Posts from the ‘Oil and Gas’ Category

Oil exploration at Dreki on hold

Five years ago, when the Icelandic National Energy Agency (NEA) granted two licences for oil exploration to Faroe Petroleum and Valiant Petroleum (now part of Canadian Ithaca Energy), there were high hopes this would be the start of an Icelandic oil adventure. The optimism even increased a year later, when the Chinese giant CNOOC became operator in a third license.

Now all the three licenses at the Dreaki-area have been relinquished by the operators, putting oil exploration in Icelandic jurisdiction on hold. The reason for the waning interest in the area is low likelihood of finding commercially recoverable hydrocarbons. The area is extremely complex in terms of geology, making project evaluation difficult. As described by Norwegian Petoro, “[v]olcanic activity in the area camouflages seismic responses to some extent, and has contributed to very intense heat, which creates major challenges for both potential hydrocarbon sources and reservoir quality.”

At this stage it is unclear what steps the Icelandic NEA will take regarding the oil exploration, such as if the agency will start a new licensing round. It should be noted that one of the partners in the license hold by CNOOC as operator, is still holding on the license, trying to find new qualified partner(s). Those who may be interested in stepping into the license, should contact Eykon Energy. Those who seek, find – perhaps!

Declining interest in the Dreki area

Ithaca Energy, along with its partners Icelandic Kolvetni/Eykon and Norwegian Petoro, have relinquished their hydrocarbon exploration- and production licence, which was issued by the Icelandic National Energy Authority (NEA) in 2013.

The license is is one of three licenses that the NEA has issued for for exploration and production of hydrocarbons in the Dreki Area, on the continental shelf north of Iceland. The first license was handed in already by December 2014, so now there is only one active hydrocarbon license on the Icelandic continental shelf.

According to a press release by the NEA, the holders of the license now being relinquished “acquired more than 1,000 km of 2D seismic in the summer of 2016. Based on interpretation of the data the operator concluded that the results of the completed exploration work in the 1st sub-period of the licence did not merit the continuation of exploration into the 2nd sub-period.” Geological studies based on the new seismic data indicate that the probability of finding oil and/or gas in commercial quantities in the selected focus area within their licence does not sufficiently support committing to the next phase in the work program.

The interpretation by Ithaca Petroleum suggests that there is more fracturing in their area of interest than had been initially considered. The potential source rocks are also deeper in the crust than anticipated, diminishing the chances of oil formation. Thus, the license has been handed in.

According to the NEA, the geological setting of this licence-area is different from the area of the only remaining licence, which was granted in 2014 and has Chinese CNOOC as operator. However, it is still unclear if CNOOC will make any drilling in the area. In 2015, 2D seismic data was acquired, and possible acquisition of 3D seismic for selected parts of the licence area is expected to take place 2018. If the results of 3D seismic acquisition calls for further exploration, an exploration well may be drilled in the time period 2022-2026.

So far, is is uncertain whether hydrocarbons can be found in the Dreki Area and if so if it will be in commercial quantities. In the case of potential oil production in the area, the NEA expects it could take ten years until first oil following a discovery.

Current low oil prices are not sustainable

The price of oil is currently very low (31-32 USD/barrel). The main reason for this low oil price is slower economic growth in China, at the same time as oil production in the United States has increased enormously from what it used to be few years ago. Which means that oil consumption (demand) is growing slower than what was expected, and at the same time we have strong oil supply.

Now when the price of crude oil is very low, it is worth considering what it costs to produce the oil. Today, the world uses a total of 95-96 million barrels of crude oil and liquids every day. The current daily supply is probably 1-2 million barrels more. According to he International Energy Agency (IEA), the gap between demand and supply will soon decrease and then the price of oil is likely to rise.

It is impossibly to say when or how fast this will happen. However, when looking in the back-mirror we see that oil consumption tends to grow year by year, at least if the world economy is growing. And even if oil consumption would stay flat for some years, most producing fields can only sustain the daily production within a fairly short time-frame. Thus, new oil fields need constantly to be located and put into production.

When discussing the price of oil production, we not only need to look at what will be the cost of new production within the next months and years, but also what the cost will be when looking a bit further ahead, like a decade. We could also have a look at todays production costs from producing fields (operating cost or lifting cost). Today we will, however, keep the focus on the future production costs.

 Oil price will soon approach 60-90 USD/barrel 

Average cost of current oil production is close to 30 USD/barrel (this is an estimated figure put forward by the Norwegian consultancy firm Rystad Energy). The cost varies, but most of today’s oil production costs is between 10-45 USD/barrel. Some of the most recent projects are very costly and need higher oil price to break even, and some of the producing fields in the states around the Persian Gulf deliver oil at less cost (under 10 USD/barrel). But the average cost from all producing oil fields in the world is believed to be close to 30 USD/barrel.

