OCTOBER 2009

A V I AT I O N
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 OCTOBER 2009 VOLUME 63 NUMBER 753

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Energy at a crossroads
ABBREVIATIONS 47 GAS – LNG
The following are used throughout Petroleum Review: LNG and EU energy security
mn = million (106) kW = kilowatts (103)
bn = billion (109) MW = megawatts (106)
tn = trillion (1012) GW = gigawatts (109)
cf = cubic feet
cm = cubic metres
kWh = kilowatt hour
km = kilometre
REGULARS
boe = barrels of oil sq km = square kilometres 2 FROM THE EDITOR
equivalent
b/d = barrels/day
t/y = tonnes/year t/d = tonnes/day

No single letter abbreviations are used. Abbreviations go

together eg. 100mn cf/y = 100 million cubic feet per year.

Front cover: Jet engine endurance test rig

Source: CFMI
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FROM THE EDITOR
One has to be brave or foolish to sug-
Time to remember the fundamentals? gest markets are wrong and it is wise to
have brought onstrean fields with a remember one of the financial market’s
A fter months of depressing eco-
nomic news and data the last few
weeks have produced little but good
peak capacity of towards 1.4mn b/d.
These include Azurite (Congo, Murphy
better quotes – ‘Markets can remain
irrational for longer than you can stay
Oil), Frade (Brazil, Chevron), Jidong solvent’. However, even with these
news. There is increasing confidence
Nanpu (China, Petrochina), Mangala caveats oil demand needs to revive
that recovery from ‘the worst recession
(India, Cairn Energy), Parque de quickly and rapidly if current price
since the 1930s’ is now underway, with
Conchas (Brazil, Shell), Tengiz expan- levels are to be maintained, never mind
increasing numbers of ‘green shoots’
sion (Kazakhstan, Chevron), Thunder increase as so many seem to expect.
being spotted almost daily.
Hawk (Gulf of Mexico, Murphy Oil), Many must be praying for a severe
The oil industry has been producing
Tyrihans North and South (Norway, winter.
its own share of good news. On the
exploration front there has been BP’s StatoilHydro) and Vankor (Eastern
ultra-deep Tiber discovery in the Gulf of Siberia, Rosneft).
It is also notable that companies One of the other great hopes for the
Mexico, and Petrobras’ subsalt Abare
seem to be bringing fields onstream recession was that it would blunt or
Oeste discovery in the now legendary
with fewer delays. Almost certainly the reverse the trend to aggressive resource
BM-S-9 block in the Santos basin, where
global recession has freed up engi- nationalism. So far this hope remains
the Carioca, Guara and Iguacu fields
neering and fabrication capacity as well unrealised. Libya now appears to be
have been discovered over the last two
as deterring key staff from job hopping demanding that Libyan nationals head
years. Tullow Oil has announced that its
– all features that make on time com- up all foreign operations in the country.
Ngassa discovery may be the largest
pletion easier. Coming on top of some of the highest
find to date in the Albert basin in
This means that virtually all the oil taxation in the world, these actions
Uganda. Meanwhile, offshore Sierra
capacity planned to come onstream in provide little incentive to invest.
Leone, Anadarko appears to be on the
2009 probably will do so. As 2009 is the Meanwhile. Brazil has apparently
point of announcing an oil field dis-
peak year for new capacity increments decided (it has yet to be ratified by
covery – Venus – following the suc-
this could add around 6mn* b/d of Congress) to reserve operatorship of all
cessful completion of the Venus B well.
gross new capacity, or over 2mn* b/d of future sub-salt reserve developments to
Needless to say, the stock market has
net new capacity, to the system by the Petrobras and to replace future conces-
loved this proof positive that the
end of the year. sions with production sharing agree-
industry can still find oil in large quan-
It remains to be seen if OPEC is pre- ments in which Petrobras will have
tities and oil company shares have been
pared to increase its spare capacity by operatorship and at least a 30% share.
marked notably higher.
2mn b/d in order to defend the current Foreign companies would win shares on
Similarly good news is being made in
price level and thereby allow the non- the basis of how much oil they offer the
terms of new oil field projects coming
OPEC producers to fully utilise their government.
onstream. Since June, the Saudis have
brought onstream the AFK fields, the new production capacity. Alternatively,
Khurais field, the Nuayyim field and the is OPEC willing to allow prices to fall,
thereby stimulating economic activity, The Australian government appears to
Shaybah field expansion. In Iraq, the
hoping that this will expand oil have set a most interesting precedent
Nassiriyah field has come onstream,
demand sufficiently rapidly that its in sanctioning the Gorgon LNG project
while the Tak Tak and Tawke fields have
overall earnings are maintained? by accepting the long-term liability for
started up in Iraqi Kurdistan. In Angola,
Currently, both the oil and the finan- any sequestered and stored carbon
the Gimboa and Tombua Landana
cial markets appear reluctant to recog- dioxide subsequently leaking. If the UK,
fields have come onstream. This means
nise the industry fundamentals – the Norwegian or Danish governments did
that in just the last three months OPEC
continuing weakness of demand, lack- the same it would open the way for
has brought onstream fields with a
lustre refinery utilisation rates and enhanced oil recovery and sequestra-
peak capacity of nearly 2mn b/d. Some
depressed refining margins, high stocks tion of carbon dioxide in depleted
18 months ago this would have been
on land and at sea of both crude and North Sea oil fields.
unreservedly good news – now it is
somewhat more ambiguous as OPEC products, and the way that spare pro-
duction capacity is more likely to build *Figures from Peak Oil Consulting
already has 5–6mn b/d of spare
capacity. than decline. In addition, we are now
starting to get the flattering distortion Chris Skrebowski
For the non-OPEC suppliers, new
capacity is unambiguously good news that one year ago oil demand was
given the real struggle most oil compa- falling fast. Supply and demand are The opinions expressed here are
nies have been having in order to now rising slowly. Comparison with entirely those of the Consulting Editor
year ago figures are flattering; compar- and do not necessarily reflect the view
expand their production capacity. In the of the EI.
period since June, non-OPEC suppliers ison with two years ago are sobering.

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2 PETROLEUM REVIEW OCTOBER 2009

IN BRIEF
UK
BG Group has acquired BP’s entire
equity in the Everest, Lomond and
Armada fields, increasing its equity
stake in these fields to 80.46%, 83.33%
and 76.42% respectively, and part of
BP’s equity in the Erskine field, oper-
ated by Chevron. In return, BG Group
has transferred all of its equity interests
in all fields in the southern North Sea to
BP. These include the Easington
Catchment Area (ECA) fields (Apollo,
Artemis, Mercury, Minerva and
Neptune, which are BG Group-oper-
ated, and the BP-operated Wollaston
and Whittle fields), and the BG Group
equity in the BP-operated Amethyst
field. BG Group has also become oper-
ator of the Everest and Lomond fields,
and will continue to operate the
Armada field.
DONG Energy, Faroe Petroleum and
First Oil Expro have announced a gas
discovery in the Glenlivet licence West
of Shetland. DONG Energy is operator,
with an 80% interest. The licence is
located close to the Laggan and
Tormore gas discoveries, where DONG
Energy holds a 20% stake. Glenlivet is
the first well to be operated by DONG
Energy in the UK’s West of Shetland
sector.
Total has entered into agreements
with Mobil North Sea, Marathon Oil
and Anadarko to acquire a 43.75%
stake in UK licence P967, which
includes the Tobermory gas discovery
located in 1,600 metres of water depth
some 175 km north-west of the
Shetland Isles. Total E&P UK will
become the operator of the licence.
The acquisition is in line with Total’s
strategy of developing its position in
Complete news update
The ‘In Brief’ news items in Petroleum
Review represent just a fraction of
the news we regularly publish on the
EI website www.energyinst.org via
the ‘News in Brief Service’ link from
the Petroleum Review drop-down
menu. Covering all sectors of the
international oil and gas industry,
the News in Brief Service is a fully
searchable news database for EI
members.
Why not visit the site to find out
more about the latest developments
and trends in your industry?
www.energyinst.org
PETROLEUM REVIEW OCTOBER 2009
NEWS
North Sea market feels ‘concertina effect’
Figure 1: Periodic stock releases dampen the prompt market and
re-establish the contango in a trend known as the ‘concertina effect’ stocks from the VLCC
Source: Argus Global Markets Australis. The cycle
Rising North Sea crude prices have been Vitol sold supplies from the VLCC
periodically capped this year by sales of
oil from floating storage, according to
Argus Global Markets. The structure
that regulates this process is the ‘con-
tango’ – the discount of prompt deliv-
eries to those further out.
The North Sea crude forward con-
tango has fluctuated widely since it
became firmly established in May last
year. It reached its deepest point at the
beginning of 2009, when front-month
contracts were more than $6/b below
those three months ahead. This, com-
bined with low freight rates and a glut
of new tankers, provided a strong incen-
tive to store crude and sell it forward.
Around 100mn barrels of crude had
built up in floating storage by mid-May.
Rising outright prices and a flatter
contango have encouraged firms to sell
some of their stocks since then, while
reversing the attraction of futures sold
as a hedge. Crude in floating storage
has more than halved to 47mn barrels.
However, periodic stock releases
dampen the prompt market and re-
establish the contango in a trend some-
times known as the ‘concertina effect’
(see Figure 1).
OPEC to maintain current production quotas
The 154th OPEC meeting convened in
Vienna, Austria, on 9 and 10 September
2009. The members reviewed current
oil market conditions and future
prospects and observed that, whilst
there are signs that economic recovery
is underway, there remains great con-
cern about the magnitude and pace of
this recovery, especially in the major
industrialised nations of the OECD.
There has been some easing of the
overhang in crude oil stocks but market
fundamentals remain weak, refinery
upstream
Trading firm Vitol
sold Forties crude
from the VLCC (very
large crude carrier)
Abqaiq in Scapa Flow
in the Orkneys in late
June, coinciding with
a wider sell-off of
stocks held in floating
storage that helped
pull down outright
prices. The contango
had tightened again
by mid-July and prices
were recovering,
prompting BP to sell
was repeated when
Maersk Neptune in late August, after
which outright prices again subsided
and the contango deepened.
Traders have become more willing to
exploit an emerging contango storage
play, even when it does not promise
the same returns as earlier this year.
The recent widening of the North Sea
front month’s discount to the third
month to $1.50/b in early September
from less than 50¢/b in mid-July has
encouraged new buying for storage.
Total accumulated five 600,000-barrel
cargoes of Forties loading on 13–19
September, and planned to load two
VLCCs for storage purposes.
There is less opportunity in the US,
where benchmark front-month WTI’s
discount to the third month has nar-
rowed to less than $1/b since mid-
August. However, the prospect of slow
demand recovery, particularly for
middle distillates – which also have a
glut of stocks at sea – means that the
contango concertina is likely to keep
playing in the North Sea.
Visit www.argusmedia.com for more
information.
utilisation rates are low and product
inventories have risen considerably.
Accordingly, since the market
remains over-supplied and given the
downside risks associated with the
extremely fragile recovery, OPEC mem-
bers once again agreed to leave current
production levels unchanged for the
time being. The organisation plans to
reassess the market situation at its
155th (Extraordinary) Meeting, to be
held in Luanda, Angola, on 22
December 2009.
3
IN BRIEF NEWS upstream

the West of Shetland basin around its

Laggan and Tormore operated discov- Latest Latin American discoveries
eries. The development studies for
Venezuelan President Hugo Chavez from the Iguaçu discovery and 40 km
these discoveries are being finalised
recently announced what is claimed to from the Carioca discovery, and lies 50
and new gas export infrastructure to
be Repsol’s largest ever gas find. Repsol km to the west of the Guara discovery
the St Fergus gas terminal is planned,
is the operator of the Pearl 1 well in (1-BRSA-494-SPS), also in the BM-S-9
which Tobermory could utilise.
the Cardon IV block, in which it holds a concession, announced June 2008.
50% stake in consortium with Eni. In The three partners have also
EUROPE the development phase, PdVSA will announced that the Guara discovery in
have a 35% stake, with Repsol and Eni the Santos basin pre-salt, offshore
keeping 32.5% each. The field is esti- Brazil, is now estimated to contain
Aker Solutions has signed a NKr2.3bn
mated to hold between 7tn and 8tn cf recoverable volumes of 1.1bn to 2bn
($0.39bn) contract with Eni to deliver a
of gas, enough to satisfy Spain’s gas boe. During its drill stem test, Guara
subsea production system to the oper-
demand for more than five years. flowed at 7 200 boe/d. These flow rates
ator’s Goliat field development in the
Meanwhile, BG Group (30%) and were facilities-constrained, and test
Barents Sea. Scope of work comprises
partners Petrobras (operator, 45%) and data indicates that a permanent pro-
engineering, procurement and con-
Repsol (25%) have announced another duction well would be capable of pro-
struction (EPC) of a complete subsea
new discovery in the Santos basin pre- ducing initial rates of up to 50 000
production system, with deliveries
salt BM-S-9 concession area, offshore boe/d, providing further evidence of the
starting in 2011.
Brazil. The well, 4-SPS-66C (4-BRSA- robust economics of this pre-salt play.
723C) – known as Abare West – proved The companies have agreed a
Marathon Oil (operator, 65%) and
the presence of an accumulation of oil schedule which will prioritise the instal-
partner Lundin (35%) have produced
and natural gas in a separate structure lation of production facilities on Guara.
first oil from the Volund field in block
within the 1-SPS-50 evaluation plan The development will use a 120,000 b/d
24/9 of the Norwegian sector of the
area on block BM-S-9. floating production, storage and
North Sea. Volund is the second tie-
The evaluation plan area also encom- offloading vessel (FPSO), targeting first
back to the Alvheim floating produc-
passes the separate Iguaçu (4-BRSA-709 production from 2012. This will follow
tion, storage and offloading (FPSO)
(4-SPS-60), announced April 2009) and the 100,000 b/d first phase of the Tupi
vessel, following Vilje. Volund is
Carioca discoveries (1-BRSA-491-SPS (1- field, due onstream at the end of 2010
expected to reach a peak production
SPS-50), announced September 2007). (BG Group 25%, operator Petrobras
of approximately 25,000 b/d, the
Abare West is approximately 30 km 65%, Galp 10%).
timing of which will be subject to
available processing capacity on the
Alvheim FPSO. Marathon holds a 65%
operated interest in the Alvheim field
Tombua and Landana fields come onstream
and associated FPSO, and a 47% out- Total’s Tombua and Landana fields offshore Angola, operated by Chevron and in
side-operated interest in Vilje. which Total owns a 20% interest, started crude oil production on 19 August 2009.
The two fields are expected to achieve peak production of 100,000 b/d in 2011.
Providence Resources’ wholly owned Combined recoverable resources are estimated at 350mn barrels.
subsidiary, EIRGAS, has exercised its The Tombua and Landana fields are located in 366 metres of water in block 14.
option to acquire a 40% interest in the The $3.8bn project includes 46 wells and comprises a 474-metre high compliant
100% operated Kinsale Head area piled tower and subsea production facilities. The design will prevent any discharge
comprising the Kinsale Head, South of produced water and any routine gas flaring. Associated gas will be supplied to
West Kinsale and Ballycotton gas fields the Angola LNG project currently being constructed in Soyo, in which Total owns
from Labuan Energy, a wholly owned a 13.6% interest.
subsidiary of Petronas. Under the deal, Block 14 is operated by Chevron (31%), partnered by Total (20%), Sonangol P&P
EIRGAS has also exercised the option (20%), Eni (20%) and GALP (9%).
to acquire a 40% interest in the 86.5%
operated adjacent producing Seven
Heads gas field. Providence has made
an initial cash payment of $3.8mn to New UKCS seismic data store launched
Petronas, with the balance due at
Common Data Access (CDA), which locate, it will be quality-assured. When
closing.
manages well data collected during data is located through the Seismic
drilling activity on the UK continental DataStore online, purchasers have the
RUSSIA & CENTRAL ASIA shelf (UKCS), recently launched its opportunity to preview it to ensure its
Seismic DataStore. It is claimed that the quality is suitable before investing in it,
new online service will dramatically saving unnecessary costs. Those surveys
Having come onstream on 21 August,
increase the efficiency of retrieving which are too big to download imme-
the first 1mn tonnes of crude oil had
and analysing some 4,500 2D and 3D diately will be on members’ desktops
been produced at Vankor oil and gas
seismic surveys, enable companies to within three days. Companies who are
field in the Krasnoyarsk territory of
respond much more quickly and confi- not members of CDA will still have to
Russia by mid-September, while daily
dently to licence applications, and help sign licences but will benefit by
output at the field increased to 20,000
ensure recovery of the UK’s oil and gas receiving quality-controlled data,
tonnes (146,000 b/d). Production is
is maximised. which they have identified as useful,
expected to grow to 30,000 t/d (220,000
The surveys most in demand are within the three-week guideline set by
b/d) by year end. Total production in
being loaded onto the system first and government.
2009 is forecast to reach 3mn tonnes
by the end of this year more than 750 Companies wishing to participate in
(2mn barrels). The field currently has
of the most relevant will be available. the Seismic DataStore should visit
estimated recoverable reserves of
Not only will seismic data be easier to www.cdal.com

4 PETROLEUM REVIEW OCTOBER 2009

IN BRIEF NEWS upstream

520mn tonnes (3.8bn barrels) of oil

and 95bn cm of gas. Crude oil is trans- Subdued western Gulf of Mexico auction
ported via the 556-km Vankor–
The US Minerals Management Service’s waters, while major companies focused
Purpeoil pipeline in Yamalo-Nenets
(MMS) auction of offshore blocks in the mainly on blocks whose water depths
Autonomous District, connecting to the
western Gulf of Mexico held in August ranged from moderate to very deep.
Transneft pipeline system. Vankor is an
was distinctly low-key, writes Judith BP was the sole bidder on a dozen
integral development project for East
Gurney. Only 27 companies took part in deepwater blocks in Keathley Canyon,
Siberia and the Far East. Oil from the
the bidding, half the number of compa- including an offer of $1.1mn for a block
field will be the main input to the East
nies participating in these auctions over with water depths of 3,220 metres, the
Siberia–Pacific Ocean pipeline and the
the past few years. They made total deepest block to receive a bid. The
primary feedstock for a petrochemical
bids of slightly over $145mn, compared highest bid in the auction was $28.1mn
complex planned for construction in
to the $607mn bid in last year’s western made by BP for a Keathley Canyon
the Russian Far East.
Gulf auction. Their successful bids total block, which beat offers by both
was $115.5mn, compared to $487.3mn Chevron and ConocoPhillips.
A S I A - PA C I F I C in 2008. Well over half of the bids were The auction held last spring for blocks
for blocks in water depths ranging in the central Gulf region also attracted
between 800 and 1,600 metres, as is only moderate interest. The poor
Eni reports that production has com-
usually the case in these auctions. There showing at these auctions reflected con-
menced from its 100% owned and
was considerably less interest this year, cerns by companies over tepid demand
operated Blacktip gas field offshore
however, in blocks in ultra-deepwaters as a result of recession, continued high
Australia. The field will deliver gas to
whose water depths exceed 2,000 crude inventories and bloated gas sup-
the Northern Territory’s Power Water
metres. Companies offered only $9mn plies as a result of the active mining of
Corporation (PWC) over a period of 25
for blocks in ultra-deepwaters, com- gas shale deposits. There also remains a
years, with supply rising to 18,000
pared to the $135mn ventured for such threat of higher taxes and surcharges
boe/d over the life of the contract.
blocks in last year’s auction. on offshore acreage made by the
The major bidders were BP, which Obama administration.
Chevron has made two natural gas
ventured $53mn, followed by In addition to the two offshore auc-
discoveries in the Carnarvon basin off-
ConocoPhillips and Chevron, both tions held this year, the Department of
shore Western Australia. The Clio-2
risking $25mn. Petrobras, ExxonMobil the Interior’s Bureau of Land
well (Chevron operator, 66.66%; Shell
and Focus were also active. Smaller Management has conducted 21 small
33.33%) – situated in 3,200 ft (990
companies, with the exception of Focus, onshore lease sales in different areas,
metres) of water and drilled to a total
concentrated on blocks in shallow mostly in western states.
depth of 14,400 ft (4,405 metres) – dis-
covered 375 ft (115 metres) of net gas
pay. The Kentish Knock-1 well
(Chevron operator, 50%; Shell 50%) – BP announces giant GOM oil discovery
drilled in approximately 4,000 ft (1,200
BP announced a giant oil discovery at its Tiber prospect in the deepwater Gulf of
metres) of water to a total depth of
Mexico in early September. The well, located in Keathley Canyon block 102, is in 4,132
approximately 8,300 ft (2,500 metres) –
ft (1,259 metres) of water and was drilled to a total depth of approximately 35,055 ft
encountered approximately 110 ft (34
(10,685 metres) – making it one of the deepest wells ever drilled by the oil and gas
metres) of net gas pay.
industry. The well found oil in multiple Lower Tertiary reservoirs. Appraisal will be
required to determine the size and commerciality of the discovery. Tiber represents BP’s
Cairn Energy has started production
second material discovery in the emerging Lower Tertiary play in the Gulf of Mexico,
from the Mangala field in Rajasthan,
following the company’s 2006 Kaskida discovery, which is currently under appraisal. BP
India. It is the largest of 25 discoveries
holds a 62% stake in Tiber, partnered by Petrobras (20%) and ConocoPhillips (18%).
made by Cairn in the Barmer basin in
BP claims to be the largest producer of oil and gas in the Gulf of Mexico, with net
block RJ-ON-90/1. First oil was trans-
production of over 400,000 boe/d. It is currently progressing nine Gulf of Mexico pro-
ported via trucks to the Gujarat coast
jects – Atlantis Phase 2, Tubular Bells, Kodiak, Freedom, Kaskida, Isabela, Santa Cruz,
for onward transport to MRPL, one of
Mad Dog tie-backs and Great White. Major BP developments in the deepwater Gulf of
the government-nominated buyers,
Mexico include Pompano (onstream 1994), Marlin (2000), Horn Mountain (2002), Na
using a heated crude oil tanker. Oil
Kika (2003), Holstein (2004), Mad Dog (2005), Atlantis (2007) and Thunder Horse (2008).
production is forecast to ramp up to a
peak production of 175,000 b/d of oil
over the next two years, at which
point oil production from Rajasthan oil Proposed changes to Brazilian oil and gas law
fields are expected to account for over
20% of India’s domestic oil production. Brazilian President Luiz Inácio Lula da resources, reports market analyst IHS
Silva recently announced proposed Global Insight. The comprehensive
changes to the country’s oil and gas reg- changes to the regulatory framework
AFRICA ulatory framework that put state-run will not affect previously awarded con-
Petrobras in the driver’s seat for the tracts in the sub-salt area, but will apply
US-Canadian company EnerGulf development of Brazil’s offshore sub- to all new contracts, with Petrobras
Resources is working with the China salt oil reserves. Under sweeping pro- guaranteed at least a 30% stake in all
National Administration of Research posed reforms, the country’s current the remaining blocks in the 149,000 sq
Institute of Coal Geophysical Exploration concession-based oil and gas regulatory km of sub-salt acreage.
to conduct seismic surveys in the system is to be scrapped in favour of Petrobras is set to become the domi-
Democratic Republic of Congo (DRC), one based on production-sharing agree- nant player in Brazil’s drive to develop
reports Keith Nuthall. Studies were ments (PSAs), with state oil giant its offshore sub-salt reserves, although
scheduled for September in EnerGulf's Petrobras poised to play a primary role the proposed changes still must be
in the development of offshore sub-salt approved by Congress.

