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Posts from the ‘Oil and Gas’ Category

The Green Transformation of DONG Energy

Danish energy firm DONG Energy is in the process of selling all its oil and gas business. This is part of a major strategy where DONG is to lead the way in the transformation to a sustainable energy system and to create a leading green energy company.

Away from oil and gas

DONG’s oil and gas business on the continental shelf of Denmark, Norway and the United Kingdom has for decades been a core part of the company. According to Henrik Poulsen, CEO of DONG, the company now aims at selling all its oil and gas fields as one package, already this year (2017).

It has not been revealed who the potential buyer is. According to Danish media the most likely candidates are Maersk Oil and the US private equity fund EIG Global Energy Partners. EIG is the investor behind the company Chrysaor, which few days ago bought a variety of oil and gas fields in the North Sea from Shell.

Focusing on renewable power generation

dong-energy-green-transformation_2016DONG is also transforming its power production, by out-phasing coal. Not long ago coal used to be the overwhelming source for DONG’s (and Denmark’s) electricity- and heat generation. During the last ten years, DONG has reduced its coal consumption by 73% and is now aiming at phasing out coal completely from its power and heat generation by 2023. This will happen by replacing coal with sustainable biomass, at the same time as DONG will increase wind power generation.

dong-energy-mix_2006-2016-1This means that in just one decade, DONG Energy will have gone from being one of the most coal-intensive utilities in Europe to being among the greenest energy companies on the continent, being able to compare it self with Norwegian Statkraft and Icelandic Landsvirkjun.

Thus it may be no surprise that DONG now has launched a competition where Danes can try out their knowledge on green energy – and the winner will be awarded a week travel trip to Iceland. Iceland is of course the only European country fulfilling all its electricity consumption with renewable power generation. In addition, most of Iceland’s heating is supplied by utilisation geothermal sources, making Iceland the greenest energy country in Europe.

dong-energy-award-iceland-trip_2017

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.

iceland-oil-dreki-area-two-first-licenses-2013The 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.

iceland-oil-dreki-area-three-first-licenses-2013According 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.

Oil Prices Must Rise… Some Day

In last February we published an article explaining that the then very low oil price (31-32 USD/barrel) were not sustainable. In the article we focused on why oil prices will soon need to be approaching 60 USD/barrel and then head towards approximately 80-90 USD/barrel.

Oil-Supply-Demand-IEA__2016-2017_June-2016Now, only five months later, the price of oil is close to 50 USD/barrel. This does not mean that higher oil price is here to stay, nor does it mean that a price close to 80-90 USD/barrel is just around the corner. The world is still experiencing quite higher crude oil supply than consumption (demand), which can also be described as over-supply of crude oil. This means that oil price may stay quite low for some time (and even become lower than it currently is). But looking a bit further ahead, the price of oil will need to be approaching 60 USD/barrel and then head towards 80-90 USD/barrel. Else, there will not be enough oil for the world.

The graph above is from IEA’s June report, predicting that oil supply and demand is heading fast towards balance, supply to be outstripped by demand in the second half of 2017. Although this prediction by the IEA may be somewhat optimistic, i.e. it may take longer time for reaching balance in the oil market, it is obvious that in the long run the over-supply will vain. And then we will eventually again experience substantially higher price for crude oil than we have today.

Oil_Global-Liquids-Supply-Cost-Curve-Explained_Askja-Energy-Partners_June-2016To explain this further, we have updated our chart (at left) explaining the cost of future’s oil production. The graph shows where the world’s oil will come from in 2025 and at what cost.

In 2025 very substantial amount of the world’s oil will come from currently producing oil fields. However, due to decline in those oil fields and due to growing oil consumption, we will also need oil from new fields (which have already been discovered and are being developed). And to be able to bring those fields in production, we will need quite high oil price.

Large share of the oil consumed in 2025 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 oil supply crisis, the oil price needs to become even higher. Like close to 90 USD.

To ensure all this oil will be brought up from the ground, we will need substantially higher oil price than we have today. Thus, it is likely that within the next decade we will see the price of oil approach 90 USD/barrel (in present USD value).

Bogle-Vanguard-Nobody-knows-nothingOf course the oil price may in some periods become higher and sometimes it will be lower. And keep in mind that it is impossible to predict with any precision how oil consumption (oil demand) will develop in the world (the same applies to prediction for renewable energy growth). No one knows what the price of the black gold will be at a certain point of time in the future (remember the wise advice Jack Bogle received early in his carrier!). However, if the world economy is going to keep on growing, like we are used to, we will need crude oil.  And a lot of it. A decade from now it is unlikely we will have all that oil unless we are willing and able to cover a production cost of at least approximately 90 USD/barrel.

The unknowns are many and the oil markets are extremely sensitive to all kinds of events. We don’t know how the economy in Asia will grow in the coming decade. And we don’t know if we are soon to experience enormous growth in new types of vehicles, using electricity instead of fossil fuels.

