Drilling

Very little commentary has appeared on the effects of the recent Chilean earthquake on the country’s oil and gas industry. The magnitude 8.8 (moment magnitude scale) earthquake occurred at 3:34 am on Saturday, February 27, off the coast of the Maule region, central Chile. The epicenter was 330 km southwest of the capital, Santiago. It was the largest quake in Chile in 50 years (since the 1960 Valdivia earthquake) and set off a tsunami that battered the Chilean coast and resulted in hundreds of deaths and substantial damage to property and infrastructure.

No warning?

The Chilean hydrographic and oceanographic service (SHOA), failed to send out a nationwide tsunami alert following the earthquake. SHOA is a branch of the Chilean Navy (“Armada de Chile”). Immediately following the tsunami, Chile’s defense minister, Francisco Vidal Salinas, said that the Chilean Navy had made a mistake by not immediately issuing a tsunami warning, which could have saved lives. The head of the service, Commander Mariano Rojas, was fired on March 5. According to the Santiago Times, Commander Rojas will be replaced by Commander Patricio Carrasco.

In a national catastrophe, there is seldom a single factor upon which all blame can rest. Was Rojas really the single point of failure? Perhaps the uncoordinated response by SHOA can be tied to the story of a ship launched a few hours too early – the Cape Horn.

Naval officials preoccupied?
In the days preceding the earthquake and subsequent, devastating tsunamis, Chile hosted the COPONA 2010 – Congreso Panamerican do Poder Naval  (Pan American Naval Power Conference) in Santiago. Some conference attendees participated in a post-conference site visit to the port city of Talcahuano and its naval dockyard (ASMAR) to witness the planned launch of the Chilean Navy’s newest oceanographic vessel: AGS 61 Cabo de Hornos (Cape Horn). The launching ceremony was scheduled for 1:30 pm Saturday and was to be attended by the President of the Republic of Chile, Her Excellency Michelle Bachelet. According to the IQPC:

The oceanographic and fisheries vessel (AGS) is a state-of-the-art survey vessel built to serve Chile’s needs to develop and survey new resources while monitoring existing ones. Her design, compliant with ICES Cooperative Research Report 209 relating to underwater noise reduction, is built for worldwide geologic, fishery resource survey and oceanographic research. Cabo de Hornos is the latest oceanographic research vessel built under the MEDUSA project – a long-standing desire of Chile’s oceanographic and fishing community to be able to conduct enhanced marine studies, gain a greater knowledge of Chilean seas and gather invaluable information for the best possible management of Chile’s natural resources.

Talcahuano engulfed
The Cabo de Hornos was built to replace the Chilean Navy’s Vidal Gormaz, but the tsunami that engulfed the port of Talcahuano swept the new ship from its rails and left it lodged behind a crane. The ASMAR shipyard was heavily damaged and authorities estimated it will take five years to rebuild. The European Union Satellite Centre (EUSC) issued a report on March 5 diagramming damage to the shipyard, which includes a broken pier, at least five large ships that were tossed and grounded, and other damaged vessels. Video footage from Mega Noticias, in which Commander Rojas talks with commentator Rafael Cavada, shows floating cranes and at least one floating drydock tossed up by the tsunami. On March 9, Public Works Minister Sergio Bitar said that Chile has complete connectivity by land, air and sea, except for the port of Talcahuano. Many of the repairs to Chle’s roads, bridges, airports, dams, canals, coastlines could be done this year, but the port repairs will take longer.

Petroleum sector
Chile’s Magallanes basin has crude reserves of about 150 mbo in a few dozen fields, but production is declining. State-owned Empresa Nacional del Petroleo (ENAP) controls Chile’s oil sector and operates three refineries with 226,800 b/d of crude oil refining capacity. On March 3, Reuters reported that two of ENAP’s refineries were shut as a result of the earthquake: the BioBio refinery north of Conception and the Aconcagua refinery near Santiago. Another earthquake struck offshore Bio-Bio on March 5, magnitude 6.6 (USGS details).  ENAP later declared force majeure on a crude shipment from Ecuador’s Petroecuador due to refinery damage.