PETROLEUM REVIEW OCTOBER 2009 5

IN BRIEF
Lotshi block concession off the DRC’s 37-
km west Africa coastline.
Libya has approved a $9.9bn plan
under which state-owned National Oil
Corporation (NOC), its subsidiaries and
current foreign partners will develop
and upgrade 24 oil fields in the
country, according to Dow Jones. As
part of the scheme, Libya, which holds
Africa’s biggest oil reserves at 43.7bn
barrels, will upgrade its Waha Jalou
North field by 100,000 b/d and its
Nafoura-Oujlaa-Khleej field by
130,000 b/d. The country is also
looking at 13 other fields to see if they
should be included in another project.
Eni reports that gas production has
commenced from the North Bardawil
field in the Mediterranean offshore of
Egypt. Output is expected to peak at
2.7mn cm/d. Project partners are Ieoc
(Eni’s affiliate in Egypt, 60%) and
KUFPEC (40%). The operator is Petrobel,
a joint operating company comprising
Ieoc and EGPC. The project consists of
two subsea wells tied back to the
existing Barboni production platform.
East African Exploration (EAX), a Black
Marlin Energy Group company, has
increased its interest in the Kenyan
block L17/L18 production sharing con-
tract (PSC) by 25% to 65% under a
deal reached with Aminex. EAX is to
transfer its 10% stake in the Nyuni
production sharing agreement in
Tanzania to Aminex.
Libya has issued a directive requiring
foreign investors to appoint Libyan cit-
izens as chief executives of their joint
venture (JV) companies in the country,
writes IHS Global Insight Middle East
Energy analyst Samuel Ciszuk. Little
detail is yet known, with no indication
that international oil companies (IOCs)
are excluded. Virtually all foreign
investment in Libya operates through
JVs – especially within the oil and gas
industry. Oil and gas exploration is
100% funded by the foreign JV
partner, and Libya has in recent years
pressed IOCs to transfer their explo-
ration and production sharing agree-
ments (EPSAs) to its latest EPSA-IV
contractual standard, lowering most
companies’ production shares signifi-
cantly. This latest measure, only one in
a string of resource-nationalistic edicts,
is likely to reduce investor control over
the projects even further and be seen
as yet another risk and obstacle to
business. Earlier this year Libya
demanded that investors put a stop to
offshore engineering and move all rel-
evant project development and tech-
nology to Libya.
6 PETROLEUM REVIEW
NEWS
Indian gas price dispute – government steps in
Although the Indian exploration and
production industry holds great potential
for all stakeholders, the lack of trans-
parent or consistent regulatory guide-
lines has left investors skeptical,
according to market analyst
Datamonitor. As a result, the government
has been forced to intervene in the latest
conflict caused by these market limita-
tions, which could have far reaching con-
sequences for the activities of domestic
and international E&P players.
The big news story currently circu-
lating in the Indian energy sector is the
natural gas supply dispute between
Reliance Industries Limited (RIL) and
Reliance Natural Resources Limited
(RNRL). The dispute has resulted in nat-
ural gas production rates from the
Krishna Godavari (KG) basin being
greatly below the initial targets, which
in turn has held up projects at various
stages of execution. This has forced the
Indian government to intervene and
claim its sovereign rights to the natural
gas assets which belong to the country,
in the process reminding companies that
they are mere operators/contractors
involved in bringing gas to the surface
and supplying it to end customers.
In 2005, RNRL signed a memorandum
of understanding (MoU) with RIL for the
supply of 28mn cm/d of gas for a period
of 17 years, at a price of $2.34/mn Btu.
This is the same price at which RIL won a
bid for supplying gas to National Thermal
Power Corporation (NTPC) in 2004.
However, other fertilizer and power com-
panies have to pay the government-reg-
ulated price of $4.20/mn Btu for the gas
extracted from KG D6 block.
Karan Ahuja, Energy Senior Analyst
with Datamonitor explains: ‘The rise of
fuel prices in the international market
and an increase in operational costs has
now forced RIL to dishonour its contracts
with RNRL and NTPC, stating that it will
not be possible to provide the gas at the
pre-established price. RNRL has contested
this decision and has laid the grounds for
what is set to be an epic legal scuffle.’
All this has led RIL to cut down its tar-
geted production rate from its KG D6
block, leading the customers with which
it has already signed gas allocation con-
tracts to panic. Delayed and lower pro-
duction also means reduced or delayed
revenues for the government. As a result,
the Indian government has intervened,
stating that gas and oil are national
assets and that operators are responsible
only for bringing it to the surface and
supplying it to end users. Furthermore,
the government declared the MoU
between the two parties as null and void.
Soumya Sen, Energy Analyst with
Datamonitor believes: ‘Ideally, the oper-
upstream
ator and purchaser should sign a contract
and establish a price that is either mutu-
ally decided or fixed as per the competi-
tive pricing mechanism.’ The contract
should also accompany a revision clause
to allow a periodical review of the prices
based on market rates. The government,
meanwhile, should be entitled to earn a
revenue/royalty for the gas, based on a
predetermined rate as per the product
sharing contract. However, the govern-
ment should not be party to such con-
tracts; it should formulate policies that
provide a transparent and clear set of
guidelines, but should intervene only in
cases where policies or contracts are vio-
lated. This would reassure international
E&P operators engaged in India that,
while the government is interested in the
timely extraction and delivery of the fuel
to its entitled customers, the prices that
customers are charged are competitive
and based on free market dynamics.
Although some multinational corpora-
tions operating in India may worry about
the fact that the government is trying to
involve itself in the pricing issue and in
selecting customers of gas, given that the
stakes are high (the KG basin is touted as
one of the key solutions to India’s energy
needs), the government’s intervention
seems to make sense. The pricing dispute
between RIL and RNRL is jeopardising
production from KG blocks and raising
serious doubts about the regulatory poli-
cies governing the pricing across fossil
fuel blocks in India. This could have far
reaching consequences and dampen
investors’ appetite for investing in Indian
fuel assets. Thus, while the government is
acting in the best interests of national
resources, it is also playing the role of
regulator, acting in the best interests of
end users and the players which are
involved in the natural gas business.
The final verdict from the Supreme
Court of India will be a crucial one –
upholding the lower price would defi-
nitely have a negative impact on
investors, as it would force them to sell
gas at a much lower price than the
existing market price of gas. On the
other hand, fixing a price that is near
the current market price (ie $4.20/mn
Btu) would establish a competitive
pricing system for the Indian fuel explo-
ration and marketing industry. It is also
important that a flexibility clause, where
prices can be reviewed from time to
time with the mutual consent of the
parties involved based on prevalent
market conditions, should be intro-
duced or strongly recommended. If a
flexible pricing clause is written into the
contract, the possibility that gas prices
will reach between $2.34 and $4.20/mn
Btu cannot be ruled out.
OCTOBER 2009
IN BRIEF
UK
Simon Storage has secured a new
long-term contract to store and handle
the full range of road fuels at its Seal
Sands terminal on Teesside, UK, for
Petroplus Marketing. Simon is pro-
viding a fully integrated solution that
includes 40,000 cm of carbon steel
tankage, fully automated road loading
facilities, integrated bioethanol in-line
injection systems and batch biodiesel
blending systems. Simon’s Seal Sands
terminal has the capacity to handle up
to 600,000 t/y of road fuel products for
Petroplus, and is already assessing fur-
ther expansion plans.
A further 2 p/l in fuel duty was
added by the UK government on
1 September 2009, (54.19 p/l to 56.19
p/l) plus VAT, equivalent to 2.3 p/l
overall. The duty will take the cost of
filling the average Briton’s tank to £62
– an increase of over 25% since 2007,
according to Swinton, the high street
insurance retailer. Surging oil prices
and rising demand are also forcing
petrol prices up.
EUROPE
Foster Wheeler has been awarded a
contract by ZE PAK for the design,
supply and erection of a 55 MWe bio-
mass-fired circulating fluidised-bed
(CFB) boiler island for the Konin power
station in Poland. Commercial opera-
tion of the new steam generator,
which will be designed to burn wood
biomass and up to 20% agro biomass,
is scheduled for 1Q2012.
Dutch utility Essent expects to see one
million electric vehicles on the roads in
the Netherlands by 2020, its head of
new energy recently told Reuters.
Alexandra van Huffelen said Essent
was working with other Dutch compa-
nies to stimulate the industry, lobbying
the government to speed up the intro-
duction of electric cars and launching
demonstration projects around the
country. She expects the first rollout of
PETROLEUM REVIEW OCTOBER 2009
NEWS downstream
Call for faster climate change negotiations
Negotiations need to move much faster to deliver strong outcomes on areas such
as adaptation, technology and building skills in developing nations, said United
Nations Framework Convention on Climate Change (UNFCCC) Executive Secretary
Yvo de Boer, at a press briefing on the final day of an informal UNFCCC consulta-
tion held in Bonn, Germany, to aid negotiations in the run up to the Copenhagen
Climate Conference in December, reports Marc Height.
While there is increasing momentum at a high political level for a strong result
in Copenhagen, a concerted response to climate change is essential to meet the
concerns of developing countries, he added. He also stressed the imperative of
reaching a deal in December, stating: ‘A climate deal in Copenhagen this year is
an unequivocal requirement to stop climate change from slipping out of control.’
Environmental organisations also saw the Bonn meeting as a missed opportu-
nity to speed up negotiations. Kim Carstensen, the Head of WWF Global Climate
Initiative said: ‘Delegates spent too much time arguing over procedures and tech-
nicalities. This is not the way to overcome mistrust between rich and poor nations.
Delegates are kept back by political gridlock. The political leaders must now
unblock the process… without commitments on funding, it is impossible to design
a solid climate agreement. It is like asking a manager to run a company without
telling him what his budget is.’
Finance and technology are key to success
of a climate agreement at Copenhagen
The energy industry is making progress Truly additional, verifiable finance is
towards the Copenhagen Climate needed,’ she said. ‘We need upfront
Conference in December, but not fast financing here and now. We can come
enough, according to Danish Energy up with stimulus packages for the
Minister Connie Hedegaar, speaking to banks – it is do-able.’ The financing
Marc Height in August. However, she mechanism needs to be one that gener-
hopes that the widespread political con- ates and delivers money annually till
sensus surrounding climate change is 2020 – in the order of magnitude of
now too much for some form of deal €100bn each year, according to
not to be struck in Copenhagen. ‘To be Hedegaard. She also regards trans-
the country that blocks the deal, the parency between donors and those
political price is too high,’ she said. delivering the money as key.
Hedegaard sees the main challenges With China investing a large propor-
to striking a deal as getting finance and tion of its economic stimulus package
technology to developing countries. ‘Is into green areas, the new US govern-
it fair that developing countries will ment showing leadership in gearing up
have to contribute to the deal?’ she to the conference and an open dia-
asked, ‘No – but it’s a fact.’ In this con- logue between the two nations,
text she argues that developed coun- Hedegaard sees more forces moving in
tries need to show leadership and come the right direction. ‘We currently have
up with sustainable solutions. She sees a window of opportunity,’ she said, ‘we
financing as the key to opening the dia- have to be careful not to miss it – you
logue with developing nations: never know when we will get the
‘Without pay, there is no agreement. chance again.’
First sustainable F3 racing car
racing what is claimed to be the world’s
first ever sustainable F3 racing car at
Brands Hatch on 18 October. Developed
by the University of Warwick, the car
has components made from carrots and
potatoes, and runs on biofuels made
from a range of materials including
chocolate and fermented wine dregs.
The sustainable approach includes
bodywork that is made of recycled
G K Salter & Associates (gksa), a low materials and features a steering wheel
carbon building services design consul- that is composed of waste from juiced
tant based in Swanley & Bristol, has carrots. The 230 bhp engine is made
partnered with Aaron Steele, who is from recycled aluminium.
7
IN BRIEF
electric cars on Dutch roads in
2010–2011, with more widespread
usage around 2015, when advances in
battery technology are likely to have
reduced costs. The one million cars by
2020 would include plug-in hybrids
and pure electric vehicles, and match a
figure the German government wants
to see on its roads by the same date.
For more details, visit www.reuters.
com/article/GlobalClimateandAlternat
iveEnergy09
NORTH AMERICA
Manitoba is reportedly to become the
first province in Canada to mandate
the use of biodiesel. From 1 November
all diesel fuel sold in the province must
contain an average of 2% biodiesel.
RUSSIA & CENTRAL ASIA
A new isomerisation unit has
been commissioned at Lukoil’s
Ukhtaneftepererabotka refinery that
will allow the facility to produce high-
octane gasoline components free from
sulphur compounds, benzene and aro-
matic substances in accordance with
EURO-3 and EURO-4 standards. The
refinery currently has a capacity of
3.7mn t/y – however, it is planned to
double capacity following a large-scale
upgrading programme.
Gazprom Neft has acquired a network
of service stations consisting of 40
fuelling facilities and two oil depots in
the Chelyabinsk region of Russia. The
fuelling facilities will be managed
by Gazpromneft-Chelyabinsk, which
plans to increase the network’s sales
volume by 10% during 2009 compared
with 2008. Fuel is supplied from the
Omsk refinery. Gazprom Neft currently
operates 898 working forecourts in 17
regions of Russia. At present, the sites
operate under a number of different
brands. The company plans to imple-
ment a network-wide Gazprom Neft
branding over 2009–2011. Some 230
gas filling complexes are scheduled to
be brought in line with the new cor-
porate style by year-end 2009.
Shell is to start construction of a major
new lubricants blending plant – report-
edly the first to be built by an interna-
tional oil company in Russia. The plant,
which is being built in Torzhok in the
Tver region, north-west of Moscow,
will have a capacity of 200mn l/y (about
180,000 t/y), making it one of the
largest in the Shell network worldwide.
Commercial operation is expected to
begin by the end of 2010.
8 PETROLEUM REVIEW
NEWS downstream
UK hydrogen and fuel cell funding competition
A competition for up to £7.2mn of funding for companies to develop hydrogen
and fuel cell technology opened in the UK on 10 September. The competition is
being funded by the Department of Energy and Climate Change (DECC) and is
part of measures for stimulating low carbon technologies announced in this
year’s budget.
Companies will be able to bid to the Technology Strategy Board, who will manage
the programme, for a share of the cash to develop and test the technology.
Hydrogen and fuel cells have the potential to help drastically reduce carbon emis-
sions because they only emit water and heat as by-products. The energy conversion
in fuel cells is more efficient than those of other technologies such as the internal
combustion engine.
For more details, visit www.innovateuk.org/deliveringinnovation/forthcoming
competitions.ashx
Lukoil takes stake in TRN refinery
Lukoil has acquired from Total a 45% which TRN owns a 22% share.
share in the Holland-based Total The plant has a topping capacity of
Raffinaderij Nederland (TRN) refinery. 158,000 b/d and a hydro-cracking unit,
The Russian company will replace Dow one of the biggest in Europe, with a
Chemical as Total’s partner in TRN. The capacity of approximately 68,000 b/d.
refinery is located in the Vlissingen Oost The refinery is capable of processing
harbour area in the south-western part Urals blend crude oil as well as signifi-
of the Netherlands, in one of the cant volumes of straight-run fuel oil and
world’s largest oil and oil-product vacuum gasoil, which will allow Lukoil
trading hubs (Amsterdam-Rotterdam- to integrate the plant into its production
Antwerp) and benefits from access to chain. The company will also be able to
the well-established infrastructure, use TRN to supply and further develop
including Maasvlakte Olie terminal, in its retail presence in Western Europe.
OMV optimising service station network
Early in 2009, OMV announced its intention to continue with the optimisation of
its service station network as part of a new network evaluation and to dispose of
an additional 70 OMV and Avanti stations across the country. In 2008 it had sold a
total of 60 sites throughout Austria.
Some 30 stations have been sold this year to new acquirers and operators, with
negotiations for the disposal of a further 15 stations currently underway with pri-
vate interested parties. However, suitable investors have not been found for the
remaining 25 filling stations due to tighter legal and economic conditions in the
service station market. As a result, OMV is evaluating the potential closure of the
remaining locations.
As noted, to date this year, some 18 OMV and 12 Avanti stations have been sold
to new acquirers and operators. In Carinthia, Styria and Upper Austria a total of
13 stations were sold to Annawitt and will operate under the brand A1; nine
filling stations in Burgenland and Lower Austria were acquired by the Vienna-
based petroleum wholesale company AWI; in Tirol and Vorarlberg, four stations
were taken over by Gutmann; and in the Federal Province of Salzburg, four sta-
tions were sold to Leikermoser.
UK 10:10 Campaign to cut carbon emissions
British Gas has pledged its support for changes in their lifestyle, diet or energy
the ‘10:10 Campaign’, a national drive usage. For more information, visit
by individuals and organisations in the www.1010uk.org
UK to cut carbon emissions by 10% Meanwhile, British Gas parent
during 2010. The campaign is described Centrica launched its own carbon-cut-
as the first real opportunity for ordi- ting campaign in September – a 100-
nary people to stand up and be day drive to reduce carbon emissions in
counted in the battle to cut carbon. UK offices. A similar campaign last year
Thousands turned up at the Tate helped the company to achieve a year-
Modern in London to sign up and on-year decrease in UK office energy
promise to cut their carbon by making consumption of 7.23%.
OCTOBER 2009
IN BRIEF
A S I A - PA C I F I C
Engen Petroleum and KenolKobil are
understood to have signed a sale and
purchase agreement (SPA) to jointly
acquire all the shares in Shell
Zimbabwe and BP Zimbabwe, which
are currently operated by BP on
behalf of the joint venture which is
marketed under both the BP and Shell
brands in Zimbabwe. Assets include
some 75 service stations, as well as
several depots.
Chevron is reportedly planning to pull
out of India’s lubricants market. It is
understood that Chevron Global
Lubricants will stop selling its global
brands including Chevron, Caltex, Delo
and Havoline in the country over the
next month.
L AT I N A M E R I C A
Aker Solutions has been awarded the
project management consultant (PMC)
contract for Staatsolie Maatschappij
Suriname refinery expansion project in
Suriname. Once completed, the pro-
ject will double the refinery’s pro-
cessing capacity to 15 000 b/d,
producing diesel, gasoline, fuel oil,
bitumen and sulphuric acid. Staatsolie
is the state oil company of Suriname.
The refinery expansion is scheduled to
be completed in spring of 2013.
WORLD
Australian-based Altona Energy has
become a Foundation Member of the
Global Carbon Capture and Storage
Institute (the Global CCS Institute), a
worldwide organisation focused on
accelerating the commercial deploy-
ment of carbon capture and storage
(CCS) projects and the promotion of
the global reduction of carbon dioxide
emissions. Amongst others, 23
national governments including all
the G8 countries are Foundation
Members. Altona’s Arckaringa coal-to-
liquids (CTL) and power project has
been designed to be ‘CCS ready’ with
carbon capture technology included as
an integral feature of its planned spec-
ifications. The final stage of the pro-
ject’s bankable feasibility study for a
10mn b/y CTL plant with a 560-MW co-
generation power facility will incorpo-
rate extensive development work on
the technical and economic aspects of
CCS, as well as other measures to miti-
gate greenhouse gas emissions. For
more information, visit www.global
ccsinstitute.com
PETROLEUM REVIEW OCTOBER 2009
NEWS downstream
Desulphurisation technology deal signed
SulphCo, a Houston-based technology company with a patented ultrasound
process designed to desulphurise crude oil products and crude oil, has entered
into a letter of intent (LOI) with Laguna Development to move toward the com-
mercial installation of SulphCo’s desulphurisation technology.
Under the terms of the LOI, Laguna has agreed to evaluate SulphCo’s
Sonocracking™ technology to reduce the sulphur content of the diesel stream
produced at Laguna’s New Mexico trans-mix facility to reach ultra-low sulphur
diesel requirements that Laguna will be required to meet beginning in June 2010.
Upon achievement of agreed upon technical requirements to produce ultra-low
sulphur diesel, SulphCo and Laguna intend to enter into a commercial arrange-
ment for the installation and operation of a SulphCo Sonocracking™ unit at
Laguna’s facilities.
Trans-mix is a mixture of gasoline, diesel and jet fuel created during the trans-
portation of such fuels through a shared pipeline. The process for separating
trans-mix is a distillation process. The trans-mix plant operates 24 hours a day and
produces approximately 50,000 g/d. All diesel that is produced at the trans-mix
plant is sold through retail outlets owned by Laguna.
The patented Sonocracking™ process employs ultrasound technology to alter
the molecular structure of crude oil and crude oil products. The overall process is
designed to ‘upgrade’ the quality of crude oil and crude oil products by modifying
and reducing the sulphur and nitrogen content to make those compounds easier
to process using conventional techniques, as well as reducing the density and vis-
cosity. For more information, visit www.sulphco.com
Power sector confidence in risk management
Over one third of senior executives at concern to 18%.
European power and utilities firms are Commenting on the research, Mark
highly confident in their existing risk Pollard, Head of Industry Practices for
management processes and are cau- Europe, the Middle East and Africa at
tiously optimistic about the long-lasting Marsh, said: ‘The economic downturn has
effects of recession, according to new created two fundamental and intercon-
research commissioned by Marsh, a nected threats for the power and utilities
leading insurance broker and risk adviser. industry – a short-term decline in
Marsh’s research reveals that over demand, driven by falling industrial
36% of participants intimated that they activity across the region; and a reluc-
were ‘very confident’ in their existing tance on the part of both lenders and
risk management processes, but 45% of project developers to invest or to increase
those surveyed said the downturn has indebtedness in these uncertain times.
led to a reduction in risk appetite in This may also have a significant bearing
their organisations. Further evidence of on the sector’s ability to meet long-term
a shift in risk attitudes is also evident in demand expectations while meeting effi-
relation to risk management expendi- ciency and renewable targets.’
ture – 36% of respondents expect bud- He continues: ‘Marsh’s research
gets to increase in the next 18 months, demonstrates confidence in the sector,
with 40% expecting some of the extra which seems well-founded – future
spending to go on insurance, either due demand is assured and there is a sense
to an expected increase in the cost of across the industry that the downturn is
insurance or on more specialist lines of a blip in its growth curve. Despite this
cover; investment in risk management optimism, the research paints a picture of
training and information systems was a cautious industry, with a prudent, long-
also ranked as equally important. term view of risk management. The
Despite being less directly affected by power and utilities sector will have a fun-
the recession than some other indus- damental role in the return to economic
tries, Marsh’s research reveals that stability, and then to prosperity, during
European power and utilities companies the coming months and years, given that
are keenly aware of its effects – 43% of it is essentially a public service industry.
respondents identified credit risk as a Risk management, now more than ever,
critical priority for the next 18 months; is a critical element in the sustainability
commodity price volatility is of critical of a profitable and stable future.’
Visit the Energy Institute website at
www.energyinst.org
9
IN BRIEF
UK
BG Group has completed the upstream
and midstream acquisitions under its
alliance with EXCO Resources. It paid
$1,127mn for the upstream portion,
which consists of $727mn plus $400mn
to be paid as a carry of 75% of EXCO’s
future costs to develop the Haynesville
shale gas, and $269.2mn for the mid-
stream portion. Under the terms of the
alliance, BG Group has acquired a 50%
interest in 120,000 net acres in EXCO’s
upstream leases in a defined area of
East Texas and North Louisiana, which
encompasses the Haynesville shale, the
prospective Bossier shale and the Cotton
Valley tight gas sands formations;
added 2.6tn cf to BG Group’s net poten-
tial resources, with current net produc-
tion of 90mn cf/d (forecast 250mn cf/d in
2012) net to BG Group; acquired a 50%
interest in a new company that will hold
related and complementary EXCO gas-
gathering and transportation assets and
entered into agreements to support the
joint development of these assets; and
entered into a joint development agree-
ment with EXCO to cooperate in the
development and production of
onshore shale and tight gas resources
across 14 counties and parishes in East
Texas and North Louisiana.
Lloyds Register, Shell and Acergy are
the latest international organisations
to join the National Subsea Research
Institute (NSRI) as industry members.
They join BP, Subsea 7, Chevron,
Technip, Total, Nexen and Talisman,
bringing the total number of members
to 10 and moving NSRI towards its
target of 20 company members by the
end of 2009. NSRI was established by
Subsea UK, and Aberdeen, Dundee
and Robert Gordon Universities via the
Northern Research Partnership in
Engineering, to provide a focus for the
development of subsea technology
and expertise. Newcastle University has
also joined the Institute as a new acad-
emic partner. NSRI aims to ensure, that
by the use of leading edge technology,
the UK retains its market-leading posi-
tion and captures a significant share of
the global subsea market worth £25bn
at present and estimated to grow to
over £40bn by 2011. For more informa-
tion, visit www.nsri.org.uk
The Royal Society has published the
results of a one-year study on geo-
engineering and is calling on the UK
government to spend £10mn/y to
study the topic further. ‘That’s about
10 times what is being spent now and
about 10 times less than what we
spend on climate change research,’
10
NEWS
Gorgon partners agree FID
Chevron (operator, 50%*), Shell (25%)
and ExxonMobil (25%) have awarded
Australia’s Gorgon LNG export project
its final investment decision (FID). The
project will include construction of a
three-train LNG facility with a capacity
of around 15mn t/y on Barrow Island,
off Western Australia’s coast. Due
onstream in 2014, plans call for devel-
opment of the Greater Gorgon gas
fields, beginning with the Gorgon and
Jansz-Io fields – the largest gas discov-
eries to date in Australia – with devel-
opment facilities installed directly on
the ocean floor in water up to 1,300
metres deep. Two subsea pipelines with
a combined length of 240 km will carry
the gas to facilities on Barrow Island.
There is also speculation the Gorgon
project could add a further two trains
in the future, taking it to a five-train
25mn t/y mega-project.
Gorgon is also expected to be a
world leader in capturing the naturally
occurring carbon dioxide produced
alongside natural gas and storing it
safely underground, more than 2 km
beneath Barrow Island.
The FID for the Gorgon project fol-
lows a host of LNG supply agreements
that have been signed with Asian con-
sumers. Chevron has signed a heads of
agreement (HoA) with the Korea Gas
Corporation (KOGAS) for 1.5mn t/y of
LNG. As part of the arrangement,
Chevron and KOGAS have an option to
extend the 15-year agreement for a
further five years. The parties are also
discussing LNG sales and an equity pur-
chase from Chevron’s Wheatstone pro-
ject, located in north-west Australia.
Three further binding long-term
sales and purchase agreements (SPAs)
for Chevron’s share of LNG from
Gorgon have also been recently
signed. The agreements are for a total
supply of nearly 3mn t/y of LNG to
Osaka Gas, Tokyo Gas and GS Caltex.
Chevron will supply Osaka Gas with
1.375mn t/y of LNG for 25 years.
Osaka Gas will also purchase 1.25%
equity in the Gorgon project. Tokyo
Gas will be supplied with 1.1mn t/y
over 25 years and will purchase a 1%
equity stake. Supply from both agree-
ments is expected to commence in
2H2014. Chevron has also signed sepa-
rate agreements with GS Caltex for
0.5mn t/y of LNG for up to 20 years.
The LNG to GS Caltex will be supplied
from the Gorgon project and other
gas within the global Chevron port-
folio. GS Caltex is 50% owned by
Chevron.
Earlier, ExxonMobil signed SPAs for
the supply of 2.25mn t/y of Gorgon
industry
LNG to PetroChina for 20 years, and
with Petronet LNG for 5mn t/y over 20
years (the LNG cargoes to be delivered
to a new terminal under construction
at Kochi in southern India).
In November 2008, Shell announced
a long-term supply agreement with
PetroChina for LNG from its share of
Gorgon. During the 20-year contract
term, Shell will sell up to 2mn t/y of
LNG to PetroChina.
According to market analyst IHS
Global Insight, Asian consumers are
keen for supplies from massive projects
such as Gorgon. First, because it is a
much closer supply source compared to
Qatar, so transit costs are likely to be
lower. Second, the massive size of the
project also means it can provide long-
term LNG supplies that can help meet
demand over decades from developing
economies such as China and India.
Third, Australia is a relatively secure
country from which to source LNG, in
contrast to other regional producers
such as Indonesia where the govern-
ment is increasingly re-orientating gas
production towards the domestic
market. Fourth, given that LNG prices
in Asian markets are generally indexed
to crude oil prices, producers and
buyers alike in the region have suf-
fered from price volatility over the past
year and are looking for long-term
contracts at stable prices from world-
class projects such as Gorgon that will
enable them to better manage their
finances and plan their investments.
Fresh memories of the extremely
tight LNG market in mid-2008, which
pushed spot prices up to $20mn Btu,
and expectations that the global
economy will rebound by 2012 and
thus lead to a resurgence in LNG
demand and prices, have encouraged
Asian buyers to go out and sign agree-
ments for LNG supplies now to protect
their long-term supply security and to
take advantage of the current environ-
ment of weak demand and low spot
prices to get better value over the long
term, comments IHS. This could have
been a key motivation behind the
world’s largest single buyer of LNG,
KOGAS, signing a preliminary 15-year
agreement for the delivery of 1.5mn t/y
of LNG from Gorgon with the option
to extend the deal for five years
despite the 30% year-on-year drop in
South Korea’s LNG imports in August
on weak demand.
*This will change to 47.75% once rele-
vant approvals have been obtained on
the equity agreements with Osaka Gas
and Tokyo Gas.
PETROLEUM REVIEW OCTOBER 2009
IN BRIEF
John Shepherd of the University of
Southampton, who chaired the RS
report, told The Guardian newspaper,
‘And it’s only 1% of what we spend on
new energy technology.’
EUROPE
Germany’s key Frankfurt airport has
become the first airport to receive certi-
fication for carbon reduction efforts
under a new European scheme, writes
Keith Nuthall. ‘Airport Carbon
Accreditation’ is operated by the
European Commission, ECAC (European
Civil Aviation Conference), air traffic con-
trol organisation EUROCONTROL and
UNEP (UN Environmental Programme).
NORTH AMERICA
North American Free Trade Agreement
(NAFTA) countries the US, Canada and
Mexico have agreed a detailed commu-
niqué on future cooperation in climate
change, reports Keith Nuthall. This
includes working together in reducing
oil and gas industry greenhouse gas
emissions, (notably cutting flaring),
developing ‘comparable’ methods on
greenhouse gas reporting and compat-
ible emissions trading systems.
A S I A - PA C I F I C
The oil and gas sector should prosper
from a new India and South Korea
trade deal, reports Keith Nuthall. The
deal confirms various market access
commitments, such as supplying oil
pipelines and employing South Korean
or Indian oil engineers. It also reduces
mutual duties for petroleum oils, LNG,
biofuel feedstocks such as palm oil, veg-
etable oil, and other industry products.
WORLD
There were more pirate attacks from
January to June of this year on crude
oil tankers worldwide than in the
same period of any year since 2004,
the latest report from the
International Maritime Bureau (IMB)
has shown, writes Keith Nuthall. It
notes 24 such attacks, compared to 10
in January–June 2008, 18 in 2007, four
in 2006, 12 in 2005 and 11 in 2004.
Examples of attacks include armed
robbers attacking the Bahamian MT
Front Chief off Nigeria with explosives
and automatic weapons, killing the
line tug captain. Other violent attacks
were noted in the South China Sea,
the Gulf of Aden and off Somalia.
PETROLEUM REVIEW OCTOBER 2009
NEWS industry
EnCana reorganisation back on track
EnCana’s Board of Directors has unani- The proposed corporate reorganisa-
mously approved plans to proceed with tion was first announced on 11 May
a corporate reorganisation to split 2008 and the company was advancing
EnCana into two highly focused energy plans for the split last autumn when the
companies – one a natural gas com- global debt and equity markets experi-
pany, EnCana (GasCo), with a portfolio enced unprecedented turmoil and
of prolific shale and other gas resource volatility. Given that uncertainty,
plays across North America; and the EnCana announced on 15 October 2008
other an integrated oil company, a revision to the original reorganisation
Cenovus Energy, which has industry- schedule and delayed seeking share-
leading enhanced oil production and holder approval for the transaction
top-performing refineries, as well as an until clear signs of stability returned to
underlying foundation of reliable oil the financial markets. It is now pro-
and gas resource plays. This transaction ceeding with plans to split the company
– expected to close 30 November 2009 – into two distinct and independent
is designed to enhance long-term value energy companies as it believes equity
for the company’s shareholders ‘by cre- and debt markets have improved signif-
ating two sustainable, independent, icantly with debt financing available at
publicly traded companies, each with reasonable cost. Furthermore, it states
an ability to pursue and achieve greater that global and national economic indi-
success by employing operational cators suggest that the world’s
strategies best suited to its unique economies are showing positive signs
assets and business plans’. of recovery.
Latest oil market report from the IEA
In its latest (10 September 2009) Oil revised up to 28.3mn b/d for 3Q2009
Market Report, the International and to 27.9mn b/d in 4Q2009 on the
Energy Agency (IEA) revised up global more robust demand forecast.
oil demand by nearly 0.5mn b/d for Meanwhile, global refinery crude run
both 2009 and 2010, to 84.4mn b/d and projections for 3Q2009 are also revised
85.7mn b/d respectively, mostly on up to 72.1mn b/d, an increase of 0.2mn
stronger-than-expected data in OECD b/d from the previous month’s report,
North America and non-OECD Asia. due to higher demand estimates and a
The global economy is stabilising, but lower US hurricane adjustment.
OECD demand is poised to remain Nonetheless, runs remain pressured by
weak for the remainder of this year, poor refining margins, states the IEA.
while seemingly strong non-OECD OECD industry stocks rose by 12.8mn
demand may be obscured by Chinese barrels in July, to 2,778mn barrels,
stock building. 4.6% above last year’s level. Middle dis-
August global oil supply was down tillate increases in all three regions,
400,000 b/d from July to 84.9mn b/d, on particularly North America, out-
lower non-OPEC output. Total non- weighed a decrease in both gasoline
OPEC estimates for 2009 and 2010 are and fuel oil stocks. End-July forward
unchanged versus the previous month, demand cover was unchanged versus
averaging 51mn b/d in 2009 and June at 61.8 days.
51.5mn b/d in 2010. OPEC NGL averages Benchmark crude oil prices rose $7/b
5.2mn b/d and 6.1mn b/d respectively. on average in August, to around
OPEC crude oil supply in August was $71–$73/b. Arguably, prices have tested
up 55,000 b/d at 28.8mn b/d. OPEC-11 limits and trade in a $68–$74/b price
output rose by 80,000 b/d to 26.3mn range for now. Future price direction
b/d, or 1.4mn b/d over target. The ‘call will hinge partly on how long the dis-
on OPEC crude and stock change’ is tillate overhang persists, notes the IEA.
Qatargas 2 Train B begins producing LNG
Train B of the Qatargas 2 project started producing LNG on 7 September 2009.
State-owned Qatar Petroleum holds a 65% stake in Train B, partnered by
ExxonMobil (18.3%) and Total (16.7%). It is one of the two trains that compose the
Qatargas 2 project and has a production capacity of 7.8mn t/y. Reportedly the first
integrated LNG project in the world, Qatargas 2 also comprises the South Hook
regasification terminal, located in Milford Haven, South Wales, UK. This terminal,
which started operating in 2Q2009, is the largest in Europe for import and LNG
regasification, with a capacity of 15.6mn t/y. LNG from Qatargas 2 Train B is pri-
marily intended for deliveries in the UK, France and the US.
11
IN BRIEF
EASTERN EUROPE
Bulgaria is to demand economic bene-
fits from Russia in order to confirm its
commitment to Russian-backed major
projects, Bulgarian Economy and
Energy Minister Traicho Traikov has
said. Traikov was also expected to tell
Russian Energy Minister Sergei
Shmatko at a meeting held last month,
that Bulgaria’s participation in Russian
projects should fit in with the EU’s plans
to boost security of supplies.
NORTH AMERICA
The US Energy and Treasury
Departments have announced the
first round of $3bn in government
cash grants to companies developing
renewable energy projects, with directe
direct payments made in lieu of tax
credits. Meanwhile, a report from the
Environmental Law Institute claims that
oil, gas and coal received more than
twice the level of subsidies than renew-
able energies from the US government
in 2002–2008.
MIDDLE EAST
Masoud Mir-Kazemi, previously
Minister of Commerce, has been
ratified by Iran’s parliament to become
its next Oil Minister.
RUSSIA & CENTRAL ASIA
Russia is to invest up to 60tn roubles
($2tn) in its energy sector by 2030, it has
been reported, to boost stagnating oil
and gas output. It is thought that Asian
markets will increase their share of
Russia’s energy export volumes from
6% to 25%. Meanwhile, Russia’s
Natural Resources Deputy Minister
Sergei Donskoi has said that Russia
would like foreign companies to help
develop its offshore oil and gas reserves
– as domestic firms lack the means to
do so alone.
A S I A - PA C I F I C
Japan’s new Prime Minister, Yukio
Hatoyama, has promised a 25% reduc-
tion in greenhouse gas emissions by
2020 compared with 1990 levels. The
government expects the plans to be
achieved by introducing emissions
trading, renovating housing, subsi-
dising solar panels and introducing low-
energy technologies in cars. Hatoyama
said the plan was dependent on other
nations agreeing to targets at
December’s Copenhagen climate talks.
12 JULY
NEWS government
Latest developments from the EU
Turkey – the lynchpin of European Union (EU) efforts to secure energy independence
from Russia – has started negotiations to join the EU’s Energy Community. The organi-
sation currently extends EU energy legislation to non-EU Balkan countries, but there
are plans to add Moldova, Ukraine and Turkey to its membership, writes Keith Nuthall.
Once achieved, these countries would be part of the EU’s single market for natural gas
(and electricity). On the Turkish talks, EU Energy Commissioner Andris Piebalgs said he
hoped the ‘negotiations… could be concluded in the coming months.’
In other oil and gas industry news:
l The EU Council of Ministers has now formally approved a new Oils Stocks Directive
that will require member states to maintain reserves of at least 90 days of average
daily net imports, or 61 days of average daily inland consumption (whichever is the
greater), by January 2013.
l The Council also approved a new Ship-Source Pollution Directive that says EU member
states must criminalise reckless or negligent discharges of pollution, with responsible
companies and persons subject to ‘effective, proportionate and dissuasive’ punish-
ments. This replaces a similar law struck down by the European Court of Justice in
2007.
l Oil and gas companies received a positive assessment in a European Commission (EC)
report on the EU Health and Safety at Work Directives 92/91/EEC (mineral extraction
through drilling) and 92/104/EEC (surface and underground mineral extraction). ‘The
larger companies, especially in the drilling sector, perform relatively well,’ the report
said.
l The European Investment Bank (EIB) is planning to lend Spain’s CEPSA (Compañia
Española de Petroleos) up to €150mn to finance various technical improvements at
its refineries in Algeciras and La Rabida.
l PK Borets, a Russian company making electro-submersible pumps used by the oil and
gas sector, is expected to receive a $150mn loan from the European Bank for
Reconstruction and Development (EBRD).
l The EBRD is also planning to lend $120mn to Azerbaijan’s Azmeco to build and operate
a 561,000 t/y methanol plant, possibly including a carbon dioxide capture unit.
l The European Environment Agency says EU greenhouse gas emissions decreased in
2008 for the fourth consecutive year, falling 1.3% compared to 2007 for the old 15-
member EU, and 1.5% for the expanded 27-state membership.
l The EC has cleared without conditions the proposed acquisition of German natural
gas supplier Kom-Strom by a wholly-owned subsidiary of Danish energy giant DONG
Energy.
l A €8.25mn EU research project has been launched to develop new ways to convert
agricultural and forestry waste into liquid biofuels, such as using enzymes. The NEMO
project involves researchers from Belgium, Finland, France, Germany, Italy, the
Netherlands, Slovenia, Sweden and Switzerland.
l French President Nicolas Sarkozy has said he will continue to press for the EU to adopt
a carbon tax penalising imports made while generating plentiful greenhouse gas
emissions.
l A new EC quarterly report on EU gas markets has concluded that wholesale gas mar-
kets continued to operate robustly in Europe from January to March, despite the
recession and the Russia-Ukraine supply crisis. See http://ec.europa.eu/energy/
observatory/gas/doc/quarterly_report_on_european_gas_markets_2009-q1.pdf for
details.
l A report from the European Transport and Environment Group is suggesting vehicle
manufacturers only make reductions to greenhouse gas emissions when ordered by
compulsory legislation. It noted carmakers needing to cut emissions by less than 18%
to meet the 2015 target, actually cut their emissions by less than 4% last year.
See http://www.transportenvironment.org/Publications/prep_hand_out/lid:549 for
details.
l The EU is considering reducing planned assistance to developing countries, helping
them meet global warming commitments expected to be made at December’s
Copenhagen climate change conference. Proposals to spend between €13bn and
€24bn have been slashed to between €2bn and €15bn, according to a leaked EC
report.
l Sweden and Norway have revived a plan to sell common green electricity certificates
– expected to be valid from 2012 onwards.
Find out more about the supplements offered with
Petroleum Review and Energy World at
www.energyinst.org
PETROLEUM REVIEW OCTOBER 2009
GAS Global market

