2003 Industry Forecast

Senior Partner Mr. Håkon Brydøy of Acona Group AS gives us a summary and a brief look into the crystal ball for the Norwegian offshore industry.

In the news
The focus and debate currently running in the industry relate to the contract for Kristin awarded to Dragados Offshore in Spain for the riser balcony and flare boom. The Contract Award caused massive verbal attack on both Statoil as well as the Government.

Doors are opened for Statoil to enter the global LNG market. Picture: Statoil, SOGM

Dragados Offshore won based on Statoil´s evaluation concentrating on health, environmental and safety aspects as well as quality, price and deliverability.

The riser balcony weighs about 4,300 tonnes and comprises piping systems and steel structures, whilst the flare boom weighs 270 tonnes and is 105 metres long.

The completed structures are due to be shipped in March 2004 from the Dragados yard in Cadiz to Aker Stord north of Stavanger for hook-up with the rest of the topsides. The AkerKværner bid was close to 320 mill. NOK. Dragados bid for the same Work and ended up 40% below this price.

The difference in wages between Spain and Norway is only 17%. The strong krone might account for some of the difference (6-8%). The trade union at AkerKværner are trying to document that there is some subsidizing within the Dragados Group (www.dragados.com). The oil & gas activities are only a small part of the giant’s business areas. Dragados Group has 51.000 employees, a turn over of 41 billon NOK and has an international strategy. The European Community (EC) offers a variety of economical supports to different business areas. So far, there is no evidence that Dragados reallocates the EU funding internally. Hence, the trade union will base its conclusions on speculations only, which is difficult to bring before ESA.

From Statoils point of view, they can allow major variation orders until they reach the price from AkerKværner. As long as the Contractor fulfils the requirements for QHSE, the next element is the price - despite the statements concerning Contractor selection based on other criteria.

Let us pray that there will be no surprises from Spain and that the Contract will end up as Spanish paella mixing all sorts of ingredients – then begging for the result to be of quality and tasty. Remember, there is no such thing as a free lunch!

Snøhvit Surprises?
Statoil is also meeting challenges in the north as Snøhvit commences. The latest overrun from Linde on steel only, has already causes a budget overrun of 3 billion NOK before construction started. Has someone forgotten that the steel structure carries piping, electrical and other process parts? Will we see in the future that there are further cost overruns? All partners seem concerned, Statoil CEO – Olav Fjell has indirectly taken full control over the Project. The 46 bill NOK project is Statoil´s largest and most complex development project.

Statoil followed up the cost overrun with a much required reinforcement of the project's management and organization. As a result the Snøhvit project is transferred from Statoil's Exploration and Production Norway business area and will now report directly to chief financial officer and executive vice president. The project will also intensify follow-up of the Linde group which is the main contractor for the gas liquefaction plant at Melkøya in Finnmark county.

Statoil will continue to examine all aspects of the project and will present its findings to the Snøhvit partners later this autumn. It is not clear whether it will be necessary to increase the project's investment framework, or whether the identified cost increase will be covered by the item for contingency funding, we are looking forward to the report. History shows that overruns identified early in a project might be coped with, but experience on the NCS are not in the line with this. If cost overruns are caused by production increases, there is hope that there will be a quick payback. Otherwise the result might be quite a different story.

Open LNG Doors
Snøhvit’s LNG buyer El Paso Corporation had, as highlighted in the ONS Issue (7/8), major equity capital challenges. Statoil and El Paso have recently signed an agreement that allows a direct entry into the LNG market place. Statoil pays 1,6 billion NOK for 30% of the LNG-terminal at Cove Point. El Paso has also accepted that Statoil takes over the purchase contract for the 2.4 bill. m3 yearly LNG production on Melkeøya starting in 2006.

Doors are opened for Statoil to enter the global LNG market, as they has been invited to bid for operatorship in the development of LNG production from the Plataforma Deltana area off Venezuela, and a feasibility study for LNG from the Statoil operated Nnwa field off Nigeria.

The oil price still is under pressure as OPEC grabs over 15 bill NOK. Production quotas are no longer for guidance, but act more as a reference guide for cheating. The agreement in December last year of reducing production quotas from 23,2 to 21,7 mill bbld (blue barrels per day), where agreed upon as late as in September. Internal challenges within the ten OPEC countries became visible as they hit a all-time-high production of 24,2 mill bbld, 11,5 percent above the agreed quota. The threat against Iraq (not part of OPEC) pushed an addition of 570.000 bbld into the marked for October.

High production accompanied by a perceived easing in geopolitical tension, prompted a sell-off in speculative paper positions, adding downward momentum to prices lead to a drop in the price of 4 $/bbl.

Despite the slow pace of the economical recovery, oil demand growth is set to gain momentum in the fourth quarter, boosted in part by colder temperatures in the Northern Hemisphere and robust automobile fuel demand across the OECD. The IEA (International Energy Agency) has estimated the overall increase in consumption to 190.000 bbld which is far below the production capacity.