Sonacol operates Chile’s domestic oil transport network, with 290 miles of domestic crude oil and product pipelines and a fleet of oil tankers. Chile imports crude oil predominantly from Argentina, Brazil, Angola, and Nigeria, partly through two crude oil import pipelines: the 270-mile, 115,000-bbl/d Trasandino pipeline, supplying crude from Argentina to southern Chile, and the Arica-Sica pipeline, crossing into far northern Chile from Bolivia.

Chile has about 3.5 Tcf proven natural gas reserves and does not produce enough to cover domestic consumption. There are four main gas import pipelines, two in the north, one serving Santiago, and another farther south, paralleling the Talcahuan-Nequen crude oil pipeline. Reuters reported that “Argentina will double its daily supply of natural gas to Chile” and that the earthquake has not damaged pipelines between the two countries.

The Quintero Bay LNG receiving and regasification terminal operated by BG Group, 155 km northwest of Santiago, was not damaged. The single-train Mejillones LNG regasification project in Antofagasta, northern Chile, was also unaffected.

Spanish word of the day: “terremoto” (earthquake)

Postscript, 11 March 2010, 10:00am CST - Chile experienced two more large earthquakes this morning, magnitude 6.9, with epicenter in Libertador O-Higgins. Details from USGS here.

The American Petroleum Institute plans to deepen its grass-roots campaigning, with a new manager to “coordinate the association’s efforts to develop, mobilize and sustain a political infrastructure of individuals, groups, and coalitions to advance priority advocacy issues with elected officials.”

The organization announced on March 1 that it has hired Deryck Spooner away from the Nature Conservancy, to serve as API’s Senior Director for External Mobilization.  Spooner is based in Washington, DC, and previously managed climate change advocacy outreach work at the Nature Conservancy.

Both organizations lobby different agendas, and Spooner’s switching allegiances seems like a significant change in career path.  API seeks to educate public officials about the critical role of oil and gas in our economy, but has had less recognizable impact on educating the public.

A native of Trinidad and Tobago, Spooner, 42, is close to completing a Ph.D. in political science at Howard University. 

“Deryck has extensive experience in the strategic and tactical aspects of both political and issue campaigns,” said API President and CEO Jack Gerard. “He’s a veteran of coalition building and grassroots mobilization and will play a vital role in our advocacy work at a critically important moment for US energy policy.  We’re extremely fortunate to have him on our team.”

“The position at API is a tremendous opportunity and challenge,” Spooner said.  “My father was a petroleum engineer in the oil business.  I spent part of my childhood on the rigs.  I know how important oil and natural gas are today and will be for the nation’s energy future even as the use of alternative energy grows.  I’m determined to work hard to help ensure the nation’s energy policies reflect this reality”.

[I won't quibble with his familiarity with the petroleum business, but how many operators allow kids on drilling rigs? Was he playing around the machinery?]

Writing for the New York Times blog, Green Inc., Annie C. Mulkern  quoted API spokeswoman Cathy Landry, “Jack’s vision is to mobilize the 9.2 million people whose jobs rely on the oil and gas industry. We do plan to step that up.”

Mulkern interviewed Spooner, who said, “I have worked for vastly different organizations throughout my career. The bottom line is it’s all about advocacy, that’s what I’m passionate about. Mobilizing and organizing people to influence the public process and public policy is what I truly love to do.”

“At the end of the day, I don’t necessarily believe that the views of [the Nature Conservancy] and API are incompatible.” API members use technology “to ensure that the places that they drill are not impacted,” Spooner said, while the Nature Conservancy uses a scientific approach in deciding where to protect land and water. API members, he said, “don’t just want to drill anywhere for drilling’s sake. There’s a lot of science going into where they drill.”

Lots of science indeed.

The recent news of proposed acquisitions and 2010 budgets contain some large, large numbers. We’re becoming accustomed to tens of billions of dollars in planned transaction values.

This week, we read that Schlumberger Ltd. now plans to acquire Smith International Inc. for US $11 billion ($11,000,000,000), and India’s Reliance Industries Ltd. raised its offer for LyondellBasell Industries AF to $14.5 billion ($14,500,000,000). Barclays Capital said in December that oil and gas industry spending will rise 11% this year to $439 billion ($439,000,000,000), anchored by 2010 budgets at Royal Dutch Shell ($28 billion), Chevron Corp. ($21.6 billion), BP PLC ($20 billion), and Total SA ($18 billion).