An unprecedented market
Due to the economic recession, for the first time in the history of The second scenario was based on the
traditional strong linkage between
international gas markets significant demand destruction will occur industrial production and gas demand.
This forecast predicts an 8% drop in
in 2009 and perhaps also in 2010, setting back the market by up to worldwide gas demand this year, which is
substantially more pessimistic than the
nine years, write Booz & Company’s Robert Oushoorn, Otto first scenario. This conclusion is based on
an expected decline of 17% in industrial
Waterlander, Thomas Schlaak and George Sarraf. Combined gas demand in developed economies and
an equal decline of gas use in power pro-
with the completion of gas export infrastructure projects currently duction, which is also experiencing
demand destruction due to the recession.
under way, the reduced demand could lead to an oversupply in the We assume that demand in emerging
economies will be down 3%, with some
market of 5% to 15% until well into the next decade. The local growth offset by reduced demand
implications for suppliers, buyers and infrastructure companies for exports from those countries.
Although there have been some indica-
cannot be overstated. To reduce the risks of huge oversupply and tions recently that major economies are
not in free fall anymore, under this sce-
concomitant price pressure, large incumbent suppliers have a strong nario, demand destruction will continue
into 2010, albeit at a slower pace.
incentive to manage supply through increased cooperation. Buyers
A market in oversupply
must review their assumptions to take advantage of the current Independent of which scenario proves to
be more accurate, a bleak picture is
buyer’s market – for example, by joining together to access emerging. Worldwide demand for nat-
ural gas will be set back by at least two,
previously inaccessible sources of gas and spread the risk. and perhaps as many as nine years. In
Booz & Company’s view, it may take until
Infrastructure providers may need to rethink their business models after the middle of the next decade for
demand to reach the level that pre-
to take advantage of opportunities that may arise from changing recession assessments had forecast for
2010. By that time, structural demand
trade flows. destruction of between 101bn and 422bn
cm will have been built up. This calcula-
industrial output in 2009 and, potentially

S
ince international natural gas mar-
kets began to develop in the 1960s,
gas has been a tremendously suc-
cessful fuel, with sales growing
continuously at an average rate of nearly
4%/y between 1965 and 2007. Until
about a year ago, before the current
deep and lengthy recession, most ana-
lysts had predicted that through 2030
world gas demand would grow at some
2%/y – approximately twice the growth
rate of oil. However, the economic
downturn upended even the most
conservative scenarios. Demand for
industrial goods in developed countries
has dropped precipitously, hitting energy
intensive industries particularly hard.
Analysts project automobile manufac-
turing in Europe to fall by 25% in 2009.
Output in the chemical industry, the basis
of many industrial value chains, is
expected to drop at a similar rate, while
output in the steel industry, another
large energy consumer, is declining by
30% or more in North America and the
European Union (EU).
History shows that demand for natural
gas closely correlates with changes in
industrial output in developed countries.
Thus, with deeply negative forecasts for
2010, gas demand will be particularly
hard-hit. However, other factors are at
play as well. Industry is only one of the
major consumers of natural gas –
demand in power production and
domestic heating will also influence the
course of the market. Furthermore, the
recession may not challenge each region
of the world in the same way.
To gauge the potential impact of the
current economic crisis on worldwide gas
supply and demand, we analysed two
scenarios. The first was a relatively
optimistic forecast built from outlooks
published by well-known agencies
such as the US Energy Information
Administration (EIA), the International
Energy Agency (IEA) and the Inter-
national Monetary Fund (IMF). In this
scenario, world gas demand will fall by
approximately 2% in 2009. Underlying
this assessment is the belief that whereas
developed economies will be badly dam-
aged by the crisis, emerging economies
will continue to generate natural gas
demand growth of 2% throughout the
year. These agencies believe that overall
demand for natural gas will begin to rise
again in 2010.
tion is based on the belief that gas
demand will, at best, enjoy a growth rate
of nearly 2%/y once the recession is over
– a pre-economic crisis forecast that, by
and large, incorporated changes in gas
demand driven by environmental con-
siderations and energy efficiency
improvements. However, there is a risk
that when economic and gas demand
growth returns, it may be lower than
what we had become accustomed to in
periods of previous normal economic
growth. Indeed, future economic growth
may be constrained in many of the major
economies by the large deficits that have
now been built up in an attempt to
reverse the recession and stimulate
growth.
On the supply side, because of the
magnitude of the demand uncertainty,
and the reduced access to project
financing, a substantial number of new
gas infrastructure development projects
have been cancelled or delayed until
demand growth returns.
If we assume that all projects currently
pre-FID (final investment decision) are
put on hold for the foreseeable future,
and only those that have taken FID are
completed, then the worldwide natural

14 PETROLEUM REVIEW OCTOBER 2009


Figure 1: World gas demand under different scenarios, 2006–2020 (in bn cm)
Source: IEA, Booz & Company analysis
gas supply–demand balance should face
a surplus of 5% to 15%. This surplus,
expected to continue until well into the
next decade, will be driven in part by
additional liquefaction plants, export
pipelines and increased production of
gas from unconventional sources in
North America.
The recent huge discoveries of uncon-
ventional gas reserves in the US may add
to the pressure of an oversupplied world
market. Indeed, up to now, expectations
were that the US would become more
and more dependent on LNG imports to
meet its demand for gas, partially pro-
viding the basis for a number of gas
liquefaction projects around the world.
If, however, the US becomes self-
Figure 2: Global gas supply–demand overview, 2005–2015 (in bn cm) – taking demand and
supply developments together, the gas market is expected to have structural overcapacity
until at least 2015
Source: Booz & Company analysis
PETROLEUM REVIEW OCTOBER 2009
sufficient in its gas supply, as some ana-
lysts now predict, the risk of oversupply
in other regions may be increased even
further.
Navigating a difficult landscape
The global gas market has rapidly shifted
from favouring sellers to favouring
buyers. As the speed of this change is
unprecedented, we may well see similarly
unprecedented reactions from market
participants. The large incumbent
exporters, such as Russia, Qatar, Norway
and Algeria, are faced with a stark choice
– either compete head-on with each
other and with smaller companies for
market share while demand falls, or sit
out the storm, accept the volume and rev-
enue loss, reduce
production, and
strive to maintain
prices and pricing
structures. The
implications of
head-to-head com-
petition are
unappealing – they
include severely
depressed price
levels of some dura-
tion and altered
contract structures
and buyer behav-
iour in the longer
term, with gas
prices potentially
decoupling from oil
prices.
The second option –
sitting out the storm
– therefore appears
more appealing.
However, it is unlikely that players will
want to shoulder the burden of reducing
sales volume alone. Therefore, the antici-
pated oversupply may trigger increased
coordination among the large exporters
to manage world gas supply. The 10
largest gas exporters, which control some
80% of worldwide gas supply and are led
by the large national oil companies
(NOCs), such as Gazprom (Russia),
Qatargas (Qatar), StatoilHydro (Norway)
and Sonatrach (Algeria), have incentives
to do so given their large market shares.
In addition, a structure already exists in
which the large producers meet and dis-
cuss market developments – the Gas
Exporting Countries Forum (GECF). The
international oil companies (IOCs), with
their limited equity shares in national gas
production, are not in a position to
greatly influence decisions by the NOCs
and have little choice but to follow along.
A further reason to expect the large NOCs
to lead the management of global supply
is the entry of a group of new producers
into the market in the next few years that
have motivations and strategic concerns
potentially quite different from those of
the large incumbent suppliers. Smaller
players like Angola and Peru are expected
to have export programmes, but with no
established positions to defend or lose
they may well be unwilling to initiate, or
even agree to, production reductions.
Today’s global natural gas market envi-
ronment is highly uncertain. Yet with
careful consideration, sellers and buyers
may find that the current situation can
also provide interesting opportunities for
carving out advantageous positions.
Implications and opportunities
With lower-than-expected production and
revenue, project profitability may be at
risk for NOCs. In addition, buyers will seek
15
GAS Global market

to renegotiate contracts, thus putting
prices and pricing structures at risk. NOCs
should assess the implications of reducing
production and bring their project portfo-
lios in line with new forecasts.
Opportunities will arise in aggressively
taking advantage of lower costs for con-
tractor services and materials due to
oversupply in those markets. Furthermore,
this can be the moment to initiate geo-
graphic swaps with other players to
optimise logistics costs, to assess integra-
tion downstream to secure captive
demand and to expand capabilities by
taking over specialised companies whose
value has dropped.
For the IOCs, many of the implications
and opportunities are similar to those
faced by the NOCs, because they are usu-
ally part of joint ventures. Simply put, they
should be poised for NOC-induced supply
restrictions and cost reductions. They need
to cut costs and manage working capital
closely. The opportunity for IOCs may lie in
the fact that they typically have a portfolio
of stakes in different plays across the
globe. They could optimise portfolio ben-
efits by accelerating the building of
cross-market connections and capabilities.
Demand destruction leads to reduced
revenues, especially for those companies
with large exposure to the industrial seg-
ment. Players that are in long-term
take-or-pay (TOP) contracts may experi-
ence problems in fulfilling their minimum
offtake obligations. Opportunities will
arise to renegotiate prices and other con-
tract conditions, and chances will appear
to take advantage of increased supply on
spot markets. Nevertheless, buyers should
be cautious not to damage long-term rela-
tionships with NOCs – they will need these
alliances in the longer term. This may also
be a good time to rebuild gas supply port-
folios – for example, by partnering with
other importers to access new sources of
gas and share risk, or by entering existing
upstream plays, taking advantage of the
current lower valuations.
Clearly, for infrastructure players the
main risks are in reduced project prof-
itability and reduced access to project
financing. Also, customers who might oth-
erwise be candidates for adding LNG
capacity or other pipeline assets will tend
to delay making decisions on projects.
Infrastructure companies should be aware
that the value in LNG projects may shift
from ‘volume‘ plays, in which a company
seeks baseload positions, to ‘access’ plays,
in which the value resides in a company’s
available capacity in multiple locations
and opportunities for optimising arbi-
trage. At any rate, infrastructure
companies should take advantage of
falling prices for materials, labour and
construction services to push project costs
down.
A final word
Today’s global gas market is at an unprece-
dented juncture. The worldwide economic
downturn – set off by the credit crunch –
has the potential to profoundly change
the behaviour of market participants,
prices and pricing structures. To a large
extent, the change that the market will
experience depends on supply decisions
made by large NOCs. Also, developments
in the production of unconventional gas
in the US based on the recent huge
reserves discoveries will play a crucial role,
with a potentially shifting position of the
US in the global supply/demand balance
adding to the situation of oversupply.
Yet all players along the value chain,
suppliers, buyers and infrastructure com-
panies need to carefully assess the current
new dynamics. Those players who fully
understand the implications of the current
market conditions and the opportunities
they may offer can emerge from this crisis
stronger than they went into it. G