It has been speculated that the oil price might, in the worst scenario, hit $80 bbl. The Centre of Strategic and International Studies, (CSIS), has presented that study. It is based on a horrible scenario, where Iraq is destroying its own production plants during retraction, and attacks Kuwait and Saudi-Arabia with weapons of mass destruction. The UN resolution is expected to be accepted by Saddam Hussein, even though there are diverse signals from Iraq.

OPEX
Back to the national arena, the latest Contract Award to ABB Offshore Systems (ABBOS) shows that the OPEX market is in the move. The modification for Visund (Hydro) has a value of NOK 600 mill. and consists of two modules for gas injection and gas export. Also for sub sea specialists the different discoveries in Haltenbanken and Gullfaks areas will be tied back in to existing infrastructures.

The global ABB struggle for survival with a 43 bill NOK debt, prompting speculation that ABBOS might be sold to Sinopec (China Petroleum and Chemical Corporation). The ABBOS division has 12.000 employees, 3.000 in Norway, and will be sold within the next 12 month period according to the Group CEO Jürgen Dormann. So far sources within Sinopec has denied this as rumour. Speculations sets the price to 2,4 billion USD, but it confirms that ABB is under heavy pressure. AkerKværner has sown little interest in the Norwegian part of the division.

The low focus on abandonment confirms the previous articles on this matter. Concepts are still in the Powerpoint file, expecting to be further developed. This will not be a market place for many Contactors. The large contractors seem to be streamlining towards core business – leaving the decommissioning and abandonment as a low priority.

CAPEX
There are not many platforms under construction. Grane, Kvitebjørn and Valhall are the only few, but they enter completion stage and will leave the yards with a roaring silence.

The Goliath 80 kilometres northwest of Hammerfest is to be developed by Norsk Agip. Their concept is based on zero discharge oil production. The PDO (Plan for development and Operation) will therefore be an important threshold for oil production in the Barents Sea. So far more than 60 wells have been drilled. The authorities are currently assessing the consequences of future activities in the region. The regional impact assessment for Lofoten, the Barents Sea is expected to be considered by the Government in the autumn of 2003. Voices are raised in concern as the report might end up with oil production restrictions. The politicians have invented a phrase 'petroleum free zones', a strange expression as petroleum zones are found under seabed, and most areas in fact are petroleum free.

The politicians have invented a phrase “petroleum free zones”, a strange expression as petroleum zones are found under the seabed, and most areas in fact are petroleum free. Here the Minister for Petroleum and Energy, Einar Steensnes

Technological advances will result in future well operations that can be planned without discharge to sea. During drilling of wells the cutting and drilling fluids will be reinjected or brought on shore. Water-based drilling fluid will be used. The industry is working on environmental friendly solutions. Production can be obtained with 100% reinjection of produced water. Various solutions are presented for collecting produced water during start-up, shutdown and minor operating interruptions.

Seabed production installations will ensure conditions for co-existence of the oil and fishing industries. All installation will be designed with trawl guidance systems. The high goals for future activities with focus on new technology shows that the oil & gas industry players are planning to take a step forward and meet the challenges.

Zero Discharge
There are not many platforms under construction. Grane, Kvitebjørn and Valhall are the only few, but they enter completion stage and will leave the yards with a roaring silence.

The Goliath 80 kilometres northwest of Hammerfest is to be developed by Norsk Agip. Their concept is based on zero discharge oil production. The PDO (Plan for development and Operation) will therefore be an important threshold for oil production in the Barents Sea. So far more than 60 wells have been drilled. The authorities are currently assessing the consequences of future activities in the region. The regional impact assessment for Lofoten, the Barents Sea is expected to be considered by the Government in the autumn of 2003. Voices are raised in concern as the report might end up with oil production restrictions. The politicians have invented a phrase “petroleum free zones”, a strange expression as petroleum zones are found under the seabed, and most areas in fact are petroleum free.

Technological advances will result in future well operations that can be planned without discharge to sea. During drilling of wells the cutting and drilling fluids will be reinjected or brought on shore. Water-based drilling fluid will be used. The industry is working on environmental friendly solutions. Production can be obtained with 100% reinjection of produced water. Various solutions are presented for collecting produced water during start-up, shutdown and minor operating interruptions.

Seabed production installations will ensure conditions for co-existence of the oil and fishing industries. All installation will be designed with trawl guidance systems. The high goals for future activities with focus on new technology shows that the oil & gas industry players are planning to take a step forward and meet the challenges.

The Crystal Ball
The up and coming period is somewhat foggy. The Ormen Lange (Hydro) is a bright spot. New areas are mostly on the UK sector and West of Africa. The pipeline described in the last issue, is reinforces by the discoveries in different wildcat wells which is due for further analysis. New licensing rounds are due by NPD (the Norwegian Petroleum Directorate) as their view is that there is still a considerable amount of undiscovered resources throughout mature areas in the North Sea. The production of these resources if confidently included in the graphs of production over the next 30 years in NPD’s annual report.

The aim of the North Sea Awards 2002 is to maintain efficient exploration of areas near infrastructure, in order to discover additional resources which can be tied back to existing installations prior to shutdown.

The announcement comprises 109 blocks or parts of blocks. The deadline for submission is January 28, 2003. The award is planned to take place in March/April 2003. We wait with baited breath for the results.