In terms of market capitalization, ExxonMobil Corp. leads the major integrated oil & gas companies with $309.1 billion, followed by PetroChina Co. Ltd. ($203.5 billion), BP ($169.6 billion), Shell ($164 billion), Chevron ($146.4 billion), and Total ($129.6 billion).

Among the oilfield equipment and services companies, Schlumberger leads with $73.7 billion market capitalization, followed by Halliburton Co. ($28 billion), National Oilwell Varco Inc. ($18.6 billion), Baker Hughes ($15 billion), and Weatherford International Ltd. ($12.3 billion).

However, China’s CNOOC Ltd., leads the industry with $7.013 trillion market capitalization. CNOOC raised its 2010 capital budget to $7.93 billion, planning to spend 29.5% more than it did in 2009, but it’s still barely 25% of front-runner Shell’s 2010 budget.

These long strings of zeros represent sums that dwarf the personal budgets of almost all workers by a vast margin. Do we appreciate and will the next generation entering the workforce properly comprehend numbers at this scale? Many high schools offer classes in basic economic theory, business priniciples, and perhaps personal budgeting, but are today’s 18-year olds equipped to understand-and vote-on issues* involving trillions?

*According to the US national debt clock, the US deficit stands at $12 trillion and has increased an average of $3.87 billion daily since Sept. 28, 2007.

After withdrawing its ambassador in 2005, the United States has sent an envoy to Syria and plans to post an ambassador. Under-Secretary of State William Burns met with Syrian President Bashar al-Assad in Damascus this week, after Syria approved the nomination of career diplomat Robert Ford as the new US ambassador.

What does this mean for the oil industry?

Ford currently serves as the deputy chief of mission in Baghdad, served as ambassador to Algeria 2006-08, and deputy chief of mission in Bahrain 2001-04. He should be familiar with the politics of oil in northern Africa and Middle East. Iraq was a founding member of the Organization of the Petroleum Exporting Countries (OPEC) in 1960, and Algeria joined OPEC in 1969. Syria is a prospective member.

According to the New York Times today, analysts say Washington hopes to pull Syria away from Iran.

Syroil 2010, the 7th Syrian International Oil & Gas Exhibition, is scheduled for April 5-8, sponsored by Syria Shell Petroleum Development BV, Total E&P Syrie, Petro-Canada, Sinopec, CNPC, SSKOC, Schlumberger, and others.

According to an Arab economic report issued in January 2008, Syria’s oil reserves rank 11th in the Arab world, tied with Yemen, at 3  billion bbl. Syria’s gas reserves were also ranked 11th, at 310 billion cu m.

In October 2009, Syria and Venezuela signed trade, agriculture, and energy cooperation agreements. Industry players from Canada, China, and the Netherlands are developing relations and projects- and perhaps the US is finally following suit.

An editorial in today’s Miami Herald lambasts Venezuelan President Hugo Chávez for trying to prevent collapse of the country’s strained infrastructure with energy advisors from Cuba (”Venezuela heads toward disaster,” 9 Feb. 2010).

Venezuela is rich in natural resources but petroleum production has plummeted in the last decade under Mr. Chavez’ leadership. According to the US Energy Information Administration (EIA) figures from 2007, Venezuela had the second largest proven oil reserves in the western hemisphere-99.4 billion bbl-after Canada  (178.1 billion bbl).

In 2007, the country had net oil exports of 1.9 million barrels per day (bbl/d), seventh-largest in the world and the largest in the Western Hemisphere…[but] crude oil production in the country has fallen, mostly due to natural declines at existing oil fields.

Industry experts estimate that Petroleos de Venezuela S.A. (PdVSA), the country’s state-run oil and natural gas company, “must spend [US] $3 billion each year to maintain production levels at existing fields, as many of these fields suffer annual decline rates of at least 25%”  (EIA). But PdVSA’s ability to reinvest in infrastructure and field maintenance is stymied by the increasing demands placed upon its finances by the government [not unlike Mexico].

The Miami Herald author writes, “The problem with PDVSA, the oil company, as Venezuelans well know, is that Mr. Chávez turned it into a sinecure for political cronies, destroying its once admirable efficiency and productive value. Only by putting the experts back in charge can it hope to recover.” 