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Dates/locations for 2009:

G Gain practical knowledge of equipment employed G 10–11 November 2009, Frankfurt, Germany
G Discuss individual fuel cleanliness problems with our G 12–13 November 2009, Vienna, Austria

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www.energyinst.org

16 PETROLEUM REVIEW OCTOBER 2009

 E NERGY INSTITUTE
James Smith –
looking to the future
James Smith FEI,
Chairman, Shell UK, who
recently took over as the
Energy Institute’s President,
talked to Petroleum
Review about his career to
date and the challenges
facing both the industry
and the EI in the future.*
Q
. Would you outline how you
started your business career and
give us some idea of the major
challenges and successes you have had
in the various companies you have
worked for?
A. I went to university intending to
study chemistry but eventually studied
physics instead. Once I got my degree I
still wasn’t sure what I wanted to do as
a career. I did accountancy because I
believed it would give me a marketable
skill and a lot of flexibility about where
I could work geographically, and also
the types of organisation for which I
might work.
I joined Accenture in London in 1978
because I thought it would add to my
skills, particularly in the application of
computer systems to business. I also
liked the style of the company, where
innovation and problem solving were at
a premium. I don’t think I would have
left Accenture for any other industry or
company than Shell. Shell became an
Accenture client and I worked as a con-
sultant helping Shell develop global
financial systems in 1980.
The attraction of the energy industry
is just as powerful now as it was when I
joined it in 1983 as it lies in the impor-
tance of energy to modern society. The
industry faces extraordinary technolog-
ical challenges and major long-term
investments are needed. Delivering in
this environment requires, most of all,
teamwork both inside and outside com-
panies, and across the widest range of
disciplines that could be imagined.
The energy industry has always been
18
exciting, but never more so than today
as we all confront the twin challenges
of more energy and less carbon dioxide
(CO2).
Q. More recently, what challenges
have you faced as Chairman of Shell
UK? What do you regard as your major
achievements at the company to date?
A. The challenges as Chairman of
Shell in the UK can be separated into
three main parts. First, within the UK,
we have to run safe, highly efficient
businesses with great customer service
in highly competitive markets. It is a
very wide ranging set of businesses
from the production of oil and gas off-
shore through to the full range of
petroleum products, including a net-
work of around 900 service stations.
The second part is about participating
in the important debate about the chal-
lenge of meeting growing energy
demand and less CO2. Companies like
Shell must tackle this energy challenge
by delivering some of the technologies
required and advocating the policies
that will best promote rapid and far-
reaching change in the energy system.
One example of that is where, along
with another dozen or so people from
the business, I put my signature to a
letter to Rt Hon Tony Blair MP in May
2006, urging government to go to the
tougher end of the caps they had in
President
mind for CO2. We did it because we
believed the sooner we got the essen-
tial commercial changes into the system,
the better business would be able to
plan and respond.
The third area is in explaining to
many interested parties Shell’s busi-
nesses around the world. People want
to know about Shell’s activities in
Nigeria, they want to know about oil
sands in Canada, they want to know
about gas projects in Sakhalin Island
and they want to know whether Shell is
meeting expectations under the head-
ings of ‘people, planet and profits’.
So, I explain that Shell, like other
companies, works to get the environ-
mental and social aspects of its projects
right. For example, the Shell joint
venture in Sakhalin has recently
won awards for environmental and
social performance.
Q. What do you see as the key chal-
lenges facing the international oil, gas
and energy sector going forwards, and
how is the Energy Institute (EI) placed
to help tackle these issues?
A. The world needs more energy and
less CO2. This is a challenge of a factor
of 10. By the middle of the century the
global economy might be five times the
size of what it is today, yet globally, CO2
emissions need to be at least halved.
That means the overall carbon intensity
of carbon energy needs to be one tenth
of what it is today.
This is a gigantic challenge, but we
should see it as stimulating rather than
daunting. It will mean huge improve-
ments in energy efficiency and huge
reductions in the CO2 content of energy.
It will be relevant to nations and com-
panies, and also relevant to
communities and individuals. All of
us will have to step up to the energy
challenge.
The solutions are within our grasp.
What we have to do is muster the
common will to put those solutions in
place. It will mean nations reaching big
agreements such as in Copenhagen
later this year. It will also mean us as
individuals making less resource inten-
sive choices in our daily lives.
The technological solutions are
broad. Fossil fuels have advantages in
availability and energy density. But
carbon mitigation technologies such as
carbon capture and storage are going
to have to be developed for them.
Nuclear has an important role to play
and a wide range of alternative ener-
gies will have to be scaled up very
rapidly. Shell’s energy scenarios
envisage alternative technologies such
as wind and solar being 40 to 70 times
the size they are today by the middle of
the century.
PETROLEUM REVIEW OCTOBER 2009
 The EI can play to its strengths in step-
ping up to the energy challenge. It’s a
challenge about all the energies and a
very wide range of disciplines. Meeting
the challenge requires a huge scaling up
in knowledge and skill. The EI has for a
long time promoted skills development,
promoted high professional standards
and stimulated knowledge transfer. All
these things are vital if we are to meet
the energy challenge successfully.
In my view, the EI has been ahead of
the curve over the last few years. It has
foreseen the huge changes needed and
the great demand on talent and knowl-
edge that is emerging. It recognises the
breadth of the debate and recognises
the importance of a professional body
that can offer objective and straightfor-
ward advice to policy makers.
Q. Oil prices are rising again and most
of the world is in economic doldrums –
do you think this is an opportunity for
a change of direction in international
energy policy?
A. I think there are three hard truths
we had better recognise. First, even
though we are in the midst of a very
severe recession, we can expect energy
demand to grow very significantly in
the coming years. Secondly, it’s going to
be hard for conventional sources of
energy to keep up with surging demand
and it’s going to be hard for the new
sources of energy to get scaled-up
quickly enough to fill the gap. Thirdly,
it’s a hard reality that environmental
stresses will continue even against rela-
tively optimistic assumptions for getting
low CO2 technologies scaled-up and
deployed.
But there are perhaps two big posi-
tives we should take out of the present
economic difficulties. First, perhaps
society as a whole will learn to avert
looming crises rather than hope for the
best and mop up and muddle through.
Secondly, getting out of the current
economic difficulties is requiring
unprecedented international collabora-
tion. If we can get that collaboration
well enough embedded, it sets a much
stronger basis for getting the agree-
ments necessary internationally to
tackle climate change.
Q. Although alternative fuels will
play an increasingly important role in
the future energy mix, fossil fuels will
remain the primary source of energy for
many years to come. How does Shell
plan to continue meeting demand, and
how will development of the Canadian
tar sands fit into the company’s port-
folio?
A. Fossil fuels presently meet about
80% of primary energy needs. There
need to be huge improvements in
energy efficiency and huge growth in
PETROLEUM REVIEW OCTOBER 2009
alternative energies such as wind and
solar. But, even then, fossil fuels could
still be meeting 60% of energy needs by
the middle of the century. So, the fossil
fuels will need to be used in a way that
leads to lower CO2 emissions; and there
are business opportunities in lower CO2
sources of primary energy. All of this
spells opportunity if you have the right
technologies.
The Canadian oil sands are a huge
energy resource on the doorstep of the
world’s biggest market. They contribute
to energy security but, like other forms
of fossil fuel, the environmental impacts
need to be mitigated. It should be
realised that the environmental impacts
are not ‘off the scale’ as is sometimes
suggested. On a ‘well to wheels basis’,
petrol from oil sands is up to 15% more
CO2 intensive than petrol from conven-
tional oil. But it needs to be realised
that conventional oil is getting heavier
anyway, so this gap will narrow. In addi-
tion, the mines will be reclaimed to
forest and the mineable area is only
0.1% of the total boreal forest in
Canada. So, the impacts can be miti-
gated and they need to be kept in
perspective.
In Shell’s long-term energy scenarios,
crude oil from unconventional sources
such as oil sands and shales amounts to
about 5mn b/d out of a total of around
100mn b/d. We believe that CO2 mitiga-
tion can take place through things such
as carbon capture and storage and by
blending in properly sustainable bio-
fuels.
There is a more general point here.
Virtually any technology, whether fossil
or nuclear or alternative, will have envi-
ronmental impacts if it is going to be
relevant at scale. In all cases these
impacts are going to have to be miti-
gated sufficiently so that energy can be
delivered while protecting against dan-
gerous environmental damage.
Q. There have been reports of Shell in
particular, and some oil majors in gen-
eral, ending investment in some parts
of the ‘sustainable energy’ sector. Does
the development of sustainable energy
require the involvement of oil majors?
A. The newspaper headlines in March
saying things like ‘Shell dumps renew-
ables’ were not correct. What we were
trying to explain was that we had made
some technology choices from a wide
range of technological ‘irons in the fire’.
We based our choices on three things.
First, by looking at what is needed; sec-
ondly, by looking at what fits our
strategy; and thirdly, by thinking about
where we have competitive advantage.
We don’t mass manufacture things like
solar panels. Where our strengths lie is
in large-scale engineering processes and
in catalysis. In addition, we have
worked on bio-energy for many years
and recently we have stepped up our
capability in this area considerably.
Taking that as background we
decided to focus on two themes. The
first is reducing the CO2 emissions from
fossil fuels and the second is on trans-
port liquids from bio sources. We have
spent several hundred million dollars
over the last 20 years or so developing a
coal gasification technology that can be
very useful for carbon capture and
storage. This is a technology whose time
may have come. On biofuels, far from
cutting investment, we have very signif-
icantly increased our spend. We have
five pre-commercial joint ventures and
research projects with seven universities
around the world, three of them in the
UK. The main aim is to produce biofuels
that don’t compete with food crops. We
began this several years ago making
bioethanol from corn stalks. More
recently we have been working on
marine algae.
So, developing more sustainable
energy definitely involves the oil
majors.
Q. How do you see the EI developing
and where do you think it should be in
the next five years; ten years? What do
you see as the main challenges for you,
as EI President, in driving the EI for-
wards to meet these goals?
A. I think the EI has already demon-
strated forward thinking about the
huge energy challenge in front of us. It
is estimated that providing the energy
the world needs for the CO2 it can
afford, will cost about a trillion dollars a
year. But we should not just focus on
the money. What is also important
are the people with the skills and
knowledge to get the job done.
Reengineering the energy system is a
huge task, but one that everyone
involved with the EI can be excited
about. The EI is about technical stan-
dards, about professional skills and
about knowledge sharing. These are
the things that will underpin a suc-
cessful energy future.
I think I am lucky to be EI President at
this time. The Executive Team that runs
the EI is very able and has a strong-
shared vision. We also have a very
strong Council with people from a wide
variety of backgrounds who bring a lot
of insight. It is very important that we
remain farsighted and think about all
sources of energy. G
This is an abridged version. For the
full Q&A article, please visit
www.energyinst.org ‘About us’,
‘Council’.
19
A VIATION
The challenge of FAME
The December 2008 issue of Petroleum Review highlighted the
potential risk of cross-contamination of aviation kerosene (jet fuel)
by biodiesel in the fuel distribution system. Throughout 2009 the
EI’s Technical Department has been working with industry
stakeholders on various initiatives to assist the industry in its efforts
to manage this risk. Martin Hunnybun, Technical Team Manager
at the EI, reports.
I
n January of this year the EI held a tech-
nical seminar entitled ‘Preventing jet fuel
contamination by FAME – best practice in
the distribution system’. The seminar, chaired
by Mike Farmery (Shell Aviation) and with
more than 150 attendees, presented the rea-
sons for the introduction of fatty acid methyl
ester (FAME) in diesel fuel (Harald Schnieder
of EUROPIA); industry experience gained
from controlled trials of jet fuel/biodiesel
fuel handling (Patrick Viltart, TRAPIL, and
Mieke Mortier, Chevron); jet fuel specifica-
tion limits and aircraft OEM requirements
(Jerry Tucker, UK MoD Defence Fuels Group,
and Ramya Venkataraman, Rolls-Royce); and
an overview of the areas of risk to jet fuel
quality (Anthony Kitson-Smith, ExxonMobil).
It was highlighted that Defence Standard
91-91 limits the FAME content of jet fuel to
less than 5 mg/kg (the limit of FAME detec-
tion by the most sensitive analytical method
available) and that just one litre cross-
contamination by B5 (EN 590 diesel con-
taining 5% v/v FAME) in 10,000 litres of jet
fuel is sufficient to render the jet fuel off-
specification. Speakers at the seminar also
described the stringent fuel handling proce-
dures that are currently in use throughout
the supply chain in order to meet this low
limit. For background information and han-
dling recommendations see Joint Inspection
Group Bulletins 15, 16, 20 and 26 (available
to download from www.jointinspection
group.org).
Approval programme
Major jet fuel suppliers had worked closely
with airframe and engine OEMs (original
equipment manufacturers) to see what
could be done to mitigate these fuel han-
dling challenges without compromising jet
fuel quality. Industry stakeholders agreed
that the 5 mg/kg FAME limit in jet fuel could
potentially be increased if an extensive
testing programme showed that a higher
level of FAME in jet fuel had no adverse
impact on aircraft safety, reliability, mainte-
nance requirements, performance or
operability. It was evident that this process,
which is followed by industry to confirm the
acceptability of new jet fuel additives, would
20
require significant industry resources and the
EI was asked to manage the testing pro-
gramme.
An EI Joint Industry Project (JIP) was estab-
lished in May 2008, with the objective of
gaining formal OEM acceptance of up to 100
mg/kg FAME in jet fuel supplies. So far, a
total of 21 companies/organisations have
provided funding towards the £1.2mn pro-
gramme, as shown in Table 1. The Project
Steering Group also includes representatives
from the major airframe and engine OEMs,
who have collectively defined the required
laboratory testing for the impact of FAME on
aviation fuel properties and larger scale
engine and airframe hardware testing.
Representatives of other organisations,
including regulatory authorities, have also
been invited to participate to ensure all
issues are adequately communicated. This
collaboration between aviation industry
stakeholders has been critical to the devel-
opment of the project to date. Sourcing the
required funding has been a challenge and
additional financial support from other
companies/organisations would still be
most welcome (please e: mhunnybun@
energyinst.org).
The process for approving new jet fuel
additives is documented in ASTM D4054
Standard practice for qualification and
approval of new aviation turbine fuels and
fuel additives. It requires testing jet fuel con-
taining the FAME ‘additive’, in this case a
mixture of equal amounts of the four most
common FAME types (rape, soy, palm oil and
tallow methyl esters) at four times the target
approval level. The target for completion of
the required testing is the end of this year,
with analysis of results and a decision on
approvals of up to 100 mg/kg FAME in jet
fuel anticipated in late 1Q2010.
Test method development
At a similar time to initiating the JIP, the EI
was asked to expedite the development of
analytical test methods for the measurement
of trace levels of FAME in aviation fuel. The
objective was to establish a primary refer-
ence method, against which future
laboratory and field methods could then be
Jet fuel quality
compared. Various analytical techniques
were considered at an EI workshop and the
four most viable were subjected to a rugged-
ness trial in August/September 2008.
Assessment of results at a follow-up work-
shop in October led to agreement to the
publication of IP Proposed Method (PM)-
DY/09 Determination of fatty acid methyl
esters (FAME), derived from bio-diesel fuel,
in aviation turbine fuel – GC-MS with selec-
tive ion monitoring/scan detection method
in December 2008. It was agreed that the
GC-MS method should be subjected to an
inter-laboratory study (round robin) as
quickly as possible, in order to develop a pre-
cision statement so that it could be published
as a full method.
Further development work on the
method in early 2009 included optimisation
of the gas chromatography column, SIM ion
selection and work on calibration levels. As
the results for FAME content in the 0 to 5
mg/kg range from some instruments were
found to be affected by background
noise/baseline drift, the round robin was run
with an internal standard (deuterated C17)
to evaluate whether or not improved
accuracy and precision performance was
achievable. The round robin was undertaken
during the summer, involving 14 laboratories
and 32 samples (including blind duplicates)
on a range of instrument types. The results
were reviewed at an EI workshop in
September, and should lead to the publica-
tion of the full method with a precision
statement this month.
Another method was prepared at the
same time, based on equipment being
developed by Stanhope-Seta. IP PM-DT/09
Determination of the fatty acid methyl esters
content of aviation turbine fuel using flow
analysis by Fourier transform infrared spec-
troscopy – Rapid screening method was
published in April 2009, and uses an integral
FTIR and through flow analysis cell to process
a 50-ml fuel sample. With a FAME measure-
ment range between 30 to 400 mg/kg, this
portable unit is intended to offer a go/no go
visual indication within 15 to 30 minutes.
Units were supplied by Stanhope-Seta to
enable the round robin to take place at the
same time as that for the GC-MS method
above. This involved nine laboratories and
the testing of 26 samples (including blind
duplicates), with the results reviewed in
September. The full method with precision
statement should also be published this
month.
Although industry resources have been
focused on the GC-MS and SPE-FTIR methods
above, it has also been possible, based on
experience gained from the ruggedness trial
in 2008, to develop and publish IP PM-DV
Determination of fatty acid methyl esters
PETROLEUM REVIEW OCTOBER 2009
 JIP funding companies/organisations
Air BP
Air TOTAL
Central Europe Pipeline Management Agency (CEPMA)
Chevron Global Aviation
CONCAWE
Defense Energy Support Centre
Direction Générale de l’Energie et du Climat/SNOI
DIESTER Industrie
ENI
ExxonMobil Research and Engineering Company
Federal Aviation Administration
Kuwait Petroleum International Aviation Company
QinetiQ/UK MoD Defence Fuels Group
Service des essences des armées
SFDM
Shell Global Solutions
Société des Pipelines Méditerannée – Rhône (SPMR)
SOFIPROTEOL
TRAPIL
UK Department for Transport
US National Biodiesel Board
Table 1: The EI FAME Joint Industry Project Steering Group
(FAME), derived from bio-diesel fuel, in avia-
tion turbine fuel – HPLC evaporative light
scattering detector method and IP PM-EC
Determination of the fatty acid methyl ester
content of aviation turbine fuel – solid phase
extraction and gas chromatography
method. Both of these were issued last
month. The round robin for the HPLC-ELSD
method took place in September, involving a
number of laboratories measuring 32 sam-
ples (including blind duplicates). It is the
intention to publish a full version of this
method with a precision statement
(depending on the outcome of the round
robin) before the end of 2009. Although the
round robin for the SPE-GC method has
been defined, at the time of writing it is
unclear whether sufficient volunteer labora-
tories will be forthcoming to enable it to
proceed.
The development and management of
the inter-laboratory study has been a major
undertaking during 1H2009, drawing upon
funds provided to the EI Technical
Programme from our Technical Partners.
With around 1,500 samples this was one of
the largest programmes ever undertaken by
the EI. With the uncertainty around future
permissible levels of FAME in jet fuel, and
increasing levels of experience in laboratory
analysis, it is likely that test method develop-
ment will continue in this area for some time
to come.
Maritime cross-contamination
The EI seminar drew attention to the risk of
cross-contamination during marine ship-
ment and, as highlighted in the August issue
of Petroleum Review, EI HM 50 Guidelines
for the cleaning of tanks and lines for marine
tank vessels carrying petroleum and refined
products was published in April this year. This
title was prepared by the EI’s Marine
PETROLEUM REVIEW OCTOBER 2009
Major airframe and engine OEMs
Airbus
Boeing
Bombardier
Cessna
CFMI
Embraer
GE
Honeywell
Pratt & Whitney
Rolls-Royce
Snecma
Liaison organisations
Air Transport Association of America
Civil Aviation Authority
European Aviation Safety Agency
International Air Transport Association
Joint Inspection Group
Pipeliner Biodiesel Steering Committee (USA)
Transportation Committee, with input from
many stakeholders, including the Joint
Inspection Group Product Quality
Committee. It includes recommendations
regarding the carriage of aviation fuels, and
for the cleaning of vessels which have previ-
ously carried biodiesel or FAME cargoes. It is
available to download free of charge from
the EI publications website www.energy
instpubs.org Printed colour copies can also
be purchased in bulk from the EI – please
e: pubs@energyinst.org
Jet fuel ground handling equipment
Part of the aviation fuel handling industry
response to the challenge of FAME in jet fuel
has been to assess potential effects on
ground handling equipment/materials
should the acceptable specification limit be
increased to 100 mg/kg. In response to a
request from the EI Aviation Equipment Sub-
Committee, the international suppliers of
aviation fuelling hose have confirmed that
their products are suitable for use with fuel
containing up to 100 mg/kg FAME.
The EI Aviation Fuel Filtration Committee
has also reviewed the potential impact of
FAME on filtration equipment. It is consid-
ered that the surfactant additive package
that is included in the test protocols man-
dated by industry for filter/water separators
(API/EI 1581 Specifications and qualification
procedures for aviation jet fuel filter/
separators, 5th edition) leads to filters that
are not readily affected by trace levels of
FAME in jet fuel. In support of this, bench
scale testing by one EI member company has
confirmed that exposure to 2,000 mg/kg
FAME during a 40-hour test did not degrade
coalescence performance. Similarly, limited
bench scale testing by another EI member
company has confirmed that trace levels of
FAME do not adversely affect filter monitor
media water uptake – the key function
provided by this type of filter.
Microbial spoilage and corrosion
The EI’s Microbiology Committee is currently
undertaking a laboratory testing exercise
that, although primarily aimed at investi-
gating rates of microbial growth in biodiesel,
also includes in the test matrix two different
jet fuel blends containing both 100 mg/kg
and 400 mg/kg of the same FAME cocktail
being used for the approval programme.
Results from this study are due to be pre-
sented at the International Association on
Stability, Handling and Use of Liquid Fuels
(IASH) conference this month.
International perspective
The industry is currently managing signifi-
cant fuel handling challenges brought about
by the introduction of FAME in diesel for
road transport, to ensure the continued
integrity of jet fuel quality and equipment
compatibility and operability throughout
the supply chain. What started as an issue of
regional concern has quickly taken on an
international perspective as biodiesel man-
dates have spread worldwide.
The EI has demonstrated its ability to
respond rapidly in support of changing
industry requirements, drawing upon the
resources of several of its technical commit-
tees and soliciting additional contributions
from a large number of stakeholders.
The challenge of FAME will remain for
some months to come and can only be
addressed through continued collaborative
industry initiatives.
The EI wishes to thank all of the industry
specialists that have assisted in the develop-
ment of the materials/projects described
above, without whose input the work would
not have been possible. G
21
 E UROPE
Energy lobbying is big
business at the EU
It is an important symbol of
the changing focus of the
European Union (EU) that its
energy lobby is today
regarded as an equal to, if
not more important than, the
once feared agriculture lobby
in Brussels, write David
Haworth in Brussels and
Keith Nuthall. Even though
40% of the EU budget is still
spent on agriculture, free
market reforms have clipped
the influence of food groups
at the EU, clearing the way
for energy, whose importance
as an international and
strategic issue becomes ever
more obvious.
W
hen we talk about the ‘energy
lobby’, we refer to an amor-
phous and large group of
individuals and organisations united only
in one goal – to influence EU legislation
and policy so that it better reflects their
interests. As a result, given the complexity
of the energy sector, it is no surprise that
there are a vast number and variety of
Brussels-based European organisations and
representatives of major companies, set on
bending the ear of EU politicians and
officials.
As for the industry federations, there are
many – the European Petroleum Industry
Association (Europia); Eurofuel, the
heating oil association; and the European
Pure Plant Oil Association (EPPOA) are
obvious examples. But there is also the
International Emission Trading Association
and the European Energy Forum (which
insists that it is not a lobbying group).
Major consumers of oil and gas are also
22
represented by organisations such as the
European Automobile Manufacturers’
Association (ACEA) and the European
Engineering Industries Association. The
European Bioethanol Fuel Association also
plays a significant hand in the debate
about this energy source – and here a nod
should be given to the farmers’ lobby,
COPA-COGECA, which for self-evident rea-
sons has an interest in biofuels
development. Also, CEFIC, the European
Chemicals Industry Council, a powerful
presence in EU official corridors, and the
Association of Petrochemicals Producers in
Europe (APPE), are there to represent this
oil-related chemical sub-sector.
Among the oil giants different priorities
are revealed, although all maintain repre-
sentatives in Brussels. BP seeks ambitiously
to shape Commission regulation drafting.
‘Its influence should not be underesti-
mated,’ an official said, mentioning the
company’s rather cheeky claim to have ‘a
shared agenda with the EU’. Shell’s priority
is hydrogen, while ExxonMobil’s priority is
return on investment.
Meanwhile, Russia’s Gazprom is always
on the prowl in the EU’s corridors.
Gazprom hired Brussels-based PR firm
GPlus back in 2006 to update its media rela-
tions. It also signed a separate deal for
media handling and government advocacy
in 2007. This move caught the lobbying
industry by surprise. It was regarded as an
audacious gamble – but the arrangement
continues without apparent difficulties.
As for western Europe, two French com-
panies are never far from any discussions
about energy policy and are active lobby-
ists – namely, Gaz de France (GdF) and
Electricité de France (EdF). Think tanks with
influence on EU energy policy include the
Centre for European Energy Strategy
(CERES) and also the Society of European
Affairs Professionals (SEAP).
There are also a number of associated
groups who are interested in influencing
energy policy, but not for the sake of
energy companies. These include lobby
groups for environment and sustainable
development questions such as the
European Federation for Transport and
Environment, Greenpeace and the Friends
of the Earth. There are broader based
policy groups such as the Centre for the
New Europe and more business-minded
lobbyists such as the European Enterprise
Institute. The American Chamber of
Commerce is influential – and generally
respected.
Energy
Policy priorities
Julia Harrison, Managing Partner of
Blueprint, which has several energy clients,
lists the EU’s current energy policy priorities
as oil and gas, renewables and technology.
This last she says is ‘a bit perilous’ as lob-
bying clients because technologies like
solar and wind are in competition. She
adds to this crowded agenda environ-
mental questions and the EU’s approach to
energy security.
However, it is the EU energy market’s lib-
eralisation and the moves towards the
construction of a framework of regulatory
and competition policy which has been at
the heart of policymaking of concern to
the energy sector – and this has been a key
focus of energy lobbying in recent years,
she said. The additional pressure to min-
imise carbon dioxide (CO2) emissions and
EU renewable energy targets have been
further sources of recent energy lobbying
business for her firm.
Given the number of groups and inter-
ests in Brussels, it is no surprise that there
are 15,000 lobbyists in the city – an esti-
mated figure because by no means all of
them have signed the voluntary registra-
tion system set up by the European
Commission (EC). They are said to spend
€750mn/y in their efforts to influence the
EU institutions. After Washington, Brussels
is the largest lobbying capital in the world
– but one of its weaknesses compared to
the US is that no compulsory declaration of
funding sources is yet in place.
Julia Harrison, Blueprint Managing
Partner, which has several energy
clients and says oil and gas is still the
EU’s top energy policy priority
Source: Blueprint
PETROLEUM REVIEW OCTOBER 2009

