Falklands : Hydrocarbons Weekend Record 20 and 21 January 2007
Submitted by Falkland Islands News Network (Juanita Brock) 21.01.2007 (Article Archived on 04.02.2007)
Russia's Government will be seeking ways to avoid transiting other countries in order to have a frustration-free method of delivery to Europe.
HYDROCARBONS WEEKEND RECORD: 20 AND 21 JANUARY 2007
By J. Brock (FINN)
WEEKEND DEVELOPMENTS:
(Russia and Germany)
Russia’s President Vladimir Putin said on Sunday that his country would reduce dependence on transit countries to ensure smooth energy deliveries. He promised that Russia would play by market rules in the energy sector. Chancellor Angela Merkel of Germany met with Putin in the Black Sea resort city of Sochi. She stressed Russia's importance as an energy provider to Europe and called for the frustrations in supplies to Europe to be avoided if at all possible. At the end of their talks, Putin said that Russia would, in the most active way possible, develop the transport network in order to have the opportunity to deliver resources to consumers directly.
(India)
Shell is scaling up its research centre in Bangalore to bring it up to par with its two other centres in the US and Netherlands, a company official announced on Thursday. It is expected that facility capacity will increase to 500 people by the year end. It is also expected that all technical aspects of the operation will be upgraded. It is envisaged that the Shell Technology Institute will be a training centre, using virtual reality technology. The centre, which opened in September, currently has 200 employees.
(Iraq)
Iraq's new hydrocarbons law, which could signal investments from foreign oil companies, is due to be submitted to the Iraqi cabinet for endorsement early this. Once the draft law is endorsed by the Cabinet, it will go to the Iraqi Parliament for final approval. It is expected that it will take approximately one month for parliament to ratify the law. Iraq’s oil reserves are about 115 billion barrels. It is hoped that the investment will help to rectify Iraq’s ageing and poorly maintained hydrocarbons infrastructure will be brought up to date and that there will be more security for the industry.
LAST WEEK’S CRUDE PRICES:
Monday, 15: Light Sweet Crude - $53.17, Brent Crude - $53.26.
Tuesday, 16: Light Sweet Crude - $51.60, Brent Crude - $52.32
Wednesday, 17: Light Sweet Crude - $52.24, Brent Crude - $52.78
Thursday, 18: Light Sweet Crude - $50.49, Brent Crude - $51.75
Friday, 19 : Light Sweet Crude - $51.99, Brent Crude - $53.44
LAST WEEK’S TRENDS:
Monday, 15: Fears that OPEC will cut production for the third time in four months have taken their toll and crude prices gained today. The refinery fire in California is not expected to affect supply or the price of crude.
Tuesday, 16: OPEC has said that the production cuts thus far are sufficient to stem the over-supply of hydrocarbons products.
Wednesday, 17: During this volatile session the price of crude was just above $50.00 for a while today. Fears of prices going below $50.00 as drove prices higher, even though Saudi Arabia has twice in as many days assured investors that the cuts implemented thus far are sufficient to clear up any over-supply of crude and no emergency meeting to further cut production is planned.
Thursday, 18: Another volatile session today with the price of light sweet crude going as low as $49.90 during the day. An over-supply of crude and lower demand has caused crude prices to fall. Also easing prices is a statement by Saudi Arabian oil ministers that there is no need for an emergency meeting in February. There will be no production cuts because OPEC believes that the cuts instituted thus far are sufficient to deal with the current over-supply of crude. It is important to note that the market seems to like the price of $50.00 per barrel and would like the price to bottom out at that figure. As reported yesterday there seems to be an immediate upward reaction whenever prices hover near $50.00 per barrel.
Friday, 19: Even though there is over supply of crude and no new threatened production cuts by OPEC on the cards the price of crude gained significantly today. It is thought that $50.00 per barrel will be the benchmark price for a while as there seems to be nervousness when it goes below that price.
Relevant Share Prices: Monday, 15 January 2007
Tullow Oil up 27.00 to settle at 403.00, Desire Petroleum down 0.75 at 32.50, FOGL down 1.50 to settle at 89.00, Rockhopper Exploration unchanged at 40.00, Borders & Southern unchanged at 35.00
Relevant Share Prices for Tuesday, 16 January 2007:
Tullow down -5.75 to settle at 397.25, Desire Petroleum unchanged at 32.50, FOGL up 0.50 to 90.00. Rockhopper Exploration unchanged at 40.00, Borders & Southern unchanged at 35.00.