Producing fields are not able to deliver us all the oil we need for a very long time. Many large fields are in decline and therefore we constantly need new producing fields to meet all the consumption. The US Energy Information Agency (EIA) predicts that after a decade or so daily consumption of crude oil will probably have reached 99-105 million barrels.  To ensure all this oil will be brought up from the ground, oil prices will soon need to be approaching 60 USD/barrel (in present value) and then head towards approximately 80-90 USD/barrel.

If the oil price will continue to be substantially lower than 80-90 USD/barrel, many new projects will be delayed. Eventually that would lead to supply crisis. In reality it will be hard to balance the supply and consumption (demand) perfectly. Therefore the oil price will most likely fluctuate substantially. But if the oil price will soon head to 80 -90 USD/barrel we can hope for relatively stable oil price for some time (maybe over a period of few years).

So, if the oil price will soon approach 80-90 USD/barrel, the world may avoid supply crisis – in the near future at least. The diagram at left shows where the additional oil will come from in the next few years. And what oil price will be needed to bring that oil up from the ground.

In addition we must remember that many oil-producing states need high oil price to be able to balance their state budget. This factor may and will influence oil production. With regard to this issue, Saudi Arabia is the country to watch. Because Saudi Arabia it is the only oil-producing nation that has substantial spare capacity – thus being able to increase their oil production quite fast if the want to. If Saudi Arabia will abandon their current market-share-oriented-policy and decrease production, the price of oil may rise quite fast. But if the Saudis keep on trying to squeeze high cost producers off the market, by keep pumping up their low-cost oil at present pace (and even increase their production), oil price will stay low. For some time at least . And low oil price will increase risk of future supply crisis.

Within a decade oil price will approach 90 USD/barrel

When we look a few years further into the future – let’s say ten years or so – we can expect the price of oil to approach at least 90 USD/barrel. To keep production up with consumption (demand) we need to access numerous new oil fields that now are in the early stages of development. We will see new low-cost fields in the Middle-East come online, and at the same time new oil will be coming from all kinds of oilfields all around the world. And we will most likely be needing all this oil and also expensive oil from Canadian oil sands and even oil from the Arctic.

The graph at left shows where the oil will probably come from in 2025. Large share of this oil will be coming to the market even if the oil price will only be in the range of 60-80 USD/barrel. But if we are hoping to avoid major supply crisis, the oil price needs to become substantially higher. Like close to 90 USD.

The conclusion is, that within the next decade we will most likely see the price of oil (in present USD value) approach 90 USD/barrel. Of course the price may in some periods become higher and sometimes it will be lower. No one knows what the price of the black gold will be at a certain point of time in the future. But if the world economy is going to keep on growing, like we are used to, we will need crude oil. A decade from now it is unlikely we will have that oil unless we are willing and able to cover a production cost of approximately 90 USD/barrel.

CNOOC on the Icelandic continental shelf

China is showing interest in oil exploration on the Icelandic continental shelf.

According to reports, China National Offshore Oil Corporation (CNOOC)  is partnering with the Icelandic firm Eykon Energy in an application for a license to explore and produce oil and gas in deep waters offshore Iceland. The area is called Dreki (Dragon Area) and is part of a micro-continent located between Iceland and the Norwegian island of Jan Mayen. Seabed samples from the area have indicated the presence of sedimentary rocks and an active hydrocarbon system.

Eykon Energy had earlier applied for an exploration and production license, but without an operating partner. Now, the Icelandic National Energy Agency (NEA) has announced that CNOOC has decided to participate in the application of Eykon Energy as an operator and potential licensee. The NEA will now evaluate further the financial and technical capacity of the applicants and their ability to undertake the exploration and production as described in the application. The NEA estimates that the processing of the application will be finalized within a few months.

Norwegian Petoro may also become a partner in the license with Eykon Energy and CNOOC. According to an agreement between Iceland and Norway from 1981, Norway has a right to up to 25% participation in any licence granted within the area of the agreement. Petoro is already participating in two other oil exploration and production licenses on the Icelandic continental shelf.

CNOOC’s participation in the project with Eykon Energy would mark the first entry of a major oil company into Iceland’s nascent oil sector (the only foreign oil companies that have been awarded exploration and production licenses in the Icelandic jurisdiction so far, are Faroe Petroleum and Ithaca Energy). If the application by Eykon Energy and CNOOC will be successful and a license will be awarded, it would mark the Chinese company’s first foray into offshore Arctic oil drilling; a new area the industry’s biggest players are scrambling to enter in efforts to replenish reserves.

The size of Eykon Energy’s  and CNOOC’s stakes in the partnership and the exact location of the offshore Arctic license area will be announced later (probably next autumn). Big oil companies are keen to tap some of the 90 billion barrels of oil the U.S. Geological Survey estimates the entire Arctic region may hold, but progress has been slow and exploration is still at a very early stage. The entrance of CNOOC may become an important step in speeding this process up.