EU Energy Commissioner Andris
Piebalgs and his senior officials are key
targets of Brussels lobbyists
Source: European Commission
The EC has responded to this in its own
way by starting four years ago the European
Transparency Initiative. However, even EU
officials admit that its success has so far been
limited. The voluntary register of lobbyists,
announced last year with a flurry by
Commissioner Siim Kallas, has produced only
meager results. Only 593 of some 2,600 lob-
bying-based organisations have signed up –
that is, a mere 22%. Pressure may increase in
anticipation of the Lisbon Treaty being rati-
fied this autumn, which will increase EU
powers, for instance over energy security of
supply matters.
Four years ago, Friends of the Earth started
an annual exercise in mockery called the
‘Worst EU lobbying Awards’, which last year
was won by the Malaysian Palm Oil Council,
bioethanol producer Abengoa Bioenergy
and air industry group IATA. In 2007 the
German car industry got the gong for
allegedly using ‘manipulative tactics when
campaigning against mandatory emission
targets’. This shows, perhaps a bit flippantly,
that people are starting to take a much closer
interest in corporate lobbying activities in
Brussels.
Understandably, the car industry is in the
thick of the EU fray, where a huge, though
slow-moving, battle is being waged between
the traditional car manufacturers and those
who advocate the use of alternative fuels
such as hydrogen, biofuels and electric
vehicles.
Pressure points
There are different pressure points for energy
subjects that lobbyists must not ignore,
Harrison notes. If supply security is the issue,
the EU Council of Ministers matters most –
but it is almost by definition the least acces-
sible to those who are not EU officials. Also,
by the time the Council gets hold of a subject,
it is too late for the lobbyists to significantly
influence affairs, because national govern-
ments become their own lobbyists in the
decision-making process.
Far better to influence policy while it is
being drafted for ministers by the European
Commission, where officials are more acces-
sible, and indeed often openly welcoming
consultation. Also, the EU executive is the
best place to reach people if liberalisation is
on the agenda, Harrison said; the same with
the internal EU market and energy efficiency.
To a degree this also applies to environ-
mental questions, but much closer attention
has to be deployed in the European
Parliament. MEPs are notoriously jumpy
about this – the institution has a vociferous
Green membership.
Looking ahead, with energy issues increas-
ingly impacting on other policy areas,
non-energy lobbyists will gain importance.
‘The EU absolutely must join up all the dots
on energy questions,’ Harrison asserts. ‘[For
example,] what is going to happen to the
responsibility for the technical aspects of
energy; that is, using technology for energy
efficiency and smart grid technology?’
Lobbyists will certainly have something to say
about that. G

New publication

Introductory guide to
environmental damage
In March 2009, the requirements of the Environmental Liabilities Directive were implemented in England and
Wales as the Environmental Damage Regulations (similar regulations are being developed for Scotland and
Northern Ireland).

A new short guide, commissioned by the Energy Institute’s Soil Waste Groundwater Group, is in
preparation to:

• Explain the main concepts introduced in the Environmental Liabilities Directive

• Identify the important components of the Environmental Damage Regulations
• Explain what this means to operators of sites, including:
• The benefits of gathering existing information on the sensitive species and habitats in the
vicinity of a site
• A case study to illustrate the value of prior knowledge about a site's environmental setting
• How best to deal with damage if it occurs

This guide will be available via the EI publications website www.energyinstpubs.org.uk from November.
More detailed guidance for operators is in preparation by the Energy Institute. This will provide practical approaches to help site managers
establish and maintain baseline condition information for natural habitats and protected species on and around their sites. For more
information please contact Jenny Lyn at jlyn@energyinst.org

www.energyinstpubs.org.uk

PETROLEUM REVIEW OCTOBER 2009 23

 C ARIBBEAN
The Caribbean energy scene
In a world of unpredictable oil prices and unstable sources
of supply, ‘energy security’ has become a major
preoccupation of oil importing countries around the globe
– and the small island nations of the Caribbean are as
concerned as any in this regard, writes David Renwick.
O
nly one Caribbean country,
Trinidad and Tobago, is self-suffi-
cient in the main energy sources
of oil and gas and with a surplus for
export. Even Barbados, Cuba and
Suriname (the latter situated on the
northern coast of South America but
regarded as ‘Caribbean’ both politically
and economically) – all of which are also
oil producers – have to import refined
products to make up for shortfalls in
domestic supply.
It was little surprise, therefore, that all
Caribbean island nations – bar Trinidad
and Tobago, and Barbados – latched on
so eagerly to Venezuelan President Hugo
Chavez’ offer of supplies of deferred-
payment oil on a regular basis when it
was made four years ago.
Through state energy giant PdVSA,
Chavez promised enough refined oil and
crude in the case of those countries with
Only one Caribbean country, Trinidad
and Tobago, is self-sufficient in the
main energy sources of oil and gas and
with a surplus for export. Pictured is
BP’s Savonette platform, Trinidad,
which has a design capacity of 750mn
cf/d and is due to produce first gas in
4Q2009
Source: BP
24
local refineries to meet the varying
energy needs of 13 states belonging to
the Caribbean Community and Common
Market (Caricom) group, non-Caricom
island states like Cuba, the Dominican
Republic and Haiti, and the mainland
Central American nations of Nicaragua,
Guatemala and Honduras. The terms
were 60% downpayment on every barrel
of oil when the price was $50/b or over,
but dropping to 50% when the price
reached $100/b. There was a two-year
grace period for reimbursement of the
unpaid portion, which was spread over 25
years at a then-unbeatable interest rate
of 1%. This was actually converted into
loans, which each beneficiary could use
for development purposes as approved by
Venezuela.
In 2008, the then 15 PetroCaribe bene-
ficiaries (two others came onboard this
year) were assigned a quota of 199,200
b/d of oil, with Cuba the most favoured
nation, receiving 92,000 b/d. Chavez even
allowed repayment of the loan portion of
the oil supplied to be settled in goods and
services rather than cash, such as black
beans in the case of the Dominican
Republic and doctors in the case of Cuba.
Mounting debts
However, the ‘security’ of the PetroCaribe
arrangement is now being called into
question, as the energy debt mounts with
each passing year and the small
Caribbean states find themselves particu-
larly vulnerable to the world economic
slowdown. They have all lost considerable
amounts of tourism income, as well as
much of the remittances that Caribbean
nationals resident in the US, Canada and
the UK send home each year, since the
latter are naturally also affected by the
recession in their adopted homelands.
Even those countries who, like Cuba,
can easily repay principal and interest to
Venezuela in kind instead of cash – by
sending doctors, which the Communist
Caribbean nation seems to produce in
exportable numbers – are becoming con-
cerned at the size of the debt burden they
are incurring. PdVSA has estimated that
as much as 35% of the Caribbean’s
Energy security
US President Barack Obama was the
‘star’ at the fifth summit of the
Americas in Trinidad held in April
external debt will be owed to Venezuela
by 2015, a situation with which even the
International Monetary Fund (IMF) is
unhappy. Indeed, Jamaica’s Prime
Minister Bruce Golding, whose country
receives 23,500 b/d of PetroCaribe oil, has
drawn attention to ‘the huge weight of
mortgage that will be left around the
neck of the next generation in the
Caribbean’.
While it will slow down the growth of
the debt – which can only be a good thing
from the Caribbean perspective – Chavez’
recent decision to ask beneficiaries to pay
80% of the oil price up front, with only
20% as the debt portion, is regarded as a
bad thing for small states suffering from a
sharp reduction in the availability of for-
eign exchange.
Under the original agreement, 80%
payment was only applicable when oil
was priced between $24/b and $30/b,
which would have been manageable; but
with oil back up to around $70/b, 80%
becomes a severe strain. Even Guyana,
where Caricom is headquartered and
which only receives 5,200 b/d under
PetroCaribe, has noted through its
President, Bharrat Jagdeo, that ‘this
development will present grave difficul-
ties for us’.
So, perhaps the Caribbean will have to
look elsewhere for true ‘energy security’.
It could do worse than refer to the
Declaration all its countries signed, along
with Central America, South America,
Canada and the US, at the end of the fifth
summit of the Americas in Trinidad in
April this year. The first of its kind to be
PETROLEUM REVIEW OCTOBER 2009

At the fifth summit, Bolivia’s President
Evo Morales suggested the region
should pursue more benign sources of
renewable energy than biofuels, such
as ‘geothermal, solar, wind and small-
and medium-sized hydroelectric plants’
held in the Caribbean – at which the star
was, not surprisingly, new US President
Barack Obama – the summit concluded, in
its ‘Declaration of Commitment of Port of
Spain’, that energy from renewables was,
perhaps, the best way to guarantee secu-
rity in the long run, since much of it was
available domestically and countries could
exercise greater control over pricing than
they could in relation to imported oil.
The Declaration noted the determina-
tion of the heads of government of the
Americas ‘to encourage, as appropriate,
the sustainable development, production
and use of both current and next genera-
tion biofuels, with awareness of their
social, economic and environmental
impact’ and to work together to facilitate
the use of such fuels ‘through interna-
tional cooperation and the sharing of
experiences in biofuel technologies and
policies’.
Biofuels refer to such products as
ethanol from either sugar cane (as in
Brazil) or corn (as in the US), which are
increasingly taking the place of gasoline in
motor vehicles – and several Caribbean
states have already started along that
road. Biofuels, of course, are only one
example of renewable energy and it was
interesting to see Bolivia’s President Evo
Morales enter a caveat about them in the
Declaration. He thought that rapid bio-
fuels production could ‘adversely affect
and impact upon the availability of food
and raise food prices, increase deforesta-
tion, displace populations due to the
demand for land and ultimately aggravate
the food crisis’. This would ‘directly affect
low-income people, especially the poorest
economies of the developing countries’.
PETROLEUM REVIEW OCTOBER 2009
Instead, President Morales thought the
hemisphere should pursue more benign
sources of renewable energy, such as
‘geothermal, solar, wind and small- and
medium-sized hydroelectric plants’.
Uniquely positioned
The Caribbean is, in its way, uniquely posi-
tioned to adopt renewables as a
complement to imported oil and an even-
tual replacement for some portion of the
fossil fuels currently used. The climate is
sunny all year round, wind resources are
adequate in many locations, geothermal
development is possible in some territories
and there are enough large rivers, espe-
cially in Guyana, to create the foundation
for hydroelectric power.
Energy from biomass is also a possibility.
Renewable energy expert, David Barrett,
whose day job is actually representing an
Australian oil company in the Caribbean,
has done the maths and observes that: ‘In
Barbados, they were saving 33,000 tonnes
of imported fuel a year by using solar
water heaters instead of electric water
heaters when oil was only $25/b. Even
at $25/b, the whole English-speaking
Caribbean, with a population of five mil-
lion, could shave as much as $125mn off its
oil import bill.’
With that bill around $2.7bn in Jamaica
alone in 2008, it is clearly not surprising
that Jamaica’s Office of Utilities Regulation
(OUR) is anxious to increase the share of
renewables in electricity generation from
5.5% today to 10% by 2010, and 15% by
2015. There is no guarantee it will get
there, but OUR has sought proposals from
investors for providing 73 MW from such
sources as wind, solar, biomass and hydro.
Cognisant of the fact that the US’
National Petroleum Council has predicted
Venezuelan President Hugo Chavez
offered supplies of deferred-payment
oil on a regular basis to Caribbean
countries four years ago
Jamaica’s Prime Minister Bruce Golding,
whose country receives 23,500 b/d of
PetroCaribe oil, has drawn attention to
‘the huge weight of mortgage that will
be left around the neck of the next
generation in the Caribbean’
Source: Jamaica Information Service
that oil, natural gas and coal will remain
‘indispensable to meeting projected
energy demand growth in the world to
2030’, fossil-fuel deficient Caribbean coun-
tries also believe that domestic oil and gas
resources can be as much a part of the
energy security equation as renewables.
Several of them are currently engaged
in oil exploration efforts, notably Jamaica,
Guyana, The Bahamas and Curacao in the
Netherlands Antilles. Nine exploration
wells have been drilled on- and offshore
Jamaica since 1955, none of which have
found any commercial hydrocarbons. A
total of 12 blocks are currently under
licence to explorers from Australia (Finder,
the company that Barrett represents),
Canada (Rainville) and Hong Kong
(Proteam). The first well is likely to be sunk
in 2010.
Jamaica is also returning to the market
in 2010 to offer its remaining 19 offshore
blocks for exploration – the third formal
auction of Jamaican acreage since January
2005. Dr Raymond Wright, the country’s
leading geologist and Special Projects
Manager of the state-owned Petroleum
Corporation of Jamaica (PCJ), says that a
6,217-line km 2D seismic survey by
Norway’s Wavefield Inseis has ‘indicated a
number of interesting prospects’.
Guyana has been trying even longer
than Jamaica to find oil (since 1916),
but with an equal lack of success so far.
It currently has eight offshore and
onshore blocks under licence. Both
ExxonMobil/Shell and small Canadian
independent CGX Energy have recently
shot seismic in their Stabroek and
Corentyne blocks, respectively. However,
exploration is not expected to commence
until 2010. G
25
 E NERGY
When cover flees for cover
As Hurricane Bill turned east in
August, brushing alongside
Bermuda and New England,
many rig operators in the Gulf
of Mexico breathed a sigh of
relief and felt vindicated.
Spooked by massive rises in
insurance premiums and
deductible levels for windstorm
insurance, many oil companies
had decided to self insure, ie
buy no cover. Energy insurers
and reinsurers are beginning to
regret their decisions earlier this
year to tighten terms for their
clients. Indeed, the future for
energy insurers is looking
gloomy, writes Maria Kielmas.
T
he aftermath of every financial crisis
seems to grant the insurance and rein-
surance sector a ‘get out of jail free’
card. The market has tended to harden in the
two or three years following a financial
market collapse. This has meant that pre-
miums and, consequently, earnings have
risen. A conservative industry, insurers claim
that their balance sheets are healthier than
those of banks which were ruined by the last
years of financial crisis. That was until the col-
lapse of the American International Group
(AIG), which cost the US taxpayer over
$180bn to bail out.
AIG has been a major player in the energy
insurance market for decades, but it was also
a huge writer of credit default swaps (CDS), a
Loss Insured loss (2008 $bn)
Hurricane Katrina 68.515
9/11 23.654
Hurricane Ike 15.000
Hurricane Ivan 14.115
Hurricane Wilma 13.339
Hurricane Rita 10.704
Hurricane Charley 8.840
Winter Storm Lothar 7.223
Winter Storm Kyrill 6.097
Hurricane Frances 5.650
Table 1: Most expensive insurance losses, 1999–2008
26
form of insurance policy against a borrower
defaulting on debt. Its notional CDS exposure
– the total amount sold – was $372.3bn in
September 2008. It also wrote huge amounts
of residential mortgage backed securities as
well as insurance policies on banks’ (including
European banks) loan portfolios. Had the US
government not stepped in with over $180bn
in new capital, much of the US and European
financial systems would still be shattered
today. AIG was the highest profile insurance
company whose executives believed would
profit by moving into investment banking.
The other was Zurich-based Swiss Reinsurance
Company, which lost 1.2bn Swiss francs
($1.14bn) in the US mortgage securities
market and was bailed out by Wall Street
sage Warren Buffett, who bought a 3% stake
in the company for an undisclosed sum.
Opportunity for competitors
AIG’s demise signalled an opportunity for
more conventional insurance companies as it
held a dominant position in the energy insur-
ance sector. In late 2008 the prevailing view
was that AIG would quit writing property
and casualty insurance, and thus open a large
chunk of the market to its competitors. So,
underwriters went to their boards of direc-
tors and asked for more capital in order to
take up the AIG business. This capital increase
happened at the beginning of January 2009.
However, AIG didn’t quit the market and
managed to retain over 90% of its clients.
The only change was the exit of key AIG exec-
utives who were unhappy at the prospect of
the US government not just dictating on the
size of their bonuses, but whether or not they
got a bonus at all.
The energy insurance market was in a con-
fused state in early 2009. High commodity
prices of previous years had generated addi-
tional premium from increased asset values
just as competition in the market had
depressed rates. The financial crisis itself
meant that all insurance companies had to
make up for the shortfall in investment
income through premium rises. In more
benign economic times insurance companies
covered their underwriting losses through
Date
2005
2001
2008
2004
2005
2005
2004
1999
2007
2004
Source: Munich Re, Swiss Re, Willis
Insurance
investment income. This is no longer possible
and insurers have to watch their loss ratios
and balance their underwriting books. But
these companies had also increased the
capacity of the energy insurance market by
about 5% at a time when the cost of capital
was becoming ever more expensive. A radical
accounting solution was needed to maintain
profitability. One such strategy was to rethink
their exposure to windstorm risks in the Gulf
of Mexico given the losses caused by
Hurricane Ike in 2008.
Gulf of Mexico windstorms
The biggest headache facing insurers who
cover risks in the upstream oil sector is the
windstorm risk in the Gulf of Mexico.
Hurricane Ike in 2008 was the third largest
insurance loss ever, after Hurricane Katrina
and 9/11. Although the storm was just cate-
gory 2 strength when it hit land, it had
destroyed 54 oil platforms and damaged a
further 95 en route (see Tables 1 and 2).
However, until this year the Gulf of Mexico
generated about 25% of the upstream
market’s insurance premium – a crucial part
of an insurer’s portfolio. Energy insurers had
to be careful not to price themselves out of a
market and lose clients. Nevertheless, the
thinking was that the market could sustain a
30% cut in available capacity for windstorm
damage, greater retentions by insurance
buyers, higher premiums and restrictions on
some aspects of available cover. These
included a limit on compensation for the
costs of making wells safe and re-drilling.
Some insurers had hoped to increase insur-
ance buyers’ retentions up to tenfold.
The combination of a near doubling of
premiums, less cover and low oil prices per-
suaded rig operators to eschew insurance
altogether and carry their own risks. In some
cases, the new insurance terms meant that
the operators would have to carry about
75% of their windstorm exposure them-
selves. So, what was the point of buying
insurance at all? The operators not only scru-
tinised insurance costs more closely, but now
claim that greater government regulation
and improved technology reduce the need
for insurance in the first place. Multinational
majors such as BP have self-insured for many
years. Now companies such as Transocean
and Diamond Drilling have decided to self-
insure this year. Insurance restrictions have
also affected small- to medium-sized opera-
tors in other offshore areas such as the North
Sea and West Africa. Once the darlings of the
stock markets, the economic crisis has meant
that these companies have had to delay
expansion plans as well as pay more to pro-
tect their existing assets.
The consequences of this strategy remain
unclear. The appearance of the El Nino
Southern Oscillation (ENSO) climatic effect
PETROLEUM REVIEW OCTOBER 2009
 Hopes of an end to the economic crisis
Ivan Katrina Rita Ike
and recession could be just an illusion.
Joseph Mason, Professor at Philadelphia-
Saffir Simpson* Cat 4 Cat 5 Cat 4 Cat 2 based Drexel University Le Bow School of
Hurricane Severity Index* 33 47 42 36 Business, observed in his regular market
Integrated Kinetic Energy* 4.4 5.1 4.3 5.2
No of platforms destroyed 7 46 69 54 commentary in August that the US adminis-
No of platforms damaged 24 20 32 95 tration’s credit and capital programmes
Commercial market loss $1,250mn $3,000mn $3,500mn $3,000mn have provided a vacant subsidy to the finan-
cial sector. This thinking also could apply to
Table 2: Comparison of four major windstorms subsidies provided by European and other
* The Safir Sampson Hurricane scale defines the strengths of Western Hemisphere tropical cyclones on the governments to their national financial insti-
basis of their wind speeds, the Hurricane Strength Index aims to calibrate the intensity and destructiveness tutions. Mason notes that no investor really
of a hurricane given the size of the area affected and not rely solely on wind speeds. Integrated Kinetic believes that recent (improved) financial
Energy is a computational process which takes into account the expected damage from windstorms over
a given area given the experience from previous storms.
results are built up on anything other than
government subsidies and that those subsi-
this year implies that hurricane strength in insurance altogether and many will not dies can continue indefinitely. Without real
the Gulf of Mexico and south-eastern US return unless premiums fall significantly. This growth, investors are largely following gov-
could be much weaker than in previous could be difficult for the insurers as they find ernment money. Even government money
years. But if windstorms later in the season it more expensive to protect their own cash itself is unstable, he adds, as the bad debts
cause any significant damage, rig operators flow. The reinsurance and retrocession (where that caused the crisis in the first place have
may not be able to carry out necessary repairs reinsurers reinsure themselves) markets are to go somewhere. The present policies of
given the constraints on both their cash flow drying up. In addition, the European government financial engineering to reduce
and their lack of insurance cover. This, in turn, upcoming Solvency II rules on capital ade- the effects of the crisis risks imposing a
could impact on the region’s oil and gas pro- quacy will have a huge effect on the insurance greater total recessionary effect than other-
duction rates. market. More capital will be needed to write wise would be the case.
various lines of business, notably energy, and In their own efforts to address the causes
More regulation it will be difficult to invest in other than triple- of an earnings slump, energy insurers may
Life is not going to be any easier for the rated government debt. Insurers will have to have taken the first steps to destroying what
energy insurers either. About one third of adjust their liabilities in line with market used to be a lucrative market in the Gulf of
Gulf of Mexico rig operators stopped buying changes and bond yields. Mexico. G