Mr. Chávez has cultivated a close relationship with Cuba since coming to power, and has increased shipments of crude oil in exchange for the services of Cuba’s well-trained doctors (highly regarded by many in the US) and other advisors. Now Chávez has invited Cuban advisors to help solve Venezuela’s energy crisis. Presumably this includes electricity, power generation, and oil production. (”Chavez turns to Cubans for help with energy crisis,” 3 Feb 2010) 

I applaud Cuba’s movement to explore its offshore resources but it is still a fledgling effort, and coupled with the island country’s own electricity crisis and continuing blackouts, does not constitute the depth of experience necessary to plan or critique energy policies in Venezuela. Fixing the South American country’s large and well-established petroleum industry requires more expertise than the Cubans are likely to deliver.

The editorial also notes that Mr. Chávez has “spent $6 billion to buy weapons from Russia, and provided covert support to the terrorist Revolutionary Armed Forces of Colombia (FARC).”

Neighboring Colombia has a long history of oil exploration, recently improving and attracting considerable foreign investment. The country is reportedly safer for travel and business than it has been in decades. If the allegations of Venezuela supporting the FARC are true, one wonders why President Chávez would deliberately antagonize and attempt to destabilize its neighbor to the west. Surely Colombia could provide more knowledgable technical industry advisors than Cuba?

Colombia’s hydrocarbons regulator Agencia Nacional de Hidrocarburos (ANH) starts an exhaustive schedule of road shows this week, promoting “Open Round Colombia 2010.” 

ANH will offer data rooms and presentations in five cities from February 1 to May 16: Calgary, Houston, London, Rio de Janeiro, and Shanghai. Presentations alone are schedules for eight additional cities, presumably for financial analysts and management: Toronto, Dallas, New York, Madrid, Edinburgh, Sydney, Perth, and Singapore.

Colombia is offering three types of blocks in this open round:
Type 1: 74 blocks totalling 4.347 million hectares, containing 192 wells, in E&P “Miniround” for mature basins.
Type 2: 31 blocks totalling 8.458 million hectares, containing 147 wells, in E&P round for basins with new potential.
Type 3: 63 blocks totalling 39.058 million hectares, containing 50 wells, in TEA round, for frontier basins.
[TEA = special technical evaluation agreements]

Financial capacity test for a single Type 1 block is US $2 million; for Type 2 block it’s $20 million, and for a Type 3 block, it’s $200 million. The ANH additionally states that “ Those participants appearing in the last issue of “The Energy Intelligence Top 100: Ranking the World’s Top Oil Companies” are understood as qualified.”

E&P contracts are for 30 years, defined as 6 years of exploration and 24 years of production. New seismic and well data will be kept confidential for 5 years.

Offers are due to ANH by June 21.

Another oil spill on the Texas-Louisiana coast? Off with their heads! (as the Queen of Hearts says in the new “Wonderland” musical at Houston’s Alley Theatre).

News of the massive oil spill in the Sabine Neches Waterway at Port Arthur, Texas is another blow to the image of the oil industry and bad news for the coastal wetlands of Texas and Louisiana. Port Arthur is near the mouth of the Sabine River, the natural boundary between Texas and Louisiana.

The flora and fauna of coastal estuaries support a large Gulf of Mexico fishing industry, support millions of migrating birds that move throughout the Americas, and support the tourist industry in local communities through birding, fishing,  hunting, and other recreation.

The Gulf of Mexico shorelines are constantly under threat from hurricanes, red tides, industrial pollution and accidents such as this one. The Texas coast stretches 367 miles between the borders with Mexico and Louisiana, but it has an estimated 3,300 miles (5,310 km) of shoreline (including islands, bays, and river mouths), administered by 18 coastal counties. The Texas General Land Office (GLO) is responsible for managing the coast, protecting natural resources through initiatives such as Recycling, Adopt-A-Beach and Oil Spill Prevention and Response programs.

The Great Texas Coastal Birding Trail attracts many visitors from around the world to see a rich variety of species on annual migration routes, and includes 41 Texas counties. Oil spills have a decidely negative effect on any natural environment and images of oil spills, however localized, may significantly deter tourism. The birds, however, have no choice.