Relevant Share Prices for Wednesday, 17 January 2007:
Tullow Oil down -4.25 to settle at 393.00, Desire Petroleum down +0.50 at 33.00, FOGL down-1.50 to settle at 88.50, Rockhopper Exploration down -1.50 at 38.50, Borders & Southern up 0.50 at 35.50
Relevant Share Prices for Thursday, 18 January 2007:
Tullow Oil down +3.00 to settle at 396.00, Desire Petroleum unchanged at 33.00, FOGL down +0.50 to settle at 89.00, Rockhopper Exploration unchanged at 38.50, Borders & Southern down 3.00 at 32.50
Relevant Share Prices for Friday, 19 January 2007:
Tullow Oil up +1.75 to settle at 397.75, Desire Petroleum up 0.75 to settle at 33.75, FOGL down -0.50 to settle at 88.50, Rockhopper Exploration unchanged at 38.50, Borders & Southern up +1 at 33.50
LAST WEEK’S REGIONAL DEVELOPMENTS:
Venezuela and Iran)
The Governments of Venezuela and Iran have both announced that excess supplies of crude have been found on the world oil market. Their solution to the problem is to agree with OPEC to the policy of reduction supply hydrocarbons in order to stabilise prices, Iranian’s president is in Venezuela on a one-day official visit on a Latin American tour also including visits to Nicaragua and Ecuador.
(Venezuela)
According to a communiqué issued by PDVSA, Venezuela’s State Oil Company (PVDSA) has opened an office in Ecuador to seek joint ventures in research, transportation and processing of hydrocarbons and gas. The opening of headquarters in Quito was hosted by PDVSA Refining Vice President Alejandro Granado. At present, PDVSA has offices in Brazil, Cuba, Argentina, Uruguay, Bolivia, China and Ecuador, part of the strategy to diversify the enterprise s markets.
(Bolivia and Argentina)
YPFB President Juan Carlos Ortiz said on Wednesday that nine of the twelve natural gas suppliers operating in Bolivia have announced their intention to supply their product to Argentina, according to agreements forged between them and Enarsa of Argentina. on Wednesday.
Three other companies, Andina, Petrobras Energia and MatPetrol, did not join the others because they do not have additional gas supplies and they are already committed to the internal market as well asexports to Brazil. Presenters include DonWon, Canadian Energy, Plus Petrol, Vintage, Chaco, Petrobras Bolivia, Total, Repsol YPF and BG Bolivia Corporation. It is expected that they will supply 7.7 million cubic meters of gas per day to Argentina in 2007.
(Falkland Islands)
FOGL’S TIM BUSHELL TALKS ABOUT PROCURING AND PAYING FOR AN OIL RIG
By J. Brock (FINN)
Tim Bushell, Chief Executive Officer of Falkland Oil and Gas Limited (FOGL) is visiting the Falklands with Exploration Manager, Mr. Colin Moore to give a presentation to shareholders at the Chamber of Commerce as well as updating Councillors on progress in the South Falkland Basin.
FOGL’s shareholders, who have written to FINN, have asked mainly about when exploration drilling will begin and how much will it cost. On Tuesday FINN interviewed Mr. Bushell about these concerns.
FINN: Back in 1997-1998 the crude price that made it viable for an exploratory rig to come to the North Falkland Basin was around $14.50 per barrel. Obviously this has fluctuated upwards. Would you give an explanation about what the viable price is now for the acreage FOGLE is exploring?
TB: We run various scenarios looking at the viability of oil development to the south and to the east of the Islands. We did this work last year and we had to make some assumptions so we assume that the minimum field size would be around 200Million barrels. You would need the oil price to go below $25.00 a barrel before that became uneconomical. Under current prices it is very economical. In terms of economic viability of any prospect of that size, well, we are fine at the moment so that, in itself, doesn’t stop us from bringing a rig down.
FINN: We realise that the price of crude has gone down, losing 17% thus far this year and still declining. It was the high price of crude that caused the rig market to seize up. Is the market easing now that crude prices have come down?
TB: First of all, I think oil exploration companies operating in the Falklands are in slightly different positions here. Desire petroleum have been looking for a rig for some time and they have been ready for some time. They have been ahead of the game and have done a lot of work in advance of searching for a rig. It’s the way it worked out. From FOGL’s perspective we are actually not ready right now to have a rig. We only started exploring in 2004 with a very extensive 2D Seismic programme, which we are still finishing off. Our time-table, if you run forward – it will take the rest of the year to identify which prospects we want to drill and when we have done that we will need to conduct site surveys – all that takes time.
In the current market you need to order equipment at least a year to eighteen months in advance so the earliest possible time that we could drill is probably late on in 2008. Other exploration companies – Rokhopper and Borders and Southern - also have different timings that are closer to ours than Desire’s is. One issue is that each of the exploration companies in the Falklands are not, at the moment, on the same time-table. FOGL is at least 18 months or even longer from needing a rig.