International Petroleum Week 2010

Monday 15–Thursday 18 February 2010, London, UK
IP Week 2010 will bring together experts from the oil and gas industry to discuss the impact of the financial
downturn on the industry, the twin challenges of economics and environment and the positive advances that
have been made with technology, innovation and future leadership.
Conference topics include: Confirmed speakers include:
• Fuelling the recovery • Sean Cronin, Editor, Argus Media
• Russia and CIS • Andrew Gould FEI, Chief Executive, Schlumberger
• Focus on Africa • Julian Lee, Senior Energy Analyst, CGES
• Upstream • Gerald Rohan FEI, CEO, Rohan Global Consulting
• 23rd Energy Price conference • Christof Ruehl, Chief Economist, BP
• Spotlight on the Middle East • James Smith FEI, Chairman, Shell UK and President,
• Downstream: Satisfying ever more demanding customers Energy Institute
• Generating growth through effective asset management • Raphael Vermeir CBE FEI, Vice President, External Affairs –
• Gas conference Europe, ConocoPhilips
Plus the IP Week Lunch, Dinner and opening night
drinks reception

IP Week 2010 sponsors:

www.energyinst.org.uk/ipweek

PETROLEUM REVIEW OCTOBER 2009 27

E &P
Is ‘peak oil’ upon us?
This year’s Petroleum
Geology Conference (PGC)
– organised by the
Geological Society, the
Petroleum Exploration
Society of Great Britain
(PESGB) and the Energy
Institute – was the latest
of seven held over the past
30 years. Held at the QEII
Centre, Westminster, it
included for the first time
three hour-long, lively
lunchtime debates that
were convened under the
theme of topical
‘Geocontroversies’, in
which two expert
protagonists presented
their views for and against
three motions of direct
relevance to the oil
industry. The second of
these debates tackled the
issue of peak oil. John
Underhill, Grant Institute
of Earth Science, The
School of Geosciences,
The University of
Edinburgh, reports.
28
‘P
eak oil’ was a term originally
coined in the mid-1950s by M
King Hubbert, a US Shell geol-
ogist, to describe the inflexion point at
the top of a production curve at which
peak production is achieved and after
which the rate of oil extraction inextri-
cably declines. Whilst the term could
arguably be applied to individual wells
and fields, it is most commonly used in
the evaluation of prospective sedimen-
tary basins, countries and, more
especially, in geopolitical circles to
describe global production. ‘Hubbert’s
Peak’, as it has become known, was
surpassed in the US in 1971 and in the
late 1990s in the North Sea as major
fields discovered in the 1970s entered
a phase of terminal decline. However,
controversy surrounds whether the
balance and offset between the cumu-
lative effect of basin maturity and
exploration success in new frontier
basins has already been achieved or
will soon be reached.
The following article summarises the
debate on the motion that ‘This house
believes peak oil is no longer a con-
cern’. Whilst David Jenkins, a former
Technical Director and Board Member
at BP, argued that peak oil is not of
immediate concern, Jeremy Leggett of
Solarcentury spoke against the motion.
Julian Rush, the Chief Scientific
Correspondent at Channel 4 News,
moderated the debate and provides a
personal reflection on the issues raised
and the outcome of the debate.
A description of the first debate
appeared in last month’s issue of
Petroleum Review. The third and final
debate on the role and impact that
national oil companies (NOCs) have
upon our industry will be published in
December.
For the Motion – David Jenkins
‘Historically the concerns about peak
oil have focused on the inability of
supply to meet progressively increasing
demand. The time of peaking relates
to the degree of cumulative produc-
tion from the resource base and, once
it is passed, declining production is
inevitable. Peak oil concerns are
entwined in a wistful recall for the
days when cheap energy underpinned
the Organisation for Economic
Cooperation and Development’s
(OECD) rapid economic growth.
Those days are now over and will
never return. The world needs to
become accustomed to expensive
energy. If the present concerns about
Debate
carbon dioxide (CO2) persist, the con-
comitant requirement to decarbonise
carbon-based fuels will mean a further
significant increase in costs. In fact,
rather than the supply peak around
which commentators have fretted,
high energy prices could even
engender a demand peak for oil,
something which the environmental
movement would applaud.
It is important to recognise that
there is no near-term resource peak for
oil, nor gas or coal. That is quite clear
from the 2005 International Energy
Agency’s (IEA) World Energy Outlook.
This gave an assessment of ‘available
oil resources’ at over 3.5tn barrels –
and this did not include any con-
tribution from gas-to-liquids or
coal-to-liquids technologies, which
could become significant sources of
liquid petroleum at prices above
$100/b.
The question of whether or when
we experience peaks in production is
fundamentally about market forces
and definitely not related to a resource
peak, as exemplified in the classic King
Hubbert model. We had a production
peak in 2008. It was caused by a very
sharp speculative run up in price and
led to the inevitable cut back in
demand. Although the price has since
come back it remains high in historic
terms and demand is continuing to
decline. Investment though has also
been cut back dramatically and we can
certainly expect a supply shortfall
sometime in the next four to seven
years. This shortfall will also not be
related to peak oil, but it will cause a
further spike in price as occurred in
2008 and then, as last year, demand
will again drop. The pattern in
the future is likely to be one of
an extended irregular production
plateau, punctuated by abrupt swings
in prices leading to abrupt changes in
demand.
Although at the moment we rely
almost exclusively on liquid petroleum
for road, marine and air transport
fuels, and because mobility is so funda-
mental to our way of life and standard
of living, we cannot conceive how we
could change. This perceived depen-
dence has underpinned our worries
about global oil supply peaking.
Decarbonising energy because of the
fear of climate change, however irra-
tional that fear may actually prove to
be, would have the effect of forcing
such change. Moving away from the
internal combustion engine to an elec-
PETROLEUM REVIEW OCTOBER 2009
tric drive train, associated with greatly
increased production of biofuels, is
soon to be technically feasible and
could very plausibly produce a scenario
that eliminated further growth in
global demand for oil. Combine this
with the production capacity available
from the global resource base and a
future world of expensive carbon free
energy, then peak oil clearly becomes
an artefact of a prior economic world.
In this somewhat bleak future it will
definitely not be one of our many
concerns.’
Against the motion – Jeremy
Leggett
‘“Early peakers” like me fear that the
oil industry has lapsed into a culture of
over-exuberance about both the
remaining oil reserves and prospects of
oil yet to be discovered, and about the
industry’s ability to deliver capacity to
the market even if enough resources
exist. In the corporate world, early
peakers include the recently-formed
UK Industry Taskforce on Peak Oil and
Energy Security (ITPOES), members of
which include Virgin, Arup, Foster and
Partners, Scottish and Southern
Energy, Solarcentury, Stagecoach and
Yahoo.
The first report of the ITPOES group
of companies, released in November
2008 at the London Stock Exchange
[see Petroleum Review, February
2009], presented evidence that total
global oil production will begin
declining early in the next decade. The
main argument is that new capacity
flows coming onstream from discov-
eries made by the oil industry over the
preceding decade will begin dropping
at that time. This problem will be com-
pounded by other issues, including the
accelerating depletion of the many old
oil fields that prop up much of global
oil production today, the probable
exaggeration by OPEC countries of
their reserves, and the failure of the
“price-mechanism” assumption that
higher prices will lead to increased
exploration and expanding discoveries.
In the same week as the ITPOES
report was released, the IEA published
its latest weighty annual report, the
World Energy Outlook. In 2008, for
the first time, the IEA conducted an
oilfield-by-oilfield study of the world’s
existing oil reserves. It revealed that
the fields currently in production are
running out alarmingly fast. Crude oil
production from all the world’s
existing fields climbs unevenly from
just below 60mn b/d in 1990 to a peak
– more exactly a brief plateau – of just
over 70mn b/d between 2005 and
2008. In 2009, however, crude produc-
tion begins a steep descent, falling
PETROLEUM REVIEW OCTOBER 2009
steadily all the way below 30mn b/d by
2030. To meet the projected demand
figure by 2030, up to 64mn b/d of
totally new production capacity would
be needed onstream within 22 years.
That, the IEA points out, is fully six
times the production of Saudi Arabia
today.
The oil industry is not discovering
giant oil fields at anything like the rate
it did in the 1960s – the peak decade
for discoveries. This is the case even
with much better equipment for
exploration today, and even after four
years of rising oil prices from 2004 into
2008, when exploration was not ham-
pered by lack of funds for investment.
When the oil companies do make big
discoveries, the lead times from dis-
covery to first new oil delivered to
market are long – often more than 10
years. In addition, the oil industry has
profound infrastructure problems, and
major issues with underskilling and
underinvestment. Many drilling rigs,
pipelines, tankers and refineries were
built more than 30 years ago, and
according to some insider experts the
physical state of the global oil infra-
structure is a major problem even at
current rates of oil production, much
less the significantly higher levels
anticipated in the future. The average
age of personnel in the oil industry is
49, with an average retirement age of
55 – little less than a human-resources
time bomb. To add to the challenges,
the industry’s overall exploration
budget has actually fallen in real terms
in recent years. The ITPOES fears that
these issues will synergise to com-
pound the peak oil crisis, gravely
impairing society’s collective ability to
respond.
In conclusion, this debate is all about
the risk of a mighty global industry
having its asset-assessment systemically
overstated, due to an endemic culture
of over-optimism, with potentially
ruinous economic implications.
That couldn’t possibly happen could
it?’
Peak oil summary – Julian Rush
‘I’m old enough to remember the
furore surrounding The Limits to
Growth from the Club of Rome in the
early 1970s. It was published while I
was an undergraduate studying
Engineering and Economics, and I
recall it prompted considerable
debate. Much maligned for predictions
it didn’t actually make, not least the
infamous ‘forecast’ that oil would run
out in 1992, it did serve to start a
debate that continues to this day
about the way Earth’s growing human
population uses and exploits the
planet’s resources.
The debate is rightly wider now than
the narrow issue of supply and
demand, as both speakers implicitly
recognised. It is no longer a debate
based on the assumption that
resources are infinite and demand
enduring and inflexible, but one
coloured by the realisation that peak
oil must happen; it is a necessary pre-
condition for the successful adaptation
of humanity to climate change.
The issue, then, is not a matter of if,
but when? And the timing is critical,
especially if you accept the latest warn-
ings from IPCC (Intergovernmental
Panel on Climate Change) scientists
of the need for greenhouse gas
emissions cuts way beyond those
currently contemplated in interna-
tional negotiations.
Can peak oil be managed so there is
a smooth transition to replacement
technologies or fuel sources with
urgency but without excessive societal
disruption? Both contributors agreed
oil prices will rise in the next few years;
the trick for the world’s leaders is to
put in place timely policy responses to
use such rising prices so they act as a
driver to accelerate the switch to a
low-carbon economy and infrastruc-
ture. Arguably, they have been
dismally slow to do so.
Or will unfettered market forces
drive up oil prices so quickly, as oil
companies seek to recover the costs of
extraction from increasingly difficult
environments like the deep sea or tar
sands, that wealthy Western societies,
at least, are left with difficult choices
about unaffordable lifestyles? For the
politicians, that is a distinctly uncom-
fortable scenario, one likely to be
made of their own reluctance to act.
The problem is, as both David Jenkins
and Jeremy Leggett make clear, partic-
ularly acute when it comes to
transport.
Then there are the oil companies.
‘Business as usual’ is a superficially
attractive option for those unwilling or
unable to adapt. Already we see many
of the majors retrenching to their core
businesses. But by adopting strategies
designed to delay peak oil in order to
protect their short-term vested inter-
ests, they risk not only exacerbating
climate change – for which they are
unlikely to be forgiven – but their very
survival as well when their bluff is
eventually called.’ G
Following a vote by those attending,
Jeremy Leggett won the debate – the
audience concluding peak oil was of
concern, not so much because of its
impact on the industry, but because of
its importance to the planet.
29
NORTH SEA Decommissioning

Environmental countdown
to decommissioning
The UK is currently home to approximately 470 offshore oil and gas the platform. In the shallower waters of
the southern North Sea the strong tidal
installations, primarily located in the northern, central and southern currents disperse the cuttings, diluting any
environmental impact. Weaker tidal cur-
North Sea. Many of these have now entered their ‘mature’ phase, rents in the deeper northern North Sea,
however, mean cuttings instead accumu-
with their working lives scheduled to come to an end in the next late at the foot of the platform. It has been
estimated some cutting piles may contain
decade or so. Preparing for the decommissioning of structures in as much as 40,000 tonnes of contaminated
sediment.
the North Sea has, unsurprisingly, been on the industry’s agenda for Likewise, any other debris remaining
after decommissioning – such as scaf-
quite some time. Here, Pamela Coulthard, a lawyer in the folding dropped during the process or over
the lifetime of the platform – must be
Planning and Environmental Team at Maclay Murray & Spens, looks removed, or protected and monitored.
at the environmental issues surrounding this process and the Energy expenditure throughout decom-
missioning – including cleaning and, in most
precautions that are being taken. cases, transport back to shore – is also likely
to be high. New docks will likely need to be
constructed and the incineration of mate-

C
leaning, dismantling and transporta-
tion on a massive scale are an
inevitable part of any decommis-
sioning process, as are the extensive
preceding preparations and consultations.
Although each stage is tightly regulated by
both international and national legislation,
the oil and gas industry has effectively
been left with the unenviable task of bal-
ancing several competing concerns –
health and safety, changing technology,
cost and, of course, environmental issues.
The effects of E&P activity on the envi-
ronment are well understood, through
extensive studies on issues such as pro-
duced water, drill cuttings, naturally
occurring radioactive materials (NORM)
and coral formations. Unfortunately, how-
ever, this understanding does not yet
extend to the impact of the decommis-
sioning process on the environment,
which, at least insofar as the UK is con-
cerned, is still in its infancy.
So, what are the environmental issues
surrounding the decommissioning process?
More importantly, what precautions are
being taken to protect the environment?
The issues
The starting point must be to acknowledge
that decommissioning is not simply reverse
construction. Much of the infrastructure
present in the North Sea has been in place
since the 1970s/1980s and, in many cases,
the marine environment will have adapted
significantly to its presence. In environ-
mental terms, this raises a whole new set of
challenges.
The removal and disposal of hazardous
substances in the decommissioning process
has proven to be a significant issue for the
industry. For example, the presence of
NORM, a by-product of the processing and
refining of oil and gas extracted from
beneath the North Sea, means decommis-
sioning operations will inevitably include
the collection, transportation and disposal
of radioactive waste. Polychlorinated
biphenyls, a family of chemical present in
older oil and gas equipment, must also be
identified, registered, labelled and dis-
posed of. Furthermore, having frequently
been used to insulate pipe equipment, and
for its fire and heat resistant properties,
asbestos is also a common find at many off-
shore installations.
Some methods employed to dislodge
parts of the infrastructure can have serious
environmental consequences. The use of
explosives for underwater cutting and
demolition, for example, may pose a
serious threat to some marine mammals
which rely heavily on sound for finding
prey, detecting predators, communication
and navigation.
Cleaning ageing and corroding struc-
tures before bringing them back to shore
means the utilisation of blasting tech-
niques, as well as heavy chemicals, and
subsequent contaminative discharges into
the marine environment. There are also
issues surrounding the level of cleanliness
to be achieved and how far it is necessary
to carry out cleaning activities offshore.
The presence of drill cutting piles at the
foot of platforms has also long been recog-
nised as something which must be dealt
with at the point of structure decommis-
sioning. Usually the drill cuttings are simply
discharged into the sea close to the foot of
rials and subsequent transportation of the
by-products are all energy-intensive
processes. It has been estimated that
decommissioning a single large North Sea
installation requires as much energy as a city
the size of Aberdeen consumes in a month.
The world has also changed in the 40
years since many UKCS oil and gas structures
were erected. Public concern over the envi-
ronment has placed organisations under
unprecedented pressure to disclose,
account for and improve their environ-
mental performance. The Companies Act
2006, for example, includes provisions
which oblige company directors to have
regard to the environmental impacts of the
company’s operations, while quoted com-
panies must include details of any policies
relating to the environment in their busi-
ness reviews.
Decommissioning timetable
Of course, the oil and gas industry has been
aware of the increasing importance of
decommissioning for some time.
Predictions in the early 1990s that wide-
spread decommissioning was imminent
were scuppered by factors including a dra-
matic recovery in the price of oil, improved
production methods and favourable taxa-
tion. In fact, only 23 installations were
approved to be decommissioned during
this period, taking the UKCS decommis-
sioning total to a mere 34 facilities.
Another false alarm was triggered by the
sharp dip in oil prices in the latter half of
2008. A recent announcement from the
International Energy Agency to the effect
that demand for oil this year will be greater

30 PETROLEUM REVIEW OCTOBER 2009


Figure 1: Estimated decommissioning dates for the UKCS
Source: UK Department of Energy and Climate Change (DECC)
than previously expected, coupled with the
doubling of the price of oil in the first six
months of 2009, is likely to further delay
decommissioning.
Some analysts have estimated the
remaining oil reserves in the North Sea at
between 20bn and 22bn boe. Optimistic
estimates put this figure at over 30bn boe.
Unsurprisingly, the industry appears to be
continually pursuing ways to extend the
productive life of existing infrastructure.
Figure 1 shows the Department of
Energy and Climate Change (DECC) current
estimate of decommissioning dates for the
UKCS. The graph appears, however, to be
continually shuffling to the right.
Existing experience
Globally, most of the decommissioning
experience to date has come from the Gulf
of Mexico, where approximately 1,000
structures have already been removed.
However, most of these have been removed
from relatively shallow inshore waters in
the Gulf of Mexico and have limited appli-
cation when working in the rather greater
depths of the northern North Sea.
The UK does, of course, have some home-
grown experience of the decommissioning
process – the best-known of which is
undoubtedly Brent Spar. For 15 years the
Brent Spar, a floating structure made largely
of steel, served as a crude oil storage tank
and loading buoy. The 460-ft tall, 14,500-
tonne platform was located in the North
Sea, 118 miles off Lerwick in Scotland.
When Shell decided in 1991 to decommis-
sion the structure, its studies concluded that
the best practicable environmental option
was to sink the Spar to the bottom of the
North Atlantic, rather than bring it ashore,
cut it up and use its different parts in new
ways. The UK government agreed.
However, a protest by Greenpeace in
1995 – and the resulting costly boycott of
Shell’s products – prompted the company to
withdraw its plans to sink the Brent Spar. In
1999 the structure was cut into segments to
PETROLEUM REVIEW OCTOBER 2009
make the base of a ferry quay in Mekjarvik,
Norway.
OSPAR Convention
The impact of the controversy surrounding
Brent Spar was far reaching. In July 1998,
the OSPAR Convention came into force and
remains to this day the legal instrument
guiding international cooperation on the
protection of the marine environment of
the North-East Atlantic. OSPAR Decision
98/3 sets out the regime for decommis-
sioning disused offshore installations. There
is a general presumption that structures will
be completely removed from the marine
environment at the end of their economic
working life. Only in exceptional cases and
following a rigorous assessment and consul-
tation procedure may very large and heavy
installations occasionally be left in situ.
Decisions on such derogations are
reached in accordance with the principles of
waste hierarchy; a conceptual framework
which ranks the options for dealing with
waste in terms of their sustainability, begin-
ning with the premise that there should be
a reduction in the generation of waste.
Where this is not possible, re-use either for
the same or a different purpose should be
considered ahead of recovering value from
the waste through recycling. Only if none of
these offers an acceptable solution should
disposal be considered.
Furthermore, all steel installations placed
in the maritime area after February 1999
must be totally removed. Recent figures
suggest that of the 470 installations on the
UKCS, fewer than 10% of them will qualify
for derogation under OSPAR. As the proce-
dure is also far from static, it would also be
unwise to presume derogation will be an
option in the future.
In the vast majority of cases where dero-
gation under OSPAR Decision 98/3 is not a
possibility, a decommissioning programme
must provide for full removal for reuse,
recycling or final disposal of the installation
on land.
Alternative uses
It is possible that technological advances
will see at least some ‘mature’ structures in
the North Sea being put to alternative uses
in situ. Many installations have an expected
lifespan of some 100 years and are
designed to withstand the harshest condi-
tions of the northern North Sea.
Perhaps one of the most obvious possible
reuses is in the field of offshore wind
power. With up to a 20% higher wind
speed than onshore sources, in many cases
virtually no visual or noise impacts, and gen-
erally less turbulent wind conditions, there
are clearly significant advantages to har-
nessing offshore wind. On the negative
side, it is significantly more costly and must
feed into the national grid at its fringes
where transmission capacity is weakest. Of
note in this respect is the Talisman Beatrice
wind farm demonstrator project, which is
currently underway 12 miles east of
Helmsdale off the Caithness coast. This pro-
ject, which utilises the world’s first
deepwater* offshore wind turbines, is
providing 30% of the Beatrice Alpha oil
platform’s energy requirements. The
€50mn demonstration project has been
hailed as a crucial step forward in deploying
offshore wind power.
Other possible uses for redundant oil and
gas installations include gas or oil storage
sites, or for carbon sequestration. Tidal gen-
eration from existing infrastructure is also a
possibility, by relocating existing infrastruc-
ture which then forms part of the
construction materials for tidal stream tur-
bine units.
Going forward
The UK has in place a strong decommis-
sioning model, which has been designed to
minimise the effects of the decommis-
sioning process on the environment and;
all actors in the chain must adhere to and
acknowledge this.
Going forward, the role of environ-
mental issues in decommissioning can only
grow. The oil and gas industry will increas-
ingly be called upon to balance the
complicated and often competing factors
which make up the process as a whole.
There is no room for error. In the environ-
mental context at least, very few mistakes
will be tolerated. G
*Deepwater in this context means water
depths of 50 metres. The project is part of
DOWNViND (Distant Offshore Windfarms
with No Visual Impact in Deepwater) –
claimed to be Europe’s largest renewable
energy research and technology develop-
ment programme. The purpose of the
demonstrator project is to test the tech-
nologies and to develop a solution that will
make full-scale development economically
viable in deeper water distant from the
shore while minimising the visual impact of
wind power generation.
31
WP C Y O U T H F O R U M
Energising a future generation
Young professionals – the
industry’s future leaders –
from across the world will
come together to debate
whether a sustainable
future is within our grasp,
when the World Petroleum
Council’s Youth Forum
meets in Paris next month.
F
rom 18–21 November 2009, around
1,000 young professionals, stu-
dents, academics, thought leaders,
industry experts and non-governmental
organisation representatives (NGOs)
will gather for three days in Paris for
the next World Petroleum Congress
Youth Forum, which has been named
‘EnergiseYourFuture’.
EnergiseYourFuture is an initiative to
promote discussion and debate between
young professionals and existing leaders
and influencers about the challenges and
opportunities facing the energy industry,
and how to determine the roadmap
towards a sustainable future.
For several years, the World Petroleum
Council (WPC) has been committed to
supporting young professionals under
the age of 35 in their career paths. This
focus led to the creation of a youth com-
mittee gathering representatives of 17
countries, and the organisation of the
The next WPC Youth Forum will be held
in Paris next month
32
first Youth Forum, which took place in
Beijing in 2004. In view of its success and
the strategic importance of such events,
the WPC decided to host a Youth Forum
between each World Petroleum
Congress, which is held every three years.
This year’s Forum, organised by the
French National Committee of the WPC,
has secured the support of key industry
players with sponsors including GdF Suez,
Schlumberger and Total. Other major
industry companies supporting the event
include CGGVeritas, GEP, IFP, INPEX,
Maersk Oil, ONGC, Qatar Petroleum and
Sonangol.
Paris 2009
More than just an event,
EnergiseYourFuture is a three-phase
initiative with young people at its heart
from start to finish, from developing pro-
grammes to fostering debate with their
peers, academics and leaders:
G Phase 1 is already active with more
than 700 young professionals sharing
ideas and information about key
industry challenges and opportunities,
launching new debates, and building
the event programme on ‘Energise My
Network’ – a participative online tool
to develop a genuine network of pro-
fessionals across the world.
G Phase 2 brings the network together in
Paris in November.
G Phase 3 creates a genuine community
to overcome tomorrow’s challenges
and publicises a roadmap of the key
resolutions that emerge from the con-
ference.
The event will be structured around
three key themes:
G A reality check on tomorrow’s energy
Preview
landscape.
G An ethical and sustainable industry –
making it happen.
G Tomorrow’s leadership – matching
industry skills to the challenges.
Each theme will offer three levels of
discussion – keynote plenary sessions for
strategic thinking; workshops for an
in-depth view of the overall themes; and
a networking and knowledge sharing
area – the ‘Knowledge Café’ – in which
the Energy Institute will also be
involved. It is hoped the café will facili-
tate further discussion and interaction
between future leaders and the broad
range of industry experts present.
Key speakers will include Christophe
de Margerie, Chief Executive, Total;
Randy Gossen, WPC President; Gérard
Mestrallet, Chief Executive Officer,
GdF Suez; and Paal Kibsgaard,
President, Schlumberger Reservoir
G
Characterisation.
EnergiseYourFuture is open to every
young professional or student.
Participating in the Forum will give
attendees the opportunity to extend
their network and gain further under-
standing on key energy issues. For more
information and to register visit
PETROLEUM REVIEW OCTOBER 2009
 P ROFESSIONAL DEVELOPMENT Tr a i n i n g

Nurturing industry talent –

present and future
the need to develop its current and
future employees. This article will
examine a number of initiatives the
company has in place – designed not
only to strengthen the organisation, but
to ensure that those who make up the
Honeywell workforce become advo-
cates for Honeywell and the industry as
a whole.

