Boom or boost for North Sea

Dec 13, 2004 01:00 AM

by Iain Dey

When Gary Luquette received the first drilling results from the Lochnagar field at the end of August, the head of ChevronTexaco's European business knew he had stumbled on to something a little bit special.
Major discoveries in the North Sea have been hard to come by for the past 15 years or so. Most of the 1.6 mm barrels of oil pumped from the UK seabed every day stem from fields first discovered 20 or 30 years ago. This one was clearly significant. Some say it could hold as much as 500 mm barrels -- about 10 % of the total oil reserves the government believes are left in the UK sector of the North Sea.

It could be that it is just one lucky strike -- perhaps the final big find to be made in British waters. But there is a hardcore of optimists who believe this new discovery in the largely unexplored waters to the west of Shetland heralds the dawn of a new North Sea oil boom. But after seeing that first test data three months ago, Luquette was in no hurry to alert his rivals towhat ChevronTexaco had just discovered.
"There were a lot of questions being asked in the industry as to why we didn't announce anything when we finished drilling in August," he explains. "But it's a competitive environment, and while we have stringent internal disclosure requirements, we're not expected to announce things that lose us our competitive advantage."

"Everything was exactly as the geologist said it would be, but I didn't want everyone to know that. The jackpot question is just how much have we found. I don't know the answer to that myself yet. We have described the field as a significant find. For ChevronTexaco to say that in a wild frontier land like the west of Shetland, then clearly you are talking about something in excess of 100 mm barrels."
"This 500 mm number is just a product of everyone's imagination because everyone wants it to be true. But it's by no means beyond the range of what could be there. It's certainly a big find."

The Lochnagar discovery is 78 miles west of Shetland in a deep water channel that separates the northernmost outcrop of the UK from the Faroe Islands. For several years now, this Atlantic frontier has been the great hope of the North Sea oil industry. Almost every inch of the Moray Firth has been scoured for evidence of hydrocarbons and the companies operating those shallower fields have a fair idea how much oil is left.
The waters west of Shetland remain largely unknown -- so much so that ChevronTexaco has agreed to conduct ecological surveys of the seabed around its new find to pass on to government authorities and the National Museum of Scotland. There are some established fields in the area, such as BP's Foinaven and Schiehallion complexes, but the deeper waters remain more or less virgin territory.

A number of test wells were drilled in the mid 1980s -- and many looked promising. But the deep water and limitations on technology were enough to put the majors off at that stage. For example, BP's Clair field, which is only just coming on stream, was discovered 20 years ago. The first test well on the field only produced a few thousand bpd, so it was left by the wayside. But modern drilling techniques mean that same field can now produce about 15,000 bpd.
"If this discovery is as big as some people are saying, then that would obviously be a very big field, especially by the North Sea's standards today," says Royal Bank of Scotland's senior oil economist Tony Wood. "But it's hugely important psychologically too. There have been a lot of expectations surrounding the fields to the west of Shetland and it's just been a case of waiting for something to happen. We'll have to wait to see exactly what it is they've discovered. If this is the big one, it could be the beginning of a significant boost to North Sea production -- not a boom, but a boost."

The last time the North Sea optimists began to get excited was two years ago, with the discovery of the Buzzard field -- which is now believed to hold reserves of about 460 mm barrels. Although this field is situated 100 km north-east of Aberdeen, conventional wisdom believes that if there are any other major finds to be made in the North Sea, they will be on the Atlantic frontier, close to this latest discovery.
Department of Trade and Industry estimates for the total oil reserves that have yet to be discovered west of Shetland range from 250 mm barrels to almost 4 bn. For the ardent believers in the region, even the upper end of this range is conservative. Among the most ardent of these believers is Graham Stewart, the CEO of Aberdeen-based Faroe Petroleum -- a listed oil minnow with a sizeable exposure to the west of Shetland region in both UK and Faroese waters.

"Lochnagar is extremely good news for us as we have two of the neighbouring licence blocks. And they are both the same play -- roughly similar size, with very similar geology. If ChevronTexaco has been successful it bodes very well for us," Stewart says.
"Over the past few years the interest in the Atlantic frontier has waxed and waned quite a bit. But there are suggestions that things are beginning to look a bit more solid there now. This could quite easily be the next boom for the North Sea oil industry. It really does have that potential. I honestly believe that."

Lochnagar was not the only well drilled in the area over the summer. Total has made further discoveries on its Laggan gas field, and Amerada Hess is believed to have had success on its Lindisfarne prospect. But for the same reasons as Luquette, no one has been crowing too loudly.
Bids have recently gone in for the second round of exploration licences being allocated by the Faroe Islands government. Those companies already committed to the west of Shetland area didn't want the others to get in on the act. The results of the Faroes bidding won't be known until January 17, but it is understood that the winners will be dominated by the majors, with Faroe Petroleum possibly the only minnow involved.

Although most of the talk in recent years has been about the majors selling down their stakes in the North Sea's maturing fields, the industry's big guns are apparently still keen to get involved in the west of Shetland developments.
"This is something I like to make very clear," says Luquette. "ChevronTexaco still sees the North Sea as very much a core area. We've invested between $ 400 mm and $ 500 mm in each of the last three years and we plan to continue doing that."

"This is the upper limit of what our organisation can afford to spend here. We are flat out and we will continue to be flat out. But we believe we can make further discoveries on the Atlantic margin. It's still risky and a very deep, harsh environment, but there are opportunities."
"There have been a number of discoveries made in this area before but most of those have not been commercially viable on a stand- alone basis -- which is always the problem in frontier prospects. Now we've made a discovery, there's the Laggan field, there's the Hess discoveries - there's getting to be enough thereto put the infrastructure in place."

Putting infrastructure in place is where most of the jobs were created in the original North Sea boom. And it was once the major fabrication yards at Nigg and Ardersier wound up that the predictions of doom for the North Sea first began to materialise.
Because the Lochnagar discovery is in 1,000 metres of water, the easiest way to extract the oil will be through a floating production platform. It will not require a new platform to be built; instead one of the existing floating production modules can be towed to Shetland from west Africa, where most of these rigs are currently based. Extracting the gas from Lochnagar will require some kind of pipeline, probably linked back to the Clair field, where ChevronTexaco is a 20 % shareholder.

So while there will be lots of engineering work required to bring these new fields onstream, it won't be on the same scale as that required to bring the likes of Forties or Brent into production in the 1960s.
Even if west of Shetland does develop into a major network of fields, pumping hundreds of thousands of bpd, it seems unlikely that Aberdeen will enjoy another economic boom such as that seen when the oil first flowed. But it will allow the decay of the North Sea's reserves to be slowed and offer a brighter future for the 100,000 or so Scottish jobs dependent on the basin.

"I'm in the camp that says this is more about slowing the decline rather than creating a new boom," says Luquette. "I don't know if we'll be creating jobs with this project so much as preserving jobs. We might be able to fill in some of the gaps in the order books at some of the yards and stop people from losing their jobs for a while yet. There might be others who have been laid-off who will be taken back."
"But we've been here for 40 years and we hope to be here for another 40 years, and discoveries like this offer more hope that this will be possible."

Source: Scotland on Sunday
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