Just as we suspected, “there is no credible evidence that expanded oil and natural gas exploration and development in the Eastern Gulf would adversely affect military missions in that area.”

Such was the conclusion reached in a paper released yesterday by Securing America’s Future Energy (SAFE), with an analysis of the potential impact of expanded oil and natural gas exploration in the Eastern Gulf of Mexico on military activities, including training and weapons testing.

The paper, “Eastern Gulf of Mexico Oil and Gas Exploration and Military Readiness,” was produced in collaboration with Commonwealth Consulting Corp., led by Col. Martin Sullivan, USMC (Ret.)

SAFE and its Energy Security Leadership Council (ESLC) conducted a media conference call when they released the report.

Based on the US Department of the Interior’s Minerals Management Service (MMS) mean estimates, the Eastern Gulf contains 3.9 billion bbls of oil and 21.5 tcf of natural gas. A confirmed discovery in Destin Dome contains enough natural gas to supply 1 million households for 30 years.

General Charles F. Wald, USAF (Ret.), former Deputy Commander, United States European Command, said. “If expanded energy production in the Gulf put our armed forces or our nation’s readiness in danger, we would never support it. But this report makes clear that there is no conflict in the overwhelming majority of cases.  We can improve our energy security and remain at peak military readiness at the same time.”

Senator Byron Dorgan (D-ND), a member of the Senate Energy and Natural Resources Committee, said the report “shows that it is possible to expand production in the Outer Continental Shelf without compromising our need for military training and readiness.”

“Allowing oil production in the Eastern Gulf of Mexico is included in the comprehensive energy legislation that has already passed out of the Senate Energy Committee in a bipartisan fashion,” added Dorgan. “We need to finish the job by passing an energy bill this year. It is time for Democrats and Republicans alike to come together and act to strengthen our nation’s energy security.”

So let’s get drilling.

As more shales are exploited for natural gas, demand grows for locally sourced sand to use as a proppant during hydraulic fracturing operations. Shipping tons of sand cross-country is costly, so developing local sources in or near the new shale plays can improve the bottom line.

While new sand mining and processing operations ostensibly create local jobs–and that’s a good thing in a down-economy–not everyone wants a soon-to-be abandoned quarry in their back yard (NIMBY). 

I read recently about new frac sand mining proposals in Arkansas’ Izard County.
Arkansas resident Jennifer Bove, in “The View from My Boots” blog, wrote about frac sand mining threatening the Arkansas Ozarks.

Bove published a letter from Gene Dunaway of a group called “Friends of the North Fork and White Rivers.” Dunaway said that Fayetteville shale operations are driving the development of new frac sand quarries, such as a site near Calico Rock, and expansion of existing ones, such as the Guion sand plant, established in 1909 by the Arkansas Silica Sand Corp., now controlled by Connecticut-based Unimin Corp., an international industrial mineral producer. 

[In April 2009, Unimin announced a major capital expansion at its Guion plant that will increase by 700% the plant's capacity to produce ISO/API 40/70 frac sand. The expansion will add an additional 250,000 tons of 40/70 to the company's existing 40/70 capacity in Arkansas and be completed by end of 2009. The company's action is in response increased demand for ISO/API 40/70 grades in the Fayetteville, Haynesville and Barnett basins, where 40/70 is the preferred proppant to efficiently extract gas from shale reservoirs. Guion is ideally situated to serve these production fields via truck and Union Pacific rail direct service. The plant, located in Izard County, AR, has 48 employees.]

“Quarry mines usually become big holes in the ground,” Dunaway writes.
Evident after 100 years of operations at Guion.

“Large-scale quarry mining could change the entire character of our area.”
Agreed. Not sure what the Calico Rock area looks like now, but tourism is apparently one of Izard County’s chief industries.

“Quorum Court should take action immediately to…assure there is no risk to our water and property.”
One hopes that municipalities and governing bodies have professional standards for environmental protection. 

[Arkansas, to its credit, had one of the first programs to register and license geologists in this area of the country. When I first started working on the Gulf Coast, it was the only state to offer this, so for a number of years, I was a licensed Arkansas geoscientist. Texas has since added registration.]