Automation College
One of the most effective ways to invest
in employees is training. Honeywell cur-
rently operates in over 100 countries
worldwide, so it is important that any
training initiatives are as far reaching as
possible whilst also remaining accessible
and, most of all, relevant to the local
audience.
Accordingly, Honeywell launched its
Automation Colleges 20 years ago, and
there are now 27 located in 21 countries
around the globe. Each local college
draws from a curriculum of over 275
A key objective for any successful organisation is to be standard and custom courses, with full-
time, certified instructors available all
represented by employees who know their business and year round, delivering courses in mul-
tiple languages. In order to be
products inside out, understand their customers’ needs and responsive to local needs while also
ensuring quality and consistency, these
enthusiastically advocate solutions that can help both colleges are part of local service organi-
sations, but are coordinated by the
parties achieve their business objectives. However, this does Global Automation College organisa-
tion. For those who cannot attend the
not happen overnight, and unless organisations are colleges in person, certified instructors
are also available to deliver training
prepared to make the necessary investment in the either at customer sites or at other con-
venient locations.
development of their most valuable asset – their people – The Automation College also offers a
remote training service. This service
this can often be little more than a pipe dream. The process has an archive of over 700 technical
training modules delivered via the
industry is no different to any other in this respect, as Honeywell Intranet and supported by
an extensive web-based testing
Honeywell’s Michel Jennes, EMEA Automation College programme. In addition, the Auto-
mation College supports a continuing
Manager, and David Gillespie, Senior Manager – Technical series of webinars – live and recorded –
led by internal experts, with new
Training, explain. content added on a regular basis.
Since 2002, the College has also man-

I
f anything, the process industry is at the need to invest not only in current
aged a programme of qualifications and
more of a disadvantage than most industry talent but also in potential
certification for projects and services
due to the skills drain caused by baby recruits, attracting new skilled labour to
field employees. These programmes
boomer retirements and the lack of new the sector through as many channels as
combine web-based and classroom-
young talent coming in. This emphasises possible. Honeywell has long recognised
based training, testing and verified
experience on specific products.
Honeywell’s student competition is aimed at those with an interest in pursuing a
technical career. Winners of last year’s competition presented their proposals at the Expansion and evolution
Honeywell Users Group EMEA 2008 Source: Honeywell To meet the ever increasing demand

34 PETROLEUM REVIEW OCTOBER 2009

The latest of Honeywell’s Automation Colleges was opened in Brussels last year (left); students on Honeywell’s new JETPro
initiative, which is run in partnership with universities and designed to provide a ‘tailored’ learning opportunity (right)
Source: Honeywell
for technological training, Honeywell is
constantly looking for ways to expand
the Automation College programme.
The latest Europe/Middle East/
Africa (EMEA) training facility was
opened last year in Brussels with
brand new equipment and resources in
top of the range facilities. The Brussels
facility is also the EMEA coordination
centre, responsible for training
activities at all EMEA Automation
Colleges throughout the region. All
EMEA centres are also aligned with the
Global Automation College pro-
gramme to ensure consistency and to
present a unified experience to
customers.
Furthermore, the EMEA Automation
College programme has also invested
in a new online training management
system for both Honeywell employees
and customers, which provides real-
time access to the entire EMEA training
schedule through the internet or even
via a mobile phone, and simplifies the
course booking process.
Honeywell regularly evaluates ways
in which it can improve and evolve its
training experience. In recent years, the
combination of a rapid growth in
Honeywell solutions, baby boomer
retirements and travel restrictions has
led customers to request an even more
flexible training system. Drawing on
experience with shorter recorded and
real-time remote training, and the use
of virtual machines, Automation
College developers and instructors
have built and piloted a new genera-
tion of full-length, remote ‘blended’ or
‘hybrid’ courses. These typically include
real-time daily introductions and Q&A
sessions with the instructor, recorded
lectures, ‘how-to’ movies, labs, quizzes
and on-demand access to instructors
for assistance with lab issues. Following
successful pilot tests in 2008 and 2009,
PETROLEUM REVIEW OCTOBER 2009
the Automation College will roll out
additional remote classes in late-2009
and 2010.
Nurturing young talent
In addition to investing in current
employees, it is important to look to the
future of the industry as well. The Junior
Engineering Talent programme (JETPro)
in EMEA is a new Honeywell initiative
designed to nurture the next genera-
tion of process professionals. Launched
this year, the programme – which is run
in partnership with a number of univer-
sities – provides a tailored learning
opportunity that is beneficial to all
groups involved. For young engineers, it
provides the opportunity to work with
an industry leading organisation to
develop skills and put them to practical
use in real life scenarios. For Honeywell,
the programme operates as an ongoing
recruitment strategy that produces
young engineers with extensive experi-
ence and relevant skills, trained to an
exacting standard based on the latest
industry requirements.
The year-long programme is driven by
top Honeywell executives and combines
on-the-job and classroom-based
learning at both a local and EMEA level.
Much of the programme is run in con-
junction with the Automation College
in order to ensure consistency and each
participant in the programme receives
one-to-one mentoring for the duration
of the course from local, experienced
Honeywell engineers. At the end of the
12 months, many of the participants will
have the chance to join Honeywell
and put their newly acquired skills to
the test.
Programmes such as JETPro exemplify
how organisations can drive the
industry forward. Not only does the ini-
tiative help overcome the current
shortage of engineering graduates, it
also equips new engineers with the skills
needed to meet the current and future
requirements of the industry.
Alongside the JETPro initiative,
Honeywell also works closely with
universities, colleges and schools
throughout EMEA at a grass roots level,
to encourage interest in the industry
from a young age. In 2008, the company
launched an annual student competi-
tion aimed at those with an interest in
pursuing technical careers such as engi-
neering – but who are not yet in a
position to apply for more advanced
programmes such as JETPro. The compe-
tition challenges entrants to devise
innovative solutions to issues currently
being faced by the industry, with the
winners being invited to present their
ideas to industry figures at the
annual Honeywell Users Group EMEA
Symposium. Following a successful first
year, the recently announced 2009
competition focuses on how the
current economic and cost pressures
are shaping the control room of the
future. More information on this
year’s competition can be found at
www.honeywell.com/ps/hug
The future is in our hands
This article presents a number of ways in
which Honeywell is working hard to
invest in the future. The initiatives are
not complex in nature, but have been
planned and developed over time to
ensure maximum effectiveness within
the audience at which they are aimed.
Whether it is investing in the current
workforce to optimise its efficiency and
value, encouraging talented young
engineers to fulfil their full potential or
simply planting the seeds of inspiration
in the minds of the next generation,
now is the time to plan for the future of
both your own company and the
process industry as a whole. G
35
 P ROFESSIONAL DEVELOPMENT
A guide to getting ahead
Most people are familiar with
the term professional
development but people often
think that it isn’t something
relevant to them. Or perhaps
they know it’s something they
should be doing – but they are
unsure how to begin. There is
always a reason not to do
professional development and it
is easy to put off this part of
your career as day-to-day
activities take priority, but if
fitting it into your work life is
too difficult – then maybe it’s
time to rethink your own views
about professional
development. Kate Dunk,
Professional Development
Manager, Energy Institute,
explains.
P
rofessional development can some-
times seem overwhelming – but it
can be started with a few simple
steps.
‘I don’t know where to start’
Think about what you want to achieve in
the next six months or a year. Do you
want to get a new job, learn a new skill or
get better at something you already do?
Set yourself two or three attainable goals
that clearly state what you want to
achieve. Then think about some activities
you can do to achieve your goals.
The most important thing is to decide
what you want to achieve and plan how
you are going to get there. Your planned
activities will give you a good start and
having goals clear in your mind will help
you recognise other relevant professional
development opportunities that come
up. When you get used to the pattern
of planning, doing and reflecting (see
Figure 1), you may want to consider a few
longer-term goals to work towards.
Otherwise stick to working in six- or
36
12-month blocks.
‘I don’t have time’
Professional development doesn’t have
to be ‘extra’ to your work activities.
Taking on a new project, new responsibil-
ities or just learning something new is still
a form of development. Anything that
you learn or develop from counts – even
if this is a regular part of your work. If you
can set aside 30 or 60 minutes each week
to concentrate on development activities
then this will soon add up. Use this time
to read a journal, conduct some research
or talk to a colleague that can help you
learn something new.
‘I can’t afford training’
Professional development doesn’t have
to be all about formal training courses. If
the goals you have decided to work
towards are compatible with your work
objectives then you may be able to get
your company to support some develop-
ment activities for you. However, if there
is no budget available there are still other
activities that can be done. Consider shad-
owing a colleague, conducting your own
research through books or the internet,
or taking part in free activities – such as
Energy Institute (EI) branch events.
‘I don’t get any support’
Carrying out professional development is
always easier if your company is able to
support you. Think about how your pro-
fessional development goals will benefit
you in your current role and explain this
to your line manager. The company will
benefit from having better skilled staff,
so it is in their interest to help you. Even
if they cannot support you financially,
your manager may be able to help you
take part in appropriate activities at work
that will help you achieve your goals.
You can also make use of other support
networks. The EI will provide support and
guidance on professional development,
and you can meet energy sector col-
leagues at EI events. If there are other
people at your work in a similar position,
then help each other by discussing your
plans and sharing information.
‘I don’t need to do professional
development’
Everyone needs to do professional devel-
opment. Even if you have been doing
your job for years then you can always
benefit from trying or learning some-
thing new. Even if you are totally
confident that you are 100% up-to-date
with what is going on in the sector and
you could not improve your own skill
levels at all, then you may want to con-
Energy Institute
sider learning something different. This
will ensure that you continue to chal-
lenge yourself and it will make your job
more interesting.
The EI and you
The EI is committed to helping members
carry out professional development
through a variety of activities. In 2008,
the EI published the results of its skills
survey. This compiled views from a large
number of respondents and addressed
the skills shortage issues in the industry. It
also offered recommendations for solving
these issues and developing a sustainable
recruitment strategy. The EI continuously
carries out research into skills topics and
the latest research will examine the high-
level skills shortage in the energy sector.
The EI assists candidates to record their
professional development in a simple way
that maximises their learning without
being overly onerous. The online profes-
sional development system provides
candidates with an easy-to-use system for
logging their professional development
against the membership competencies.
After candidates have achieved a mem-
bership grade then a small sample will be
asked to submit a continuing professional
development (CPD) return each year.
In continuing to promote professional
development as best practice, the EI
encourages individual members to take
part. The EI also wishes to remind
employers of the value of staff profes-
sional development and encourages
them to support their employees in
undertaking development activities. The
CPD objectives are developed in a way
that should complement the individual’s
career and business goals and be of equal
value to both the employer and the
employee.
Figure 1: Following the pattern of
professional development
continued on p38 ...
PETROLEUM REVIEW OCTOBER 2009
 P ROFESSIONAL DEVELOPM E N T
... continued from p36
The EI can help suggest activities for
members to do as part of their CPD and,
where possible, CPD opportunities at EI
events and activities are provided – such
as giving presentations at events,
attending accreditation visits and serving
on committees.
EI technical training
The EI is committed to expanding the
range of CPD opportunities provided for
its members and closely monitors the out-
comes of the skills research to develop
new initiatives needed by the sector. The
2008 Skills Needs report discovered that
almost four out of five respondents
believed that technical skills were a key
shortage area. In response to this, the EI
has launched a new training strand based
on technical publications.
This training will build on two EI
strengths – its position as a key training
Growing with STEM – introducing the industry to a brand new generation
August 2009 saw the start of the annual
STEM In The Pipeline project run by char-
itable organisation TechFest-SetPoint.
This oil and gas industry project for
teams of school pupils was originally
developed with a team of BP young pro-
fessionals in 2006. This year, 15 teams of
17-year olds from secondary schools in
the Aberdeen area are taking part in the
programme.
STEM In The Pipeline is split into three
parts – an introductory day in August, a
project to produce a field development
plan between August and November
and finally, in December, a presentation
day.
At the recent introductory day, hosted
by the University of Aberdeen, young
industry professionals from BP, Chevron
and ConocoPhillips gave pupils an insight
into the sector with talks on geology,
drilling and reservoir, finance and
processing. TechFest-SetPoint organiser
Vivien Ellins believes it is the enthusiasm
and energy of the young professionals
that makes the project so successful.
‘They recognise the opportunity to
inspire the next generation. They know
what influenced them at the same age.
They also get a chance to practice their
own presentation skills.’
A spokesman from Chevron believes:
‘It’s also good for our young employees
to engage with pupils just a few years
their junior, to demonstrate their enthu-
siasm for the industry and share their
reasons for their career choices and their
experience so far.’
The young professionals continue to
mentor the school teams throughout the
subsequent weeks as the school teams
38
provider for the energy sector, and the
wealth of technical knowledge held by
the organisation. Initial topics will focus
on the most popular EI publications and
will continue to ensure that energy staff
are working to the highest safety and
competency standards.
The first technical training course was
piloted earlier in 2009 and was based on
the API/EI 1550 International Standards
handbook, Essentials of Aviation Fuel
Filtration. This interactive workshop was
attended by experts in the field and
extensive feedback was collected to make
sure that all aspects of the content would
meet the needs of potential delegates.
This workshop is now running as an open
course with the first dates taking place in
Frankfurt and Vienna in November.
Market research is currently being con-
ducted into several other areas of the EI’s
technical expertise to determine which
topics should be prioritised for the devel-
complete their work. The field develop-
ment plan is challenging for the pupils,
the tasks cover evaluating seismic charts
to calculate STOIIP (stock tank oil initially
in place), production profiling, separator
design and calculating carbon emissions.
Finally, at the presentation day, the
teams exhibit and present their projects
to a panel of senior industry profes-
sionals. The winning teams are awarded
prizes and all participants are presented
with a British Science Association Silver
CREST Award.
Over the course of STEM In The
Pipeline, the pupils undergo significant
development of their personal and team
skills. The project also opens their eyes to
the range of careers in the sector. Stuart,
a pupil from Banff Academy, says: ‘This
project has influenced me into following
Energy Institute
opment of training courses.
As well as classroom-based courses the
EI is also looking into making suitable
training courses and events available
online. This will make EI services acces-
sible for people that are not able to travel
to attend events. The EI library has also
introduced Knovel, a new service for
members allowing online access to a
range of reference books on energy
related subjects.
If you need any support or guidance on
carrying out professional development
then EI staff are always on hand to advise.
This may be about development activities
in general or working towards a profes-
sional membership grade. G
Information, including a list of approved
training and professional development
providers, can be found on the main EI
website at www.energyinst.org or the
EI’s careers and education website
a career in the oil industry and given me
a lot of knowledge and experience to
take into that career.’
Stem In The Pipeline can often help
pupils finalise choices for further study by
giving them an insight into a realistic
industry activity. Kathy, a pupil from
Inverurie Academy, says: ‘It has made me
more confident that I do want to
pursue a career in chemical engineering
by letting me see and experience what it
is like.’
Chevron believes: ‘The value of a pro-
gramme like STEM is that it provides
some practical context for the subjects
taught in schools, and helps these young
adults understand the relevance of
maths and science in the world of work
at a time when they are considering their
own futures.’ G
PETROLEUM REVIEW OCTOBER 2009
 C RUDE OIL Quality measurement

Loss reduction through

technology
With crude oil prices stabilising at over $60/b, loss control is high conducted annually and witnessed by the
local authorities to certify systems for import
on the agenda of many companies. The Energy Institute’s HMC-4(A) duty. In addition to certifying equipment
performance, the data from these tests pro-
Marine Oil Transportation Database Committee has been collecting vides a wealth of comparative information
about the relative performance of different
and analysing world crude oil shipping data for over 20 years. Its system types.

annual report, published last month in Petroleum Review, shows a Proving process
The process of proving a sampling system is
continued reduction in crude oil losses (see Figure 1). This is, in briefly outlined below. It involves the
injection of a metered quantity of water into
part, due to the modernisation of the fleet and better operating a measured flowing pipeline. It is a pre-
requisite to successful testing that the base-
procedures, but it is mainly due to the improvements made in line (background) water content of the oil
does not change significantly during the
loading and receipt terminal quality measurement systems, write process and this requires due care and vali-
dation using pre- and post-test baseline
Jon Moreau and Mark Jiskoot of Cameron Measurement Systems. samples. (See Figure 2).
The pre-, post- and water injection

M
easurement of oil comprises both
quantity and quality. Custody
transfer valuation is based on the
‘useable’ oil, so both measures are significant
to trade and integrity. Internationally recog-
nised standards exist for crude oil quality
measurement during custody transfer, pri-
marily for water content and density.
Quality measurement system design and
laboratory equipment, handling techniques
and analysis methods have improved
significantly over the last 20 years.
Simultaneously, suppliers and users have
worked together to develop/validate and
improve measurement performance. One of
the most significant steps in achieving this
has been the collation and evaluation of
water injection ‘proving’ tests. This large
(often independently validated) and rapidly
growing data set enables a comparative
evaluation of the performance of custody
transfer sampling/online measurement sys-
tems. Proving the accuracy of an installed
Figure 1: HMC-4(A) 2008 marine loss data
quality measurement system is a challenge,
proving samples are analysed in the labora-
even more so than proving a metering
tory. Each test generally comprises two runs
system. It requires adjustment of a physical
and the results are used to calculate the
property (in this case water content) and val-
system performance. These are evaluated
idating that the system accurately measures
against the pass/fail criteria in the standards.
that change. However, unless an installed
There is a variance between the methodolo-
system has been proved and certified as
gies and tolerances in the current standards,
compliant with the standards, its use to arbi-
which it is hoped will be resolved shortly as
trate claims or for custody transfer becomes
the EI and API are developing a single joint
questionable.
standard under the Phoenix Agreement. The
Over the last 20 years, the in-situ proving
water injection proving process validates not
of quality measurement equipment, such as
only the measurement system but also the
samplers, in accordance with the standards
installation, laboratory and operating proce-
has become common practice. The standards
dures used during the test (ie the complete
define the process and acceptable perfor-
custody transfer sampling process).
mance limits for a sampling system when
Ideally, comparative data would comprise
comparing laboratory results for a baseline
a large number of repeated tests of the same
sample with those containing a known
system. However, as this is not practical, the
injected water quantity. Preferably, this
collated proving results of over 200 different
process should be independently witnessed
sampling systems from various custody
to ensure that the procedures are followed
transfer locations worldwide can be used to
rigorously and the results properly docu-
reveal interesting trends.
mented. In some countries, proving tests are
Historically, crude oil was a relatively
cheap commodity and sampling system
designs were primitive, with little attention
paid to the homogeneity of the water in the
oil (ie mixing). However, mixing has now
been recognised as the weakest element in
the quality measurement chain. This is nor-
mally addressed by adding a ‘mixing
element’ such as piping (ie an expansion
loop, etc) or a static or power mixer to
ensure that the pipeline contents are suffi-
ciently mixed. It has been thought for some
time that there is a relationship between the
size of the sample off-take opening, water
droplet sizes and sampler performance, but
until now there was very little data to sup-
port this. (See Figure 3).
There are two fundamental designs of

40 PETROLEUM REVIEW OCTOBER 2009


Figure 2: Water injection proving process
sampling/quality measurement system,
regardless of the technology used to
homogenise the pipeline contents:
An in-line sampling system – where an
insertion probe is installed directly into the
pipeline to extract grab samples which are
then discharged into a sample receiver,
mounted in a housing located near to the
sample probe (see Figure 4).
A bypass (fast) loop sampling system –
where a grab sampler is mounted in a
pumped bypass loop which takes flow from
Figure 3: There is a relationship between
the size of the sample off-take opening,
water droplet sizes and sampler
performance
Figure 4: In-line sampling system
PETROLEUM REVIEW OCTOBER 2009
the centre of the main pipeline. Grab sam-
ples are extracted from the loop and
discharged into the receiver, which is
Figure 5: Fast-loop sampling system
Figure 6: In-line sampling system accuracy
mounted in a housing through which the
fast loop passes (see Figure 5).
One of the major differences between
these technologies is that the fast loop
system allows the use of a larger sample inlet
size. This, in theory, enables a more repre-
sentative sample to be extracted.
Collating the data from proving tests by
type of measurement system gives a better
insight into this relationship. For validity, the
only data shown here are for sampling sys-
tems that have been certified for custody
transfer. The accuracy/measurement error of
a system that has not been proved and certi-
fied could be significantly higher than the
figures shown. The water injection proving
data enables us to look at the performance
of these two types of system independently
to evaluate any performance difference
between these technologies. The basis of the
proving tests is absolute water content and
the accuracies shown in this article have
been calculated to be relative to the actual
water content.
Looking at the performance for inline
systems, two things are evident. Firstly, the
41
 C RUDE Quality measurement

form consistently better than others; how-

Figure 7: Fast loop sampling system accuracy
average (mean) accuracy for these systems
shows a clear systematic bias, with the
mean lying at –0.0318% (ie an average
under-reading of water). Secondly, the
accuracy (95% confidence) for an inline
system is +0.05%/–0.113%, with a clear bias
towards a negative reading (see Figure 6).
When looking at fast (bypass) loop sys-
ever, this doesn’t mean that any design of
sampling system could not pass a water
injection proving test. It does outline the
importance of proving and certifying what-
ever equipment is used in accordance with
the international standards. Quality mea-
surement technology has moved along
significantly in the last 25 years. It is not
enough to simply suggest that sampling
systems meet standards, it must now be
proved.
These results show that well designed
fast loop sampling systems generally have
lower uncertainties and reduced systematic
bias than conventional inline systems. As a
result, this technology is being increasingly
deployed and the better measurement
it provides will continue to drive some of
the future improvements and reduction
in losses that the HMC-4(A) Committee
strives towards. G
tems, the larger inlet size of this type of
system delivers not only a reduction in mea- Disclaimer
surement uncertainty, but also reduces the
The EI as a body is neither responsible
systematic negative bias to almost zero
for the statements or opinions pre-
with the mean of –0.0003% and an
sented in this article nor does it
accuracy of +/–0.078% (95% confidence)
necessarily endorse the technical
(see Figure 7).
views expressed.
Some designs of sampling system per-

Oil supply and

energy security
One-day conference
Thursday 26 November 2009, Energy Institute, 61 New Cavendish Street, London
The Energy Institute’s annual one-day conference examining the issue of oil depletion will this year consider data and calculations
indicating the imminence of a peaking of oil flows and investigate the challenges lying ahead. Speakers from both government and
industry will discuss findings from recent key reports, and ample time is scheduled for questions and discussion of these issues.
Chaired by Professor Martin Fry FEI. Confirmed topics and speakers include:
Fifty years of oil depletion The UKERC review of global oil depletion
Dr Roger Bentley MEI, Visiting Research Fellow, Steve Sorrell, Senior Fellow, Sussex Energy Group,
Department of Cybernetics, University of Reading University of Sussex

‘Megaprojects’ oil projects analysis Update on 2008 ‘Oil Crunch’ report

Chris Skrebowski FEI, Consulting Editor, Petroleum Review Simon Roberts, Associate Director, ARUP

Achieving UK energy security Oil audit

Chris Barton, Head of International Energy Security, Simon Snowden, Lecturer in Operations and Supply Chain
Department of Energy and Climate Change Management, University of Liverpool Management School

Medium Term Oil Report 2009 Overlap between climate change and energy supply issues
David Fyfe, Head of Division, and Editor – Oil Market Dr Jeremy Leggett FEI, Executive Chairman, Solarcentury
Report, IEA
Impact of natural gas depletion on oil production
Energy supply challenges Robert MD Howard, Senior Commodities Risk Consultant,
John Hemming MP, Chair, APPGOPO Advanced Commodities Global Consulting

To register your interest or for further information please contact:

Gemma Wilkinson, Events Organiser, Energy Institute t: +44 (0)20 7467 7174 e: gwilkinson@energyinst.org

www.energyinst.org.uk/events

42 PETROLEUM REVIEW OCTOBER 2009

 E &P O ff s h o r e E u r o p e

Energy at a crossroads
cause older fields to be shut-in with
Attracting 49,000 people to the European oil capital recoverable, but no longer economical,
oil still in place. He also said that policy-
Aberdeen, this year’s Offshore Europe was – once again – makers should be looking at technolo-
gies like carbon capture and storage
bigger than it had ever been before. Louise Smith reports. that can be implemented quickly.
Andrew Gould, Chairman and CEO of
Schlumberger, questioned whether the

