Major oil dogs long gone for greener oil patches

Implications: John Westwood of Douglas-Westwood in Canterbury U.K. reported in the August 4 issue of the Oil & Gas Journal that Europe remains one of the largest offshore producing regions. But declining production and high costs have forced the oil majors to leave. Smaller operators now salvage what oil is left in the big fields and develop the remaining tiny ones. The most recent estimate showed that the UK decline rate in 2007 was 7.5%. Combined capital and operating expenditure off Northwest Europe is the world’s highest, near $51 billion in 2008. The UK is the world’s 13th largest oil and gas producer. UK operating costs rose almost 30% from 2006 to 2007. Capital and operating costs are now $29/bbl for projects coming on stream in 2008-10. Drilling consumes much of the total offshore outlay. With 68 installations, Western Europe has more floating production systems than anywhere else in the world. The environment is harsh and weather is a test for these vessels.

Analysis:  In the early years, Exxon, Royal Dutch Shell, BP, Chevron, Phillips, Total and a few other international majors dominated the activity, drilling and completing the giant oil fields such as Brent, Forties, Ekofisk, Ninian, Beryl and Statfjord. Spot crude oil prices during early production era (1976-78) were in the $12-14/bbl range, about one third of what it now costs to produce a barrel. Only in 1979 did prices jump up over 30/bbl as a result of the Middle East “leapfrog” and by 1983, prices were in steady decline again. The current $29/bbl extraction cost can only persist in a relatively high cost oil regime. The latest estimate of transportation costs as reported by the Oil & Gas journal in the July 21 issue showed that it cost $5.98/bbl to transport North Sea crude to Houston. With refining costs of $5.00/bbl and adding margins for profit and taxes, the wholesale price going into the dealer’s tanks as gasoline, diesel, heating oil or jet fuels comes close to $55/bbl. That gives an indication of the floor price of light, sweet crude oil. As previously reported on a report about Canadian oil sands, products made from heavy crude set a substantially higher floor price. Sadly, these are not floor prices in equilibrium. Each new development, whether it is an oil field in the deep water of the Gulf of Mexico or a redevelopment project in the Middle East, brings a higher cost structure into play. As an example, the super giant oil fields of Saudi Arabia either have already been redeveloped are now being done so. While redevelopment produces more oil, the associated costs are dramatically increased.