Wednesday, August 13, 2008

Bell Curve # 1 - Oil

Analysis: On its last legs
By Ed Crooks - Financial Times, London
Published: July 11 2008 19:09 Last updated: July 11 2008 19:09

To appreciate the achievements of the North Sea oil industry, you really need to go offshore, flying an hour or more in a cramped helicopter above the churning waters that lie between Scotland and Norway.

Cat’s-cradles of pipework, planted on the sea bed up to 600 feet below, the platforms are awe-inspiring feats of engineering. They are also fraught with hazards. technological achievments. the oil & gas industry is next only to the armament industry in terms of its technological accomplishments and employment of technology in my opinion. Last weekend, memorial services commemorated the 20th anniversary of the Piper Alpha explosion, the world’s worst offshore disaster, in which 167 were killed.

Yet for all the skill and bravery of the workforce, the industry is fighting a losing battle: the North Sea is in terminal decline. The challenge now is how to squeeze out as much oil and gas as possible before the wells finally run dry. With crude prices above $147 a barrel yesterday, any extra output would be more lucrative than ever – but is the industry there in shape to deliver?

As the world looks ahead nervously to the exhaustion of its reserves of fossil fuels, whenever that may come, the North Sea is an early indication of how that decline will come. Oil & Gas UK, the industry association, warned this week that without heavy investment again thinking that investment can get us out of this predicament. Money cannot change geology. and the development of new fields, the UK sector of the North Sea would be “effectively over by about 2020”. We have to be very clear in our thinking here. The trouble starts when we hit a global peak not when we run out of oil. Anyone who has driven a car knows, the car engine will sieze when there is less than optimal oil in it, not when the oil in it has run out.

Even if the industry does keep investing, and strikes lucky in finding fresh pockets of oil and gas, the iron laws of geology and economics cannot be turned aside. some laws of economics like the 'Homo Economus', i.e., men are rational beings who always act in their self-interest are already being overturned “The North Sea will continue to decline,” says Mike Wagstaff, a former banker with Schroders who is now chief executive of Venture Production, an oil and gas producer focused on the North Sea.

“Whether we invest or not will change the rate of decline by maybe a couple of percentage points.” The investment also refers to Enhanced Oil Recovery. EOR will also change the shape of the bell curve from what it would have otherwisee been. It will change it from what normally will be a smooth tapering off on the decline side of the bell curve to a sharp drop. Then we are toast!!!

Opening up the North Sea in the 1970s helped break the power of Opec, thats like saying that the addict found a stash buried in his house and didnt need the pusher anymore. now the stash is nearing its bottom. the oil producers’ cartel, and deliver two decades of cheap energy, from the mid-1980s to the mid-2000s. Now, the region is one of the fastest-declining oil provinces in the world, according to the International Energy Agency. On the UK side, oil and gas output peaked at the turn of the decade and has been falling by 7.5 per cent a year since 2002. 6 years of technology, investment, a growing economy, (meaning a govt not strapped for funds) and they could do zilch about the decline

Today, the North Sea supplies about 4m barrels of oil a day from the UK and Norway, meeting about 4.7 per cent of global demand. That is about as much as Iran and more than Kuwait, Venezuela or Nigeria. By 2013, that will have dropped to 3m b/d or 3.2 per cent of demand, the IEA predicts.

While the Norwegian side was developed more slowly, and its peak came later, it too is in decline. Norway
suffered the world’s second-biggest drop in oil production last year, according to BP – exceeded only by the supposedly planned output reductions from Saudi Arabia.

Yet Aberdeen, the granite city on Scotland’s north-east coast that is the capital of the British oil and gas industry, does not feel like the heart of a dying business. Record high oil prices mean the cash is flowing freely, making Aberdeen an oasis of prosperity in the increasingly bleak landscape of credit-crunch Britain. The hotels are full all week, luxury car dealerships selling Mercedes and Land Rovers have been opening showrooms and the rush-hour traffic is horrendous. There are more Porsches per head in Aberdeen than in London’s elite Kensington. Luxury two-bedroom apartments are on the market at £400,000 – about what you would pay in a reasonably desirable part of London.

Scotland’s offshore workforce has risen from a low of about 19,000 at the start of the decade to about 28,000 today, while shortages of skilled staff have sent wages through the roof. An experienced diver can earn more than £100,000 a year.

About the graph above: The declines are happening in the big producers' fields, the increases are happening in the small producers' fields (more or less), so in a sense it is an incomplete picture of the situation.

Oil company profits are soaring, too. The industry will pay about £16bn in tax this year; about one-third of the corporation tax expected from the whole of British business. Office buildings are springing up across the city and its outskirts. BP moved into a new Aberdeen base this year and several subsea engineering companies – contractors that instal and maintain equipment underwater – have built head office buildings in Westhill, a suburb of Aberdeen that has been christened “surf city”.