T
he biennial event held last month
in Aberdeen, attracted oil and gas
sector professionals from all over
the world, to meet, discuss and view at
first hand the latest technology and
solutions available to the industry. The
theme of Offshore Europe 2009 (OE09),
‘Energy at a crossroads’, provided an
ideal platform to debate the matters of
the moment – where do we go from
here to tackle the twin goals of energy
security and climate change? Heralding
the official start of OE09, Tuesday
morning’s plenary session saw speakers
from industry and government address
this main theme.
Connie Hedegaard, the Danish
Climate Change Minister and organiser
of this December’s United Nations cli-
mate change conference, called on the
industry to raise its game and help
develop a decent energy infrastructure
as quickly as possible. Oil and gas com-
panies that embrace the Copenhagen
agenda first will be first to prosper, she
noted. The industry’s technical know-
how and engineering skills should be
harnessed to win a share of new off-
shore renewables markets, Hedegaard
The next generation of subsea engineers? Dave Peter, GE Oil & Gas Engineering and
Technology Manager – Training, explains the purpose of a subsea tree to pupils from
Robert Gordon’s College and Aberdeen Grammar school (see p46). GE had launched
its SVXT subsea tree (pictured) at the exhibition earlier in the week
Source: GE Oil & Gas
told delegates at the conference. There
is a window of opportunity for a low
carbon future – but it is now. A deal in
December cannot be postponed, she
warned.
Lord Hunt, UK Minister of Energy and
Sustained Development, followed
Hedegaard to say that the transition to
a low carbon economy is a necessity,
and that the oil and gas industry are not
at odds to it – they must co-exist
together, as hydrocarbons have a crit-
ical role to play as the mainstay energy
source of the near future. He urged
companies to take advantage of the
inevitable transition. Hunt also con-
firmed the launch of a new UK offshore
licensing round in early 2010.
John Manzoni, President and CEO,
Talisman Energy, said there was an
appropriate role for government but
they must step up to it, and wherever
possible use a global integrated
approach. These lessons are applicable
to both energy and climate change. He
said that business must respond to both
government and constituents regarding
carbon management. He cautioned
that the carbon price, if applied, would
oil and gas industries had the correct skill
sets to pursue renewable energy sources
– but did admit the industry would have
some contributions to make. Looking at
climate issues, Gould said it wasn’t just a
question of technology, but also one of
infrastructure. The key is to acknowl-
edge that governments have a critical
role – for the industry to innovate, the
government must make an appropriate
framework, he stated.
The busy conference programme also
included over 100 technical sessions,
short courses and a number of topical
lunches taking place throughout the
week. Speaking at one such lunch,
Christophe de Margerie, Chief
Executive of Total, told delegates that
governments needed to ‘be careful’
with carbon. ‘We are all concerned
about the environment, but we need to
know what will be the price,’ he said.
He also expressed concerns that the
Copenhagen conference would see
European states imposing the toughest
targets on themselves – while other
countries got off more lightly.
Life in the old girl yet
Speaking at a business breakfast
meeting, the Energy Institute’s Chief
Executive, Louise Kingham FEI,
explained how the North Sea still has
many advantages over other regions –
and still has a lot to offer: ‘The UKCS is
40 years old and accompanying middle
age is the inevitable mid-life crisis, but
what we forget in our youth obsessed
time is that with maturity comes experi-
ence.’ The industry’s maturity brings
with it a skilled workforce as well as the
systems, standards and working prac-
tices that have been built up over the
last 40 years, she said.
However, one of the major challenges
faced by the UKCS is how to attract new
funding and maintain current invest-
ment in the industry. Investment in the
North Sea has declined for the third
successive year in 2009. ‘The casualties
of low investment include R&D into
new and exciting technologies. This is
absolutely necessary for the industry to
maintain a competitive edge and also
help manage the costs associated with
North Sea activity,’ Kingham stated.

44 PETROLEUM REVIEW OCTOBER 2009

Energy excellence
UK Trade & Investment (UKTI) held a UK
Energy Excellence seminar at OE09, to
coincide with the launch of its updated
website – www.ukenergyexcellence.com
UK Energy Excellence is a cross-
industry, cross-government initiative led
by the UKTI and senior members of the
energy industry, which aims to link up
the wide and varied elements of the UK
energy industry (partner organisations
include the EI), and provide a single
voice to communicate the best of UK
energy engineering to the rest of the
world. The website is a way for overseas
companies to understand, learn and
access the UK industry, and for UK com-
panies to get in touch with potential
customers and partners.
The UK has always been a ‘quiet
achiever’, Lord Browne, former BP Chief
Executive and President of the Royal
Academy of Engineering, said at the
seminar. Now it is time to fly the flag for
UK excellence and show the rest of the
world what we can do, he said.
New technology round-up
In 22,620 sq metres of exhibition space,
there were over 1,500 companies on
display. Many exhibitors used OE09 as
the ideal global stage to launch new
products and services for the industry.
GE Oil and Gas (www.geoiland
gas.com) launched the VetcoGray SVXT
S-Series subsea tree, which merges hori-
zontal and vertical tree technology –
reducing weight by 20%, decreasing
height and also delivering functionality
in a pre-engineered, pre-configured
‘modular’ way. The tree – designed and
manufactured in Aberdeen and aimed
for use predominantly in the North Sea –
achieves low-cost installation by enabling
deployment using standard offshore
jack-up drilling rigs without the need for
major modifications. Its features include
smaller tree and fisher-friendly wellhead
protection structures, as well as a barrier
approach that removes the need for a
separate tree cap.
Schlumberger announced the release
of the TuffTRAC cased hole services
tractor (www.slb.com). It is claimed that
this new tractor is the industry’s
shortest, and the only tractor with full
reverse and active traction control capa-
bilities. TuffTRAC delivers more than
40% efficiency over conventional trac-
tors resulting in more pushing power
downhole, the company says. Its
reversing capability reduces fishing risk
and its modular design makes it easy to
deploy in short rig-up situations.
Non-destructive testing (NDT) specialist
Applus RTD (www.applusrtd.com) show-
cased what is claimed to be a ‘world first’
subsea inspection system. Designed to
PETROLEUM REVIEW OCTOBER 2009
Aber-green
Scottish First Minister Alex Salmond chose OE09 to unveil plans to secure
Scotland’s position as a global energy hub. Announcing the new Scottish Energy
Advisory Board, Salmond said he intends to make sure Scotland – and Aberdeen
in particular – is able to expand its position as an oil and gas hub to encompass
renewable energy as part of the shift towards a greener future.
Meanwhille, an ambitious public-private partnership designed to create
the world’s greatest concentration of energy technology companies, housing
and leisure facilities – named ‘Energetica’ – along a 30-mile coastal strip
between Aberdeen and Peterhead, was also launched at the show. Aberdeen
Council, Aberdeen City Council and Scottish Enterprise developed the
idea, joining together to form ACSEF (Aberdeen City and Shire Economic Future,
www.acsef.co.uk). The aim is to create a high energy, low carbon
lifestyle destination that will attract people and businesses from around the
world. It was announced that Energetica is now an integral part of the
region’s strategic development plans, approved by the Scottish
government. Tom Smith, Chairman of ACSEF, is pictured at the launch.
Local Aberdeen firm FMC Technologies (www.fmctechnologies.com) unveiled
its Greenshoots Fund at OE09, with Jim Mather, Scottish Minister for Enterprise,
Energy and Tourism, present at the launch. Greenshoots is designed to partially
mitigate the environmental impact resulting from the manufacture, sale
and distribution of the company’s core product – subsea trees. The fund will
help local projects reduce carbon emissions and deliver economic benefits to the
community.
ensure operational suitability and pro- minimising potential leak paths
long the life of vital assets, Applus RTD in process instrumentation was
has developed what it says is the first fully unveiled by the instrumentation
customisable NDT phased array solution products division of Parker Hannifin
by combining and integrating ultrasonic (www.parker.com), a specialist in
phased array and time of flight diffrac- motion and control technologies.
tion techniques with alternating current Solutions for all standard connectivity
field measurement. and functional requirements from the
Autodesk (www.autodesk.com process line to the instrument are
/autocadplant3d) – a specialist in 2D available in Parker’s range, a founda-
and 3D design and engineering soft- tion of which is the elimination of
ware – unveiled AutoCAD Plant 3D leak-prone taper thread connections
2010, a new software product purpose- and with it any need for PTFE tape or
built for the design, modelling and doc- anaerobic sealant.
umentation of process plants. AutoCAD A new development in swellable elas-
Plant 3D’s specification-driven tech- tomers was also launched at OE09 by
nology and modern interface simplifies Rubberatkins (www.rubberatkins.com).
modelling and editing of piping, equip- The company has developed a short
ment, support structures and other swellable sealing system which is capable
plant components, allowing project of holding pressures of up to 10,000 psi
teams of all sizes to increase produc- and temperatures of 120°C. At only one
tivity and improve accuracy and coordi- foot in length, current swellable tech-
nation of shared information. nologies can be up to 30-ft long. The
A comprehensive product range for new product is designed to provide a
45
 E &P
Sir Chris Hoy at the Lloyd’s Register stand
Source: Lloyd’s Register
more manageable solution for annular
sealing in the presence of oil or water.
Belzona Polymerics, a company which
designs and manufactures industrial
protective coatings and polymer
repair composites (www.belzona.com),
unveiled Belzona 5841, part of a range
of coatings for the repair and protection
of metal surfaces suffering from CUI
(corrosion under insulation). The
solvent-free coating can be applied
directly to surfaces operating between
30°C and 80°C, with minimal surface
preparation.
Meanwhile, the ITF (www.
oil-itf.com), the oil industry technology
facilitator, issued two fresh calls for pro-
posals at OE09 – it is looking specifically
for technological solutions to eliminate
the need for production logs and
retrofit technology in wells that have
been installed without gauges; and for
proposals for improving the operating
limitations associated with light weight
intervention vessels (LWIV) abandon-
ment. Celebrating its 10-year anniver-
sary at the show – the organisation has
successfully delivered to the market over
137 collaborative oil field technology
projects since it was formed in 1999.
The Cromarty Firth Port Authority
(www.cfpa.co.uk) also exhibited. The
Port, which is situated in north-east
Scotland, offers a range of services to the
offshore industry and is now one of the
UK’s premier inspection, repair and main-
tenance (IRM) facilities. In the last 30
years, over 600 rigs have visited the Firth
to undertake IRM works and take advan-
tage of the Port’s sheltered anchorage.
Up to 18 rigs at anchor can be accommo-
dated, as well as providing a leading ser-
vice base for the subsea industry. As North
Sea day rates drop, more and more rigs
are expected at the Port, Port Manager
Captain Ken Gray said at the exhibition.
Subsea activity has also declined but is
expected to pick up in 2H2010.
46
A Hoy!
Olympic cycling hero Sir Chris Hoy joined
Lloyd’s Register at OE09 to drive home
to the oil and gas industry the winning
formula for success and achievement.
Lloyd’s Register provides asset safety
and integrity services for challenging
and complex assets across the energy
supply chain, often in remote areas of
the world. Iain Light, Group Energy
Director, Lloyd’s Register, said: ‘Chris is a
fantastic example of a committed and
dedicated athlete whose focus on win-
ning has seen him not only become an
Olympic champion, but a record-beating
one at that. He embodies the Lloyd’s
Register’s ethos of ‘life matters’ as he is
focused, prepared and determined to be
the best.’ Delegates picked up cycling
tips from the Olympic champion, and
were able to test their cycling skills over
a 0.5 km timed sprint.
Enter the dragon
Oil & Gas UK held a Dragon’s Den-style
breakfast briefing on Wednesday, which
challenged young oil and gas profes-
sionals to find ways to improve the cur-
rent strategy for attracting, developing
and retaining the ‘next generation’ of
workers. Proposals were heard and
debated by four ‘dragons’ – Bob Keiller,
Chief Executive of PSN and Oil & Gas UK
Co-Chair; Deidre Michie, Supply Chain
Manager, Shell; Jonathon Roger, Chief
Operating Officer, Venture; and Thomas
Thune Andersen, Chief Executive, Maersk
Oil and OE09 Chairman.
The first proposal, a branding exercise,
aimed to address concern that the pool
of young professionals from which the
industry can recruit may be restricted
because the sector does not market itself
and the exciting opportunities it has to
offer to a wide enough audience. The
Sarah Butcher, a Task Group member who faced the ‘dragons’ at Oil & Gas UK’s
breakfast meeting. Sarah presented the first proposal, which called for the industry
to be rebranded to entice a new generation of industry professionals
Source: Oil & Gas UK
O ff s h o r e E u r o p e
second proposal, the launch of a next
generation Code of Practice and accom-
panying award system, was developed in
response to the belief that fostering a
better understanding and acting on the
needs, expectations and aspirations of
the next generation will increase their
attraction and help maximise retention
and productivity across the workforce.
‘The outcome from the conference pro-
vides us with a template for how the oil
and gas industry can meet its future chal-
lenges and opportunities, inspired by the
views and ideas of the next generation,’
Andersen said.
School’s out
On the closing day of OE09, OPITO – The
Oil & Gas Academy invited young people
to explore the diverse range of careers
the industry has to offer by staging its
flagship interactive careers and lifestyle
event. ‘Energise Your Future’ gave oil and
gas organisations direct access to those
already studying the key science, tech-
nology, engineering and maths subjects
needed to fill the industry skills gap in the
future.
More than 30 companies including BP,
Shell, ExxonMobil, Schlumberger, Total,
Technip, Cameron and Maersk Oil took
part, each providing a interactive activity
to raise awareness of the wide variety of
careers open to young people in the
industry. Around 350 pupils aged 15–17
from schools across Aberdeen City and
Shire got to try out a range of hands-on
activities such as testing their skills on a
crane simulator, exploring the inner
workings of a Christmas tree, piloting a
model helicopter and discovering what
life is like on an offshore oil platform. 
The next Offshore Europe will be held
at the AECC on 6–8 September 2011.
PETROLEUM REVIEW OCTOBER 2009
GAS LNG

LNG and EU
Cost comparison
The European market for LNG is devel-
oping at a time when the global LNG
market is changing markedly, making

energy security
LNG less likely to be the panacea to
Europe’s energy security needs than the
Commission may have envisioned. The
LNG chain is far more capital intensive
than the pipeline link, with liquefaction
World LNG production and export are concentrated accounting for the bulk of the costs. Since
2005, costs along the whole LNG chain
within a handful of countries. The Middle East is where have been increasing, with liquefaction
costs reported to have tripled. Although
the fastest growth in production and exports is taking construction costs for regasification
place, with Qatar alone expected to account for 25% of (regas) terminals have also risen, they
are relatively cheaper to build – conse-
global LNG supply by 2015. The EU receives all of its LNG quently, regas capacity exceeds
liquefaction capacity in the LNG market.
from the Gas Exporting Countries Forum (GECF), eight of The DG TREN paper puts total global LNG
production capacity at 268bn cm/y, total
whose 15 members are OPEC oil producers. With the production in 2007 at 235bn cm and the
worldwide total send-out capacity at
exception of Egypt, Norway and Trinidad, all the other regasification terminals at 588bn cm/y.
According to the JRC report, the tight
GECF members who supplied Europe with LNG in 2007 supply situation over the period of its
study had led to higher prices, which the
were OPEC members. Mojgan Djamarani reports. report says casts into question the
affordability of LNG and its security of

T
he LNG market has traditionally paper by DG-TREN (EU Commission’s supply value. In Europe, the lower com-
centred on Asia, led by the high Directorate-General Energy and parative gas prices will further
demand in Japan (39%) and South Transport). A 2009 study by the EU undermine LNG’s ability to compete with
Korea (16%). The US represents a lim- Commission’s Joint Research Centre (JRC) pipeline gas. However, judging from the
ited but rapidly growing market, with predicts that by 2030 Europe’s share of cost comparison provided by Table 1 for
the Energy Information Administration global LNG trade will rise to 35%. Some 14 countries around the world, con-
(EIA) predicting US LNG imports to seven more regasification terminals are sumers in a country like Spain, which is
increase by 110% in 2008–2010. being added to the existing 13, which already heavily reliant on LNG, has per
[However, more recently, US LNG will increase Europe’s send-out capacity kWh costs that compare favourably with
imports have fallen sharply, down from 96bn cm/y (78mn t/y) by 61bn cm/y most other European countries that rely
around 25% in the last three to six (50mn t/y). The UK will have 42% of the on pipeline gas. [More recently, over the
months alone on low US prices. In fact, new capacity. The South Hook plant in last year, the situation has changed con-
2008 LNG imports into the US, at 9.94bn Wales that will begin operations at year siderably, with both the LNG and
cm, were 54.4% down on 2007 imports end will be Europe’s largest. pipeline markets becoming well supplied
of 21.82bn cm – Consulting Editor] LNG currently constitutes 15% of EU and lower priced – Consulting Editor]
In Europe, the European Union (EU) gas imports. The main suppliers are Producers have been reconsidering
has been urging its member states to Algeria 34%, Nigeria 18% and Egypt their export strategies to focus on supply
improve their access to LNG in order to 15%. Spain, the world’s third largest side management in order to maximise
break Russia’s stranglehold on EU market for LNG, is Europe’s number one profits. In the case of Europe, the diffi-
pipeline gas supplies. LNG is seen as consumer. culties in gauging gas demand as a result
diversifying the EU’s natural gas sup-
pliers, bringing greater flexibility and Rank Country Cost Y-on-y
security to its energy market. Europe is in 2007 In 2006 (cents/kWh) %age change
well positioned to receive LNG from 1 1 Denmark 7.437 +0.30
West Africa and the Mediterranean, and 2 3 Sweden 4.519 –3.65
has a geographical advantage over the 3 2 Germany 4.320 –11.70
US but not the Asian markets for LNG 4 4 South Africa 4.186 +5.35
from the Middle East. [Despite LNG’s 5 5 Italy 3.828 –1.55
attractiveness in terms of supply security 6 6 Netherlands 3.799 +9.30
it has to be cost-competitive if it is to 7 7 France 3.017 –4.58
gain market share from pipeline sup- 8 10 Belgium 2.574 –7.55
pliers – Consulting Editor] 9 8 UK 2.569 –9.63
10 11 Finland 2.455 –1.15
Current investment plans 11 12 Spain 2.454 +2.75
Europe accounts for 27% (24.4% in 12 9 US 2.252 –16.43
2008) of the global LNG demand. 13 13 Canada 2.211 –4.10
Worldwide trade in LNG increased at a 14 14 Australia 1.871 +2.40
rate of 7.7%/y between 1996 and 2006,
while LNG trade to the EU grew even Table 1: Gas cost comparison (in cents/kWh) for 14 countries around the world
faster over the same period, at a rate of Source: Reuters – Gas price comparisons for industrial consumers by 14 countries by Consulting
10.6%, according to an LNG discussion Group NUS Deutschland

PETROLEUM REVIEW OCTOBER 2009 47

G AS
of accessibility of pipeline gas is another
factor that has led to a very substantial
part of the new regas capacity being
acquired by upstream LNG producers
such as Qatar Petroleum, Sonatrach,
Petronas and BG. By the end of 2008,
more than one third of the regas capacity
in north-west Europe was estimated to
be under the control of LNG producers
for their own sole trading purposes.
Another recent development in the
LNG market is the shift away from long-
term contracts towards short-term and
spot sales facilitated by declining LNG
transport costs. Colin Lyle, Gas Committee
Chairman of the European Federation of
Energy Traders, in a presentation at LNG
2009 held last March in London, claimed
that of new gas supplies becoming oper-
ational worldwide in 2008–2009, nearly
40% can be considered as flexible as pro-
ducers seek out the highest possible
margins. More than half of this flexible
LNG is situated in the Middle East, which
is within easy access of all LNG markets.
Particularly important to the EU is
Sonatrach’s declaration last year that it
will no longer contract LNG beyond five
years and will engage in cargo by cargo
sales on the spot market. The DG TREN
paper reports that the share of short-
term trading in global LNG sales
increased to 20% in 2007, compared to
16% a year earlier.
The reduced share of long-term con-
tracts means that Europe will have to
compete with the US and Asia on price.
For LNG producers to find Europe an
attractive destination, a report by MVV
Consultancy for the EU Commission states
that spot prices would have to be above
the current average level of contractual
pipeline gas prices in Europe. The actual
unit cost of supplying pipeline gas to most
European markets is lower than LNG
supply unit cost. Most geographically and
economically attractive gas bearing
regions are also located within pipeline
accessibility of the EU. So, pipeline gas is
likely to remain the basis of the EU gas
policy for long-term supplies. [However,
there is great uncertainty in the market
going forwards. Just over a year ago it
looked like there would be significant
growth in the LNG sector, with many new
projects planned. The economic slow-
down has led to a number of projects
being cancelled or shelved, so there is a
question as to whether LNG will secure a
large share of the market within the time-
frame originally considered possible by
the market analysts – Consulting Editor]
Third party access
To prevent capacity hording and facilitate
access to LNG terminals, the European
Directive 2003/55/EC on gas market liber-
alisation, provides for third party access
to terminals, with the national regulator
48
setting the tariff conditions. However,
given the large, long-term investments
required for LNG terminals and the com-
petition from pipeline gas in the EU gas
market, in 2003 the EU Commission intro-
duced Article 22 that grants temporary
exemptions to the LSOs (LNG system
operators) from the third party access
rule. With the exception of Spain, where
short-term capacity is made available to
third parties through regulated access
without any Article 22 exemptions, writes
Thiery Trouve, CEO of Elengy, in the LNG
Journal, exemption has become ‘the
quasi-general rule in Europe for new LNG
terminals’, with more than 80% of the
new terminals having requested an
exemption. So far, nine exemptions have
been granted and another three are
pending. The reason for the growing
recourse to the exemption, Trouve writes,
is the ‘de facto’ competition between
European LNG terminals.
The Commission does not see the coex-
istence of regulated and exempted
terminals as a problem. As more LNG ter-
minals are built, the argument goes,
the two regimes will converge. According
to the DG TREN paper, what the
Commission regards as more important in
creating a level playing field for terminal
access and investment in terminals is ‘the
interface between TSOs and LSOs’.
Independence of the TSOs (transmission
system operators) of supply interests is of
utmost importance, the paper says, and
the requirements to ensure effective
unbundling under the third energy
package legislation are expected to
achieve this and to apply to terminal
operators’ principles that are already
applied to TSOs.
In order for LNG to contribute to EU
energy security an internal gas market
needs to be created first. Interconnectors
need to be built to facilitate interoper-
LNG terminal Country Capacity
(in bn cm)
Fos Cavou LNG France 8.25
Offshore North Italy 8 2009
Adriatic
Gate LNG Netherlands 12
El Musel LNG Spain 7 2010/2011 Qatar Petroleum 67.5%,
Dragon LNG UK 6 2009
Grain LNG 2 UK 9 (to reach
20bn by 2010)
Table 2: LNG Terminals in Europe
LNG
ability of LNG facilities and their connec-
tion to an EU-wide grid. According to
Arianna Checchi of the Centre for
European Policy Studies, there are cur-
rently over 60 connection points within
the EU that allow cross-border gas trans-
mission, but they are not always located
where – from a security of supply point of
view – they are most needed, ie Eastern
European countries, the Baltic region
and, to a lesser extent, the Iberian
Peninsula. These regions rely on import
pipelines for their integration into the
European gas market. However, as a first
step, she writes: ‘The distinction between
gas interconnectors, import pipelines and
export pipelines which play the role of
interconnections must be clarified.’
Trade off
The aims of any EU energy policy should
be to deliver the benefits that accrue from
encouraging LNG imports whilst min-
imising the disadvantages. Looking
ahead, there is a need for a careful calcu-
lation to be made by European
governments, possibly the EU itself, and
those wishing to supply the European
market – ie what is the trade off between:
G investing now in regasification plants
and an associated distribution system
to improve security of supply, but
leading to almost certain short- to
medium-term increase in the gas costs,
compared with
G a policy of continued reliance on piped
gas, which is currently cheaper but then
face the possibility, say after 2020, that
the price of this supply of gas is
increased by those wishing to take
advantage of Europe’s captive market,
or, worse still,
G find that after 2020 the existing
suppliers of pipeline gas are unable
rather than unwilling to satisfy EU gas
demand. G
Due Developers
onstream
2009 GdF Suez 69.7%, Total
30.3%
Qatar 45%, ExxonMobil
45%, Edison 10%
2011 Dong Energy, E.on,
OMV, Essent 5% each;
Royal Vopak, Gasunie,
the remainder
ExxonMobil 24.15%,
Total 8.35%
BG 50%, Petronas 30%,
4gas 20%
2008 National Grid
PETROLEUM REVIEW OCTOBER 2009