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Oil Price Instability Slows Offshore Euphoria

A series of unrelated but critical world events have conspired to prove that the offshore oil market does indeed ascribe to the laws of nature, particularly the "what goes up must come down" part. But troubles in Iraq, leaping OPEC quotas and diving Asian financial markets aside, there aren't many participants in the offshore boom who haven't felt the sting of the roller-coaster-like swings which define the market.

The price of oil has dropped nearly 40 percent since October 1997, dipping below $13 and hovering in the $14 range. On top of this, the recent monthly report from the International Energy Agency (IEA) comes with a bearish tone, even though it still projects oil usage to rise 1.6 million b/d in 1998. IEA notes that a high level of oil inventory; slipping Asian demand; a less than receptive market for OPEC oil; and there is the prospect of major increases in Iraqi exports have conspired to drag down the previous month's projections. IEA noted that Asia (with the exception of India and China) is expected to see little growth, and has again downgraded its demand figures this month (since November, projected Asian oil demand has been reduced 500 kb/d by IEA). While the offshore business is oil price dependent, there are some different dynamics of this particular boom which are showing through. In a word, technology the ability to more economically and efficiently find, tap and recover resources — has played a huge role in calming nerves around the industry. The oil boom, particularly in the Gulf of Mexico continues to be driven by deepwater exploration.

Seismic, drilling and platform construction technologies, combined with financial incentives, have made it far more attractive for companies to initiate and stay with deepwater developments. The ensuing editorial section highlights some of the recent projects from oil and offshore majors which are engineered to bring oil to market more cost effectively.

Forecast Calls for Continuing Flow of Orders for Floating Production Systems by James R. McCaul, President International Maritime Associates, Inc. Offshore fields in the Gulf of Mexico, West Africa, Brazil, North Sea, Western Australia and Southeast Asia are alive with development activity. Much of the undiscovered, economically recoverable oil and gas reserves are believed to lie in these fields — and both majors and independents are earmarking large capital expenditures to tap their resources.

It is widely expected that demand for oil will continue to grow at a rapid clip. Industry forecasts call for crude demand to grow at 2 to 2.5 percent annually over the foreseeable future. New sources of crude need to be found to accommodate this long-term growth — and this need is driving oil companies into exploration and development of offshore fields in areas previously considered uneconomic or inaccessible.

Most oil majors and large independents plan significant investments in offshore exploration and development over the next several years. A recent survey of more than 90 oil and gas companies indicates that capital spending will increase almost 10 percent in 1998 and two-thirds of the major oil companies said they plan to increase offshore f i n d i n 9 a n d llfHn9 drilling expenditures this year. In another indus- by 4 0 percent since the try survey, respondents said that the most attractive investment at this time is deepwater explo- early 1990s ration and development in the Gulf of Mexico. This interest is evident in Gulf of Mexico leasing activity. About 75 percent of the bids in the last government auction for leases in the Gulf of Mexico were in water depths over 900 m. One bid was for a block in water depth of 3,118 m. Drill ships are now on order that are capable of drilling in water depths of 3,000 to 3,600 m.

Despite the recent drop in spot prices, there have been few, if any indications that oil companies have shelved major offshore projects — particularly those involving large deepwater fields. These deepwater projects are the crown jewels in the exploration programs of oil majors and large independents. They see deepwater as the key to new sources of oil.

Role of Floating Production Radical technology changes have taken place in the offshore sector that have reduced the cost of finding and lifting oil by 40 percent since the early 1990s. Of particular importance is the growing role of floating production systems. These systems have proven to be a cost effective way to access deepwater fields, open marginal fields to production, gain access to remote locations, minimize time to first oil and reduce cost of field abandonment. One study has found that the marginal development cost in the North Sea has decreased from $5.46 per barrel in the early 1990s to $3.58 per barrel for projects starting up in 1995/1998 — and will fall to $3.10 per barrel for projects starting over the next two years.

Types of Systems There are four basic types of floating production systems, each of which has advantages in particular types of fields and geographical areas.

FPSO Vessels — Ship shapes have become the clear choice for production in fields offshore West Africa, Southeast Asia and Australia. Process plant carrying capacity, storage capability, relatively short lead time to start production, wide availability of secondhand tanker hulls and relatively low prices on new hulls from Asian yards have contributed to this preference. FPSO vessels have also been increasingly substituting for production semis offshore Brazil and account for more than half the production units on order for the North Sea. A major exception to this trend is, and will probably continue to be, the Gulf of Mexico — where there is access to pipeline infrastructure, which eliminates the need for field storage.

Production Semisubmersibles New, purpose-built production semis continue to be an attractive option in the North Sea. They can be fabricated locally and there is considerable experience utilizing such units in North Sea fields. Converted semis continue to be attractive to Petrobras for use offshore Brazil, provided there are suitable hulls for conversion. Converted semis have also been an option for production offshore West Africa.

Tension Leg Platforms — TLPs come in two versions — full size and mini. A major advantage to the TLP is the ability to utilize dry trees, which is particularly important in fields with high paraffin content. Full size TLPs have large topside weight carrying capability and are intended for use on multi-well, complex fields with high production Contents of the March 1998 Report i e i e ' J e - k - k ^ e - J e i e i e throughput. Mini-TLPs are a cost-effective solution in smaller deepwater fields with lower throughput requirement. Both full size and mini-TLPs lack storage and are best used in areas where pipeline infrastructure can be accessed.

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