In terms of rig availability, though, it is true to say that the higher oil prices has driven the market for rigs globally. And, there is an acute shortage of available rigs. What is interesting is those rigs aren’t being used to explore particularly. We are living in a day where global exploration drilling has decreased 14 or 15% in the past few years. This means that the large oil producing companies are contracting rigs to try and increase their revenue and increase their cash flow. So they are taking the rigs on to drill production wells and not particularly exploring. That creates problem for exploration companies operating in the Falklands getting a hold of a rig.
When the prices are high rig owners will command a very high day rates. There are not just higher day rates, they are looking for longer contracts. In the last year or two these rigs are going for two or three year long-term contracts. And that is quite hard for a company down in the Falklands – like Desire – to compete with. Two or three wells is not a particularly big contract. So rig companies are not particularly interested in bringing a rig to the Falklands for three wells.
FINN: What can be done to lengthen the time a rig is in the Falklands to make a contract for an exploration rig more viable?
TB: There are a number of things you can do and one of them is to have discussions with the other operators so that we repeat what we did in 1998 and share a rig. And, we can share the large cost of mobilisation of a rig, which can be up to $20Million but it also divides a contract that is sufficiently large and we may get the attention of a rig owner. If you combine all of our operations with ourselves, Rockhopper, Borders and Southern, you get 10 wells or even more. That would be roughly a one-year contract. So a one-year contract is much more interesting than just a one or two well contract. We are talking to the other operators to form a consortium.
The other thing is – in terms of trying to build a contract of interest – is to get involved in other large contracts in the region. And, there are a number of companies in West Africa and Brazil that have exactly the same problem as us. They can’t get a rig for their two or three well contract. But if you can get them all together and have two or three wells in Brazil, two or three wells in South Africa and 10 wells in the Falklands and you all co-operate together then you might be able to go to the rig market and offer a two-year contract for the Atlantic region. Again, this is a way of getting a rig owner’s attention.
Another thing we are looking at is that there are a number of rigs out there that are currently not able to drill in the water depth that we have. But with an upgrade they could drill in those depths. There are certainly upgrade elements that we are looking at and bringing in a rig that needs upgrading for the depths that we are drilling in.
Whilst it is a challenge to get a rig in the time-table that we need, I am reasonably positive that if we work at all of these different angles, one of them will work for us and that we will have a rig. I think it is achievable to have a rig in the Falklands at the back end of 2008, which is 10 years after the last rig. As soon as we can secure a rig we will let it be known. There is work going on but no specific news right now.
FINN: What would be the viability or using a drilling ship?
TB: A drill ship is interesting and it is something that we are also looking into. The water depths that we have to the south of the Islands range between 500 and 1500 metres, which requires a certain type of rig. There are two main types that would work. One is a semi-submersible rig and there are probably 35 or 40 rigs that can drill at that water depth and, of course they can also operate in the north in shallower water. The other option is a drill ship, which has some advantages and disadvantages. The disadvantage is they are generally much more expensive on a day rate basis but the advantage is they bring much more equipment with them and they can get here a lot quicker. So there are a number of drill ships that we have looked at as a possibility that may come available in a year or two’s time that could come from West Africa or from Brazil. Although the day rate is high they don’t have to have the supply boats and all the things that a semi submersible would need. If you drill less than three wells it is more economic to drill with a drill ship. If you go above three wells then it is actually more economic to get a semi-submersible. We can use either for the area where we are prospecting. Again, it comes down to what becomes available.
FINN: Would a lower crude price be a good bargaining tool to help lower the day rate? Do you think the rig companies will continue with the higher day rate as they are now?
TB: I think the day rates are going to stay reasonably high for some time. I don’t think they are going to come down yet. The biggest factor in the drilling market is there is a lag in the system. A year or so ago people realised the oil price was going up and people secured the services of rigs. This created a demand for rigs but also created a demand for new rigs. You don’t just build new rigs overnight so to build a new rig takes a couple of years. Late in 2008-2009 you will see a wave of new-build rigs. Then the supply side will catch up with demand. Then the new rigs will be expensive but those are not the types of rigs we would be looking at but others will take them in preference to the older ones. That might free up the market. We look at the rig demand curbs and in a sense, when you get to the end of next year there are potentially more rigs becoming available and there will be more choice for us the more we leave it. That’s probably not what our shareholders want to hear but there is a balance between doing it quickly and at a reasonable cost. They may fall a little bit but I don’t expect it to drop much.
FINN: What is the current day rate for a rig ? A ball park figure will do.
TB: To operate down here a semi-submersible is anywhere between $250,000.00 and $400,000.00 a day. And, that’s just the cost of the rig. Helicopters and supply boats are on top of that. If you wanted a drill ship you are almost starting at $400,000.00 a day going up to $600,000.00 a day for a drill ship. That’s just a global rate.
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