‘It seems the world is feeling better,’ observed Talisman Energy president and CEO John Manzoni, striking an optimistic note in his keynote speech at the recent IP dinner in London. But, he wondered, is the oil & gas industry ready to drive the systemic change that must follow in the financial tsunami’s wake. Meg Chesshyre reviews this and other talking points during the Energy Institute’s IP Week.
Over the last 12 months or so, ‘we have been rightly preoccupied with applying triage to the financial markets’, said Manzoni. ‘I am sure we all have a perspective as to whether the underlying fundamentals have in fact been addressed, but there is no question the financial market wants to believe we are on the mend.
‘The world will refocus on its energy provision just as soon as the financial triage is confirmed to have been successful. And when it does, those energy issues that were at the top of the agenda last year will re-emerge in full force. We will be grappling again with whether there is enough affordable energy to sustain economic growth, and contentious debates about climate change, security of supply and shifts of power to the resource owners.
‘My premise this evening is that the core challenge to our industry is to figure out ways to drive systemic change,’ he said. ‘My perspective is that the independents are pivotal to the process of innovation in our industry, but at the same time are at the greatest at risk of being blindsided or marginalized if we neglect to engage in the more holistic debate.’
Independents had played a crucial role in the development of North American unconventional gas supplies and were equally important in extending the life of mature basins round the world, Manzoni added.
‘In the UK North Sea, recent estimates suggest that in 2009 the industry invested $7.2 billion in capital expenditure and drilled 76 exploration and appraisal wells. About 80% of this was done by independents. By comparison, industry activity was similar back in 2002, but only about half of it came from the independents. This is a natural progression as exploration and development shift to higher-cost locations and smaller fields.
‘My company plays an active role in the North Sea, and we are delighted with the business, which was largely bought from the majors. As we continue to grow, some of our potential investments may be better suited to smaller companies with a clearer focus on that activity. Government policy in the UK has been highly successful at promoting activity up to this point, but to maximize recovery from here will require another round of policy innovation as we grapple with the tricky issue of abandonment.
‘The same is true in Western Canada,’ Manzoni said. ‘Having moved to Calgary recently, I have been impressed by the entrepreneurial spirit and activity level that keeps the industry in such a mature basin more vibrant than almost anywhere else. Much of the activity is below the radar screen of larger companies, but it is nonetheless important to the sector and provides a dynamism and source of innovation.’
The market increasingly recognized how shale gas is transforming the supply situation in North America and had the potential to do so elsewhere, quite possibly including Europe, he noted. ‘Many amongst the independent sector justifiably would argue that we did not need the majors or anyone else to spur the transformation that has taken place. And they are probably right – up to this point. Now we are beginning the next phase with entry by the majors, who bring even greater financial scale.’
Manzoni took the view that the policy-making environment was grossly out of synch with the revolution in natural gas. ‘As an industry, we need to do better with education and communication. We need to make a compelling affirmative case for natural gas as a bridge to a low-carbon environment. It is abundant, economic and the cleanest fuel in terms of CO2 emissions. Past concerns about price volatility are likely to be mitigated by the shale revolution, but public utilities do not yet share this confidence.
‘We need to accept the need for gas and a positive price for carbon emissions, otherwise the less-expensive natural gas leads to greater energy demand and higher emissions, not conservation. Whether it is a cap and trade or tax mechanism is secondary, but as an industry we must demonstrate that we want the right outcome – which is conservation and affordable, clean energy supplies that are compatible with sustainable economic growth.
‘And we should accept that we need to incentivize renewables and gas. Renewables should continue to grow and become a more important piece of our energy future as technology continues to evolve, but renewable sources need back-up power when the sun doesn’t shine or the wind doesn’t blow. Natural gas can step in quickly to meet electric needs in a reliable, flexible, and highly efficient manner.’
Manzoni stressed that: ‘Without a holistic approach, we are unlikely to find a sound balance to the challenges which have proved so elusive. We have no excuses. But we do have plenty of examples where policy has gone wrong. I would argue that the biofuels industry is still struggling – and going slower than it might – for exactly the same reason. Instead of policies to positively incentivize technological change toward second-generation biofuels, we got food shortages and riots, because inappropriate subsidies, tariffs and political power plays encouraged the wrong focus at the wrong time.
‘My point is that, unless industry finds a way to engage with politicians in a holistic way around the gas industry, we risk an uneconomic solution that could, for instance, favor coal over gas,’ he concluded. ‘And that ultimately will not be a good outcome for energy availability, security or most especially for the climate.
‘There is no question that we have the resources to succeed. The crux is whether we can harness the market processes, values and incentives necessary to drive systemic change.’