That impression of robust health, however, is only half the picture. Head offshore and the troubles of North Sea are more readily apparent. The condition of the platforms and other installations varies widely. The best have the gleam of polished steel and fresh paint; the worst show every sign of exposure to the pitiless battering of wind and waves for three decades.

When the first platforms were built in the 1970s, they were designed for a life of 30 years or so. Few people believed they would still be active well into the 21st century. Many installations have had their lives extended for 10 years, some for 20.

A report last November from the Health and Safety Executive, which has responsibility for safety in Britain’s sector of the North Sea, was scathing about the state of some platforms. “Fabric maintenance is very poor on many platforms, showing inadequate long-term planning by the operators for the lifetime of installations, a lack of regard for the working environment of offshore workers and the risks to the individual of injury,” it said.

On the worst installations, handrails are pitted with rust and held together with scaffolding clips, while grating floors are crumbling and covered with board walkways. Paintwork is peeling and bubbling with corrosion. In the past few years, the industry has begun to get to grips with the problem: it is now spending about £1.5bn a year on “asset integrity”. The biggest problem with the North Sea, however, is below the surface: the fields are running dry. The giant areas developed in the 1970s are producing a fraction of their peak output and the fields being discovered today are tiny by comparison. The Forties field held 5bn barrels of oil, Brent about 4bn: more than 100 times the volumes of today’s typical discoveries in the UK sector. A new field of more than 50m barrels is a rarity.

The newer fields are also generally harder to exploit. The oil is heavy, so it will not flow easily, or is held in what is known as a “high pressure high temperature” reservoir: at 150 degrees Celsius or more. it is a well known fact in the oil industry that the second half of the oil that remains in a field is more diffcult to get out, is of lesser quality and is going to cost more to simply extract and refine Producing oil and gas from these fields means constantly pushing back the technological frontier.

Hopes for the future of the North Sea rest on new entrants: companies that can make a business out of investing in smaller and older fields that are no longer worth the time or trouble for the big international oil companies. This week, for example, Shell and ExxonMobil sold six fields to Taqa, a fast-growing energy group based in Abu Dhabi. Peter Barker-Homek, an ex-BP man who is Taqa’s chief executive, says he plans to invest up to £1.5bn in the fields, to raise production from 40,000 barrels a day to 60,000 b/d thats how much oil that probably lines the tankers after tehy are emptied; we are scraping the fields with our bare hands literally – a decision that would not have made sense for Shell or Esso.

“They were looking at those assets in a completely different way,” he says. “For a major, the problem is how to replace 1bn barrels of reserves. Taqa only needs replace 100m barrels.”
. . .
New entrants’ contributions are vital to sustaining the life of the North Sea. About 40 per cent of investment in the UK sector comes from companies that were not there eight years ago. they are operating assuming a high price of oil, when the oil price dips (if it does) in the aftermath of the coming global economic slowdown, they might have to pack their bags. Then, you know where to go and pick up your Porsche Venture and Oilexco, a Canadian company that is another relatively recent arrival, were the most active drillers of new wells last year.

Recently, however, the number of new entrants has been falling, although it picked up a little last year. The number of fields changing hands has dropped to its lowest for more than a decade. hmmm

Costs are one obstacle: the North Sea is one of the most expensive places in the world for an oil company and costs have been
rising fast. Tax is another. Oil executives observe wryly that while Venezuela and Russia have hit the headlines by grabbing a bigger share of their oil revenues, Gordon Brown did much the same thing with two tax increases imposed on North Sea companies when the prime minister was Britain’s chancellor of the exchequer.

Malcolm Webb, the chief executive of Oil & Gas UK, talks about a “window of opportunity”: the period when it is still possible for companies to develop fields in the North Sea by hooking up to existing infrastructure, before those ageing installations crumble away completely. “We don’t have the luxury of a great deal of time,” he says. “If the developments don’t come forward, if we are not making use of the infrastructure, then there is a real risk it will be decommissioned.”

Not everyone is so worried. Venture’s Mr Wagstaff thinks there will still be significant production in 2050. this guy is a recent entrant. he wouldnt have been a recent entrant, did he not think there was scope. wouldnt trust him. maybe greed clouding his rationality But the North Sea is showing how the whole of the global oil and gas industry is becoming more difficult and more expensive. As it fades away, the dependence of Europe and the US on Russia and the Middle East for their oil and gas is inevitably going to grow. Russia has a score to settle with the West. The coming down of the Berlin Wall wasn't stomached very well in the Kremlin. On top of that, our fiend Greenspan blamed the Housing Bubble in the US on the coming down of the Berlin Wall!!! Not kidding, google it and you will see
Copyright The Financial Times Limited 2008

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