BNEF-EV-Sales-Prediction-2016If the 2020’s will be the decade of the electric car, as Bloomberg New Energy Finance (BNEF) now predicts, oil demand may become a lot slower than the oil companies are assuming. Which could result in continued over-supply of oil. So it is to be seen how growing production – and lower costs – of EV’s, will affect investment decisions by the oil companies. Stay tuned!

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.

IEA-Oil-Global-demand-supply-balance-2016Now 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.

OIL_Global-Liquids-Supply-Cost-Curve-Explained_Askja-Energy-Partners-Jan-2016If 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.

Oil-and-Liquids_World-Global-Supply-Cost-Curve-2025_Askja-Energy-Partners-2015

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.

China and Norway Team Up on Iceland’s Continental Shelf

The Icelandic National Energy Authority (NEA) has finished processing the third application received in the second licensing round in the Dreki Area on the Icelandic Continental Shelf. The license will be awarded to Icelandic firm Eykon Energy, Chinese oil company CNOOC, and Norwegian state company Petoro.

Iceland-Oil-Licenses-Second-Round

The NEA expects this third license to be formally issued by the end of this year (2013). Before the licence is awarded, Petoro’s decision to take part in the license needs to be approved by Norway’s parliament.

The granting of this third licence by the NEA will conclude the licensing as a result of the second licensing round on the Icelandic continental shelf, which had a deadline for applications in April 2012. In last January (2013), the NEA granted two licences to Faroe Petroleum Norway, Iceland Petroleum and Petoro, and to Valiant Petroleum (now part of Canadian Ithaca Energy), Icelandic Kolvetni and Petoro. The licences were granted on the basis of the Icelandic Hydrocarbons Act (No. 12/2001) on Prospecting, Exploration and Production of Hydrocarbons.

The area covered by the three licenses are shown on the map (above). The new third upcoming license is marked in green (Eykon Energy, CNOOK and Petoro), the other two already issued licenses are the blue area (Ithaca Energy, Kolvetni and Petoro) and the red area (Faroe Petroleum, Iceland Petroleum and Petoro).

Dreki-Area-and-NE-Atlantic_hydrocarbon-licensing_areasThe Dreki Area, which is part of the Jan Mayen Ridge, is thought to have potential for hydrocarbon accumulations because of its geological similarity to hydrocarbon basins which were its next door neighbours prior to the opening of the northeast Atlantic ocean basin. The basins in question are the Jameson Land Basin onshore East Greenland, where oil is known to have been generated and preserved in sandstone bodies, and basins offshore western Norway, Shetland and in the North Sea, where oil and gas has been discovered in commercial quantities.

Exciting Times in the Arctic

Iceland has issued two licenses for oil exploration on its continental shelf and is finalizing a third license. This may lead to massive investment, with relevant projects in Iceland regarding infrastructure and services necessary for the oil industry.

Arctic-Sea-Route-Map

Melting ice is not only making the Arctic more accessible to oil exploration and drilling, but also to shipping through the Arctic Seas. Due to less ice, the Arctic Seas may soon become more navigable in increasingly long periods of the year. This may both apply to the Northeast Passage (off the northern coast of Russia and Norway; sometimes called the Northern Sea Route) and the Middle Passage (straight over the North Pole; sometimes called the Arctic Passage). The third arctic route is the Northwest Passage (north of Canada).

Navigable shipping routes through the Arctic  would be an attractive option for shipping companies, saving them weeks off voyages between Europe and Asia. For example, the Northeast Passage reduces the route from China to Northwestern Europe from approx. 11,000 nautical miles to just 6,500 nautical miles.

Icelandic companies and governmental agencies are closely following the possible increase in arctic shipping. And thinning ice has lead to high interest from foreign countries and companies regarding the construction of transshipment port at the Icelandic coast. This is no surprise, having in mind that the possibility of using the Northeast Passage as a viable alternative to the more and much longer conventional routes (such as through the Suez Canal).

Arctic-Northern-Sea-Route-Northeast-Passage-MapAlthough the Northeast Passage is faced with many obstacles (natural, political and technological) and will probably only be a minor seasonal route for years to come, this is an interesting and a real opportunity. Within a few decades the Northeast Passage may become not only an important sea-route, but even a major year-round transit operation. Wether Icelandic harbors will be an important part of this development is to early to say.

CNOOC on the Icelandic Continental Shelf

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

CNOOC_Logo

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.

Dreki-Area-Map-2013Norwegian 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.

Eykon-logoThe 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.

Ithaca Energy on the Icelandic Continental Shelf

Ithaca Energy has bought the British oil- and gas exploration company Valiant Petroleum for GBP 203 million (approximately USD 310 million), in cash and stock.

Ithaca-Energy-logoIthaca Energy is a North Sea oil and gas exploration, development and production company with offices in Calgary, Canada and Aberdeen, Scotland. The Company was incorporated in Canada in 2004. Ithaca’s strategy is to grow through project asset acquisitions, development of assets within the portfolio and through license rounds.

