efficiency for existing fields, Mexico needs improved oil recovery and innovative technology to help extend the productive life of its reservoirs, Ley stressed. Operators are finding Mexico's fractured reservoirs challenging because they are difficult to characterize, model, and simulate. We need a new generation of reservoir simulators, he said.

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The country's oil and natural gas industry is crucial to its economy, accounting for 40% of Mexico's federal budget. But production is on the wane oil output is 3.1 million bd, and gas is 6 MMcfd. Cantarell, Mexico's largest oil field, generates half of the output of state-owned oil company Petroleos Mexicanos (Pemex). Cantarell had been producing an average of 1.58 million bd, but production began falling last November to 1.3 million bd, and it is expected to drop to 600,000 bd by 2013.

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Ley said the challenge with Cantarell is accessing oil that is trapped under the gas cap.

Onshore Chicontepec field will require $14.5 billion to develop. Pemex expects to drill 5,421 development wells in the field by 2012. Oil production is expected to hit 1 million bd. However, according to Ley, Chicontepec has a primary recovery factor of only 5-7%.

Deep water will be the future source of oil production in Mexico, but expertise is needed in flow assurance, control pipelines, subsea systems, and other areas, Ley added.

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Pemex has assembled its first deepwater asset team for the Coatzacoalcos Profundo area, which Pemex hopes will produce 400 MMcfd of gas under a $40-70 billion investment program. The main fields are Noxal, Lakach, Lalai, and Nab.

Pemex also has contracted three semisubmersible drilling rigs for deepwater activity. Two of the rigs can drill in water as deep as 2,100 m, and the third can work in water 3,000 m deep.

Water management from producing reservoirs is another major challenge, as it takes 3 bbl of water to produce each barrel of oil, Ley added. We need to predict this accurately, as it can affect hydrocarbon production. We need to develop efficient drilling at lower costs.

API Lieberman-Warner bill could reduce domestic gas supply

james van blaricum - Washington Editor

WASHINGTON, DC, May 6 -- A climate change bill headed for the US Senate floor in early June could greatly reduce domestic natural gas production and send refining production and jobs overseas, according to a new report commissioned by the American Petroleum Institute.

ICF International report, which API released May 5, says that S. 2191, which Sens. Joseph I. Lieberman (I-Conn.) and John W. Warner (R-Va.) introduced Oct. 18, 2007, would raise the $25,000 estimated annual cost of operating a domestic gas well by some $12,500year by 2012 and $25,600year by 2030 because producers would be required to buy greenhouse gas emission allowances.

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Even though methane emissions from upstream oil and gas operations represent only about 1% of the national total, the impact on investment in new wells would be substantial because the estimated cost of allowances is high relative to gas well operating costs, the report says in its executive summary.

Higher costs would reduce the incentive to drill for gas, and it is estimated that gas drilling would decline, relative to the base case and depending on assumptions about potential additional mitigation efforts, by about 18-22% over 2012-20 and about 31-40% over 2021-30, the report maintains.

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Domestic gas production could be reduced (from the level estimated without the bill's enactment) by 3-4% in 2012, by 5-6% in 2020, and 7-12% in 2030, it indicates. Over the entire 2012-30 period, lost natural gas production is estimated at 20.4-30.8 tcf, which is roughly equal to 1½ years worth of production, it says.

james van blaricum - Less for refining in US

The report also warns that refinery investment would move overseas because US plants would be required to obtain greenhouse gas allowances for emissions when most foreign refineries would not. Domestic refinery investment could drop by more than $3 billionyear by 2012 and $11.5 billionyear by 2020, it says.

US refinery throughput could drop by an estimated 3 million bd in 2020 from a level of about 18.5 million bd under the study's base case, it continues. Imports of refined products could increase in 2020 to about 29% from 15% under the base case, the report says.

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Refiners and gas processors would feel additional negative impacts because they would be required to buy emissions allowances for their customers that would cost much more than the allowances for their own operations.

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For refiners, consumer emissions allowance costs would total an estimated $90.21 billion in 2012 (compared with more than $10.37 billion for emissions allowances from their own operations) and nearly $123.45 billion in 2020 (versus more than $13.59 billion). Gas processors could pay $39.62 billion for consumers' emission allowances (compared with nearly $1.86 billion for their own operations' allowances) in 2012 and $59.89 billion (vs. nearly $2.2 billion for refiners allowances) in 2020, the study projects.

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The study does not consider how the cost of consumer emissions allowances for gas processors could affect domestic gas supplies if the Lieberman-Warner bill is enacted.

To the extent that any of the consumer allowance costs are borne by gas processors or producers, the adverse impact on US natural gas supplies would be greater than estimated in the report, it says in its executive summary. The report did not examine that scenario because it could have created antitrust problems, API policy analyst Russell Jones said. But the American Exploration & Production Council and American Gas Association have both raised the question with senators and their staffs.

james van blaricum - Focus on supplies

LOS ANGELES, May 6 -- Indonesia has approved a proposal by Chevron Corp. to develop natural gas fields on the deepwater Galan Block off East Kalimantan.

The current price of oil has reduced the risks of developing deepsea gas blocks, said Energy and Mineral Resources Minister Purnomo Yusgiantoro. He said the price of natural gas is expected to increase in line with the price of oil.