On December 3, 2009, the Arkansas Department of Environmental Quality (ADEQ) held a public meeting and hearing in Mount Pleasant, AR, to take comments regarding a construction permit for a process water recycling pond for Bluebird Sand LLC, in Izard County. 

Bove wrote separately about the Calico Rock sand quarry, “Calico can do better than frac sand mining.” She’s opposed to unrestricted development and questions the large volumes of water used in mining operations, contamination of discharge water, road traffic, and air-quality issues. She wrote later blogs up on the dangers of silica dust at the mine site and along he haul roads, providing an exhaustive list of resources on silicosis.

Aside:
Geology of two parallel mountain ranges in western Arkansas, the Ozarks and the Ouachitas, is strikingly different. One has incredible mineralogy and the other…doesn’t.

 
Related news from disparate sources piqued my interest over the holidays.

On Dec. 22, Evan Ramstad, Korean correspondent for the Wall Street Journal, wrote that “Pain awaits Korean Shipyards,” which was differently titled on wsj.com as “Seoul Frets Over Shipyards.”

The gist of the article is that the global downturn is now beginning to affect shipyards, and South Korea, home to 7 of the world’s 10 largest shipbuilders, experienced a plunge in orders in 2009.

 According to Clarksons PLC, a London-based shipping brokerage and consulting firm, 2005-07 were the biggest years ever for shipbuilders, reaching a peak of 90 million compensated gross tons ordered worldwide in 2007. This plummeted to less than 10 million ordered in 2009, and China nearly tied South Korea in new orders.

South Korea previously garnered 10% of its GDP from shipyard exports, and Korean policy makers expect the loss of orders to lead to steep job losses and financial difficulties for shipyards. In December, they began to propose steps to cope with the changes in coming years. This may include restructuring troubled companies and providing subsidies to encourage shipyards to enter new businesses, primarily building platforms for oil and gas and wind turbines.

There are now 37 drillships under construction: 34 at shipyards in South Korea, and only 3 in Singapore. The most recent contract announced (Dec. 18) is the US $1.1 billion order with South Korea’s Daewoo Shipbuilding to build two new drillships for delivery in 2012.

Contracts for new semisubmersible drilling rigs are more widely distributed and there are 38 under construction worldwide: 17 in Singapore, 10 in China, 5 in South Korea, 3 in the UAE, 2 unspecified (potentially Brazil?), and 1 in Italy (according to RigZone).

Yards will stay busy for several years, working off this order backlog, but orders for new rigs have slowed. Which makes a January 4 report in the Moscow Times (provided by Marinelink.com) all the more curious.

Russian Prime Minister Vladimir Putin announced that the state-run United Shipbuilding Corp. would invest $7 million in two joint projects:

- Create a new yard on Chazhma Bay to build drilling platforms with Singapore’s Yantai Raffles.

- Add a new drydock to the Zvezda factory in Bolshoi Kamen to make tankers (LNG and other) with South Korea’s Daewoo.

Putin said the Russian government would spend $5 billion on new civilian ships and related technology in the Far East through 2020. It is a curious time to invest in infrastructure projects, one possibility being that Putin wants construction money spent on infrastructure improvements within Russia, rather than giving it to neighboring South Korea, China, or Singapore.  

(And with a nod to the cold front about to pummel the Gulf coast tomorrow, a photo in the Houston Chronicle this week showed that über-athlete Putin prefers SCOTT ski goggles, while Russian President Dmitry Medvedev prefers Bogner. Last January, the Huffington Post showed Putin in a similar pair of old SCOTT goggles –and hat– but he has wisely switched to wearing a svelte, safe ski helmet this season. Throwing caution to the wind, Medvedev is still in a hat.)

Follow-up, 12 Jan 2010, from marinelink.com:

“According to a Jan. 12 report from The Chosum Ilbo, Korean shipbuilders won new orders worth over $1 billion in the first 10 days of the new year, in a complete reversal of the situation last year. STX Offshore & Shipbuilding and Hanjin Heavy Industries delivered the good news on Jan. 11, and Daewoo Shipbuilding & Marine Engineering and Sungdong Shipbuilding & Marine Engineering won new orders earlier. Industry insiders said an overseas marketing drive in the second half of last year finally paid off. “