Smaller oil producers and explorers in the North Sea are consolidating in a drive to revive flagging output in British waters. The deal will enable Ithaca to double its 2013 production forecast from oilfields in the North Sea, to 14,000-16,000 barrels of oil equivalent per day. Ithaca has stated  the deal will help it transform itself into a leading mid-cap North Sea oil and gas operator, with proven and probable reserves of about 74 million barrels of oil equivalent.

Iceland-Oil-Exploration_Faroe-Petroleum-Valiant-Petroleum-litud-areas-DrekiIn a study published in last December, the University of Aberdeen forecasted that British oil output from the North Sea will rise in the next few years, reflecting more investment, high prices and tax breaks. What is more interesting, in an Icelandic perspective, is that Ithaca Energy now becomes a direct player in oil exploration on the Icelandic continental shelf. Last year (2012), Valiant Petroleum was awarded a license for exploration and production of hydrocarbons in the Dreki Area, Northwest of Iceland (area marked with blue color on the map).

According to movements on the stock market it seems that the acquisition is expected to strengthen the projects that were part of Valiant’s portfolio. This may be good new for Iceland. When the deal was announced, Valiant’s share price rose 35 per cent. How the aquisition will affect exploration on the Icelandic continental shelf will be realized in the coming summer and years.

Important Step towards Icelandic Oil Exploration

Today, the National Energy Authority of Iceland (NEA) finished processing two applications for licences for exploration and production of hydrocarbons in the Dreki Area, Northwest of Iceland.

Iceland-Oil-Exploration_Faroe-Petroleum-Valiant-Petroleum-litud-areas-DrekiFor the last six months NEA has been evaluating of the technical and geological and financial capacity of the three applicants that handed in their applications earlier this year (2012). According to Icelandic law, the applicants must be able to handle extensive activities and have sufficient financial strength to conduct the activities for the long-term and handle the corresponding environmental and safety elements.

Following this evaluation, the NEA has made a decision to grant two licences. One to Faroe Petroleum Norge and Iceland Petroleum, and other to Valiant Petroleum and Kolvetni. Furthermore, the Norwegian Ministry of Petroleum and Energy has notified the NEA of their decision to participate in both licences to a 25 per cent share, in accordance with an agreement between Iceland and Norway from 1981.

The areas covered by the two licenses are shown on the map above. Areas awarded to Valiant Petroleum and Kolvetni are marked with blue color. Areas awarded to Faroe Petroleum Norge and Iceland Petroleum are marked with red.

Dreki-Area-hydrocarbon-licenses-mapHowever, the licences will not by issued until the Norwegian Parliament has approved the decision on the participation by Norway through the State-owned fund Statens direkte økonomiske engasjement (the State’s Direct Financial Interest or SDFI), administrated by the Norwegian firm Petoro. Following this and the signing of the parties to the licences of their joint operating agreements, NEA will grant the licences. This is expected to take place in early next year (2013).

We will soon be offering more information about hydrocarbon activities on the Icelandic continental shelf on our special petroleum pages.

Oil Exploration in Iceland?

So far Iceland has had no oil industry and imports all its petroleum products (equilvalent to almost 18,000 barrels of crude oil per day). However, there are certain areas on the Icelandic continental shelf that are thought to have potential for hydrocarbon accumulations.

In recent years the main focus regarding possible oil exploration within Icelandic jurisdiction has been on the Dreki Area (dreki means dragon in Icelandic). The area is part of the Jan Mayen Ridge micro-continent on the northeastern Icelandic continental shelf.

The Dreki Area has geological similarities to neighbouring hydrocarbon basins close to Greenland and Norway. Seismic surveys and other geophysical measurements indicate that oil and gas could possibly be found in the area.

Hydrocarbon accumulations on the Icelandic continental shelf are owned by the Icelandic State. Licence from the Icelandic National Energy Authority (NEA) is required for prospecting, exploration and production of hydrocarbons. The legislation has provisions for two types of licences: a prospecting licence, and an exploration and production licence.

Earlier this year (2012) the NEA offered blocks for exploration and production licences on the Dreki Area. The area covers 42,700 square kilometres with water depths ranging from 800 to 2,000 metres. This was Iceland’s second licensing round ;the first round in 2009 attracted no serious applicants.

This time three groups of companies submitted their applications. They are (in alphabetical order) Eykon Energy (an unregistered Icelandic company), Faroe Petroleum and Íslenskt kolvetni ehf., and Valiant Petroleum and Kolvetni ehf. Íslenskt kolvetni ehf. and Kolvetni ehf. are Icelandic firms with well known Icelandic companies and businessmen as shareholders. Faroe Petroleum and Valiant Petroleum are well known exploration companies for example in the North Sea.

In the media the Director General for the NEA has said that the applications this time were beyond his brightest hopes. The NEA will be evaluating the applications during the summer in accordance with the legislative criteria. Possibly we may see the first hydrocarbon exploration and production licences on the Icelandic continental shelf awarded early this autumn.

In he coming weeks we will be adding more information on www.askjaenergy.org about hydrocarbon potentials in Icelandic jurisdiction.