According to ministry documents, Chevron committed to spend $311.6 million to develop the block, which is believed to have the potential to produce an average of 800 MMcfd. Chevron holds an 80% stake in the block, while Eni SPA holds the remaining 20%.

Chile awards eight exploration blocks

james van blaricum - Senior Correspondent

LOS ANGELES, May 5 -- Chile has signed contracts with four international oil companies for exploration of eight blocks in the southern Magallanes region.

Apache Corp., Pan American Energy LLC, Greymouth Petroleum Holding Ltd., and IPR-Manas collectively will invest some $222 million for seismic surveys and exploratory drilling over a 3-7 year period. Work is due to begin within 6 months.

IPR-Manas won the Tranquilo Block and will invest $33.2 million. Apache won the Russfin and Lenga blocks, where it will invest $23.4 million and $24.9 million respectively.

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Greymouth won the Porvenir, Brotula, Isla Magdalena, and Caupolican blocks and will invest a total of $107 million, while Pan American Energy won the Coiron Block, where it will invest $34 million. Brotula and Isla Magdalena are offshore, while Otway is onshore and offshore. The remaining blocks are onshore.

Chile's state-run oil company Empresa Nacional del Petroleos (Enap) holds a 50% stake in the Coiron, Caupolican, and Lenga blocks, with the remaining 50% in each block held respectively by Pan American Energy, Greymouth, and Apache. The other blocks will be 100%-held by the winning companies.

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For reasons that remain unclear, Total SA, which last October won the Otway Block where it was expected to invest some $44.5 million, did not attend the contract-signing ceremony.

Chile's Mining Minister Santiago Gonzalez said the government was surprised at Total's absence and that negotiations would start with the next company on the list—a consortium comprised of Wintershall, GeoPark Holdings Ltd., and Methanex Corp.

Analyst BMI said it is still possible that a deal might be worked out with Total SA before the contact is awarded to another company.

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MKJ Xploration to explore off Nicaragua

james van blaricum - Senior Correspondent

LOS ANGELES, May 5 -- Nicaragua has signed a 6-year contract with Louisiana-based MKJ Xploration for exploration and development of offshore crude oil and natural gas fields.

MKJ Xploration head Eric Conrad said the company will search for oil in two areas about 100 km off Nicaragua in the Caribbean Sea. If oil or gas is found, the company will have production rights for 30 years.

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Conrad said wells would be drilled in water as deep as 1,000 m. He said the company would pay 15% royalties on oil drilled and 30% of net profits earned in the country.

OVL's bids approved in Brazil, Trinidad and Tobago

james van blaricum - OGJ Correspondent

MUMBAI, May 2 -- ONGC Videsh Ltd.'s (OVL) proposal to buy 100% equity stake in two ffshore Brazilian blocks has been approved by the Indian government's Committee of Secretaries. OVL is the overseas arm of India's Oil & Natural Gas Corp.

The committee also considered another OVL plan to take a participating interest in a block off Trinidad and Tobago that it was awarded in the 2007 exploration licensing round.

OVL was declared successful bidder for two offshore blocks—ES-M-470 and SM-1413—for which it had competed during the recently concluded ninth round of open bidding in Brazil. The Indian company had bid for five blocks.

Block ES-M-4670 covers 725 sq km and lies in 1,100-1,700 m of water and could hold either oil or gas. It is 35 km from the nearest producing field Peroa, which is owned by state-run Petroleo Brasileiro SA (Petrobras); and produces gas and condensate. The block lies 100 km from the Brazilian coast.

A consortium led by Petrobras and another led by Perenco also put in bids for the block. OVL offered a signature bonus of $18 million for the block.

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Reliance contracts for new Transocean drillship

james van blaricum -  OGJ editors

HOUSTON, May 6 -- Reliance Industries Ltd., India's largest private sector conglomerate, signed a 5-year drilling contract with Transocean Inc. for a newbuild enhanced Enterprise-class design drillship.

A Transocean subsidiary executed a shipyard contract with Daewoo Shipbuilding and Marine Engineering Co. Ltd. for construction of the dynamically positioned, double-hull drillship in Okpo, South Korea, where four of Transocean's previously announced enhanced Enterprise-class drillships are being built. Total capital costs for the drillship are estimated at $730 million, excluding capitalized interest.

The 5-year drilling contract is expected to commence during fourth quarter 2010, following shipyard construction, sea trials, mobilization, and customer acceptance. The term of the contract may be extended to 7-10 years at the client's election up to 1 week after mobilization. The 5-year contract provides for day rates of $537,000 for the first 6 months, escalating to $557,000day for the next 4½ years. The 7 and 10 year contract terms would be $1.35 billion and $1.85 billion, respectively if Reliance Industries elects to keep the operating day rate fixed for the full 10 years and does not terminate the contract early.

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If Reliance Industries extends the contract to 10 years, then it may have the operating day rate for the second 5 years fluctuate based on crude prices. The operating day rate for the second 5 years would not be adjusted if crude is priced at $75bbl but would be raised on a straightline basis if crude is then priced between $75-100bbl, with a maximum 10% increase if crude is at or above $100bbl. It would be lowered on a straightline basis if crude is selling at $50-75bbl, with a maximum 10% reduction if crude is priced below $50bbl at that time.

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