Upstream updates
The world will exit the decade consuming 100 million b/d of oil at or around plateau, Dr Paul Wheeler told delegates at the IP Week ‘updates for upstream’ session. Wheeler, at the time managing director of Jefferies International’s energy investment banking group, anticipated that oil prices would be at a sustained level of over $100/bbl or more within a few years. Iraq production, fuel switching and efficiency gains would not derail oil demand and price growth during this decade, he said.
Wheeler said that confidence was beginning to return to the oil & gas sector and that, relative to 2009, global exploration and development spending was likely to increase over 10% in 2010 to around $400 billion. But, he asked, was this enough capex to meet world demand over the next 10 years? He also made the point that independents had discovered more oil – 26% of the top 50 global discoveries – than the international oil companies (19%) over the past three years. The national oil company share was 55%.
Gas use was growing faster – and for longer – than oil use. EIA and other industry sources forecast global gas demand growth of around 2%, over the next 20 years, without accounting for a major switch in transportation fuels. Unconventional gas would be of global importance. Innovation would break oil’s global monopoly on transportation - gas as a transport fuel would be part of the climate change solution.
According to Wheeler, the evolution of Big Oil to Big Gas had started although it still had a long way to go, citing ExxonMobil’s takeover of XTO last year, numerous US gas shale joint ventures, and the unconventional land gas grab in Europe. He added that Big Oil was emerging from a mid-life crisis invigorated. Peak Gas might be the next fashionable (alarmist?) topic. Smart M&A was needed with a 20 year view (possibly gas-led M&A?).
As boundaries of exploration are pushed there is greater potential for exploration success to collide with geopolitics and society, Wheeler concluded. It would be an enormous challenge for some nations to responsibly manage their new wealth.
Greenland probe
Cairn Energy’s plans to drill up to four exploration wells in the undrilled Baffin Basin, offshore Disko West, Greenland this summer were outlined by deputy CEO Dr Mike Watts.
According to Watts, Greenland – placed by the US Geological Survey in the top 10 ‘yet to find’ hydrocarbon destinations in the world (OE February) – was an area of technical risk, but the political and commercial risk was nil. When the first wells were drilled in the 1970s the then Danish Government’s take was 80%. The Greenland authorities are now asking for less than 50%.
Cairn has contracted the fifth generation semi Stena Don, and a sixth generation drillship, the Stena Forth, for the summer drilling period June to October. The drilling programme target was both a tilted fault block and a tertiary fan complex. Cairn’s initial prospect and lead inventory has confirmed multi-billion barrel unrisked and exploration potential in the Disko area off West Greenland. Watts said it has rich organic source rock and there are naturally occurring oil seeps along the Greenland and Canadian coasts.
Cairn has also pre-qualified as an operator for the 2010 exploration bid round in Baffin Bay, for which bids are to be submitted by 1 May 2010. A further bid round is planned for 2012.
Watts concluded that frontier exploration offered transformational potential when, as was the case in Greenland, the commercial terms were appropriate to the high technical risk.
Tern North turn
In the UK North Sea, Tern North exploration/appraisal is now under way with a view to developing any economic finds as soon as possible, Taqa Bratani managing director Leo Koot told IP Week delegates.
The decision to begin new oil exploration around the Tern field followed an agreement in principle by the DECC and the UK Treasury that the undeveloped oil accumulation north of the Tern field would be re-determined as a new oil field to be known as Tern North. Taqa Bratani, a whollyowned subsidiary of the Abu Dhabi National Energy Company PJSC, has plans to spend some $750 million in the UKCS throughout 2010.
This is only the second worked-up request for re-determination of a field’s boundaries on economic grounds since the May 2008 announcement by the UK government that, in appropriate cases, economic factors would be taken into consideration when applying Petroleum Revenue Tax (PRT). Prior to 2008, oil field boundaries were determined only on the basis of geological criteria as PRT is paid as a field-based tax.
The existing Tern field has been operated by Taqa since late 2008. All profits arising from the Tern field are subject to PRT in addition to ring fence corporation tax and the supplementary charge because development consent for the field was given before 16 March 1993, when PRT was abolished for new fields. However, Tern North will not be subject to PRT as a result of deeming the area to be a new field. Without the government’s support, development of Tern North would not have been deemed commercial by Taqa and any discovered oil volumes would not be recovered.
‘This is excellent news for Taqa and underlines the importance of government understanding the difficult fiscal environment faced by operators in the North Sea and working with us to ensure we increase indigenous supplies,’ Koots said. ‘While Taqa Bratani has increased delivery from our mature assets in the UKCS, an increase in exploration activity is vital to ensuring secure energy sources for the UK and future job prospects in the industry. The PRT exemption will allow Taqa to keep their promise of commitment to realise the full potential of the North Sea.’
UK energy minister Lord Hunt said recently: ‘Our door is open to other companies wishing to make a similar case.’ OE