OUTLOOK 2004: International
Worldwide Drilling

Heightened activity will continue in some areas

Global E&P statistics are often a collection of enigmas, and 2003 was no exception. Normally, the 44,220 wells drilled outside the US would be considered a good effort, but tell that to drilling contractors and service companies.

These firms have complained loudly and long that oil companies, both majors and larger independents, are still forcing them to charge only bare-bones prices for equipment and services, thereby cutting them out of larger profits normally expected. They also complain that operators have under-spent their budgets relative to oil and gas prices, and are not replacing reserves adequately.

Last year's well total outside the US exceeded our August issue's forecast by 2.7%. Credit for that can be given to stronger-than-expected performances in Canada, Africa and the Middle East. These regions offset totals that were lower than forecast in South America, Western Europe and the FSU and Eastern Europe. It should also be noted that Iraq did not become the negative factor that some analysts had expected to depress E&P activity (George W. Bush, please take a memo on this factoid).

We expect drilling outside the US to be nearly flat with 2003's level, at 44,048 wells, with most regions up slightly to moderately. Near-capacity levels are expected in West Africa, the Middle East and the Far East. Canada and Mexico will approach near-record levels. Now that Venezuela has calmed down, South America should post a nice rebound. The one problem area continues to be Western Europe, principally the North Sea.

Offshore activity outside the US is forecast to gain 7%, despite further drilling declines in the North Sea (see page 70 for further details).

NORTH AMERICA

Based on numbers from the Canadian Association of Petroleum Producers, plus World Oil's own survey, drilling hit a new record level in Canada last year. Strong demand for natural gas supplies was the driving factor, but high oil prices did not hurt, either. The result was 19,622 wells drilled. This year, given continued high prices, the bullish atmosphere may continue, although local analysts are predicting that drilling will not quite reach the heights seen in 2003. Nonetheless, this could still be the second-best drilling year on record.

World Oil's own proprietary survey of 30 Canadian operators, which represents 40% of all the country's activity, indicates that it is still possible that the well count could come very close to last year's figure. Respondents said that they would increase drilling, collectively, 4% in Alberta and 31% in British Columbia, but they would reduce activity in Saskatchewan 14%. For more details, please see the separate Canadian article in this issue.

Mexico. Phenomenal is the only word that can adequately describe the drilling boom underway in Mexico. State oil company Premix jacked up its effort by a third last year, tallying 605 wells, of which 85% were onshore. Gas development is the driving force behind this high drilling rate. Gas completions accounted for better than two-thirds of all wells drilled in 2003. This year, Premix expects to boost drilling by yet another 50% or so, to 912 wells. In the company's Northern Zone, alone, onshore gas activity will total about 400 wells, including 40 exploratory holes.

SOUTH AMERICA

South American drilling is set for a good comeback, now that operations in Venezuela are back to semi-normal. A 31% gain in that country will lead a 6.5% increase regionwide, with improvement expected in nearly every country. Fueled by LNG contracts, a gas boom is underway in Trinidad, while Brazil's offshore development projects will keep activity high in that country.

Venezuela. State firm PDVSA is trying its best to soldier on while the country's political climate remains turbulent, including a potential recall of President Hugo Chavez. There are signs that the contracts held by foreign operators may not be liberalized, but instead tightened up, further discouraging projects. In the meantime, while PDVSA has nearly doubled its capital expenditure budget for 2004, very little of the extra money will go to upstream activity. So, while drilling will be up from last year's strife-ridden level, activity will only recover to 805 wells, still below the 1,000-plus levels that were once standard for the country.

Brazil. Petrobrás last year struck a 419-Bcm (14.8-Tcf) gas discovery in Block BS-400 of the Santos offshore basin. Oddly enough, it was the only major find of hydrocarbons in South America during 2003. The field is believed capable of producing 55 MMcgmd (1.9 Bcfgd) for 20 years. It should help to reduce Brazil's gas imports and strengthen the nation's negotiations with gas exporters. Meanwhile, Petrobrás picked up most of the blocks offered by state regulator ANP in the Round 5 offering of concessions. Round 6, slated for August 2004, should attract more foreign participation. Brazilian drilling failed to meet expectations, falling 5.8% last year. A slight pick-up to 490 wells is forecast for 2004.

Colombia. Activity was far short of the level forecast by state firm Ecopetrol. Although drilling was up 18%, it was not the doubling of wells that officials had predicted. Disappointing exploration results are a primary reason, evidenced by poor results at the much-ballyhooed Gibraltar and Niscota prospects. The government can only shake its head and hope for luckier results this year to boost reserves and stave off becoming a net oil importer. A mild gain to 95 wells is expected, but this may depend on first-half results. Officials have stayed busy, splitting Ecopetrol into three parts – a unit focused on core business, a unit handling non-core business, and an entity that is becoming the new oil and gas regulator, ANH.

Trinidad. Good exploration results and strong global demand have brought a gas boom to this country. Given the market to convert local gas output to LNG exports, operators are prospecting and developing at an accelerated pace. Drilling was up 89% last year, totaling 140 wells, of which 52 were offshore. This year, activity is forecast by the Ministry of Energy and Energy Industries to jump 40% higher, reaching 196 wells. There will be 17 exploratory wells, all offshore. These will be joined by another 46 development wells offshore.

WESTERN EUROPE

In Western Europe, oil companies' dissatisfaction with high operating costs and inconsistent governmental policies continues to impede an E&P recovery. Nevertheless, Norway will be up slightly, and the UK will stay even with 2003's activity. Problems also persist in Italy and the Netherlands, where drilling is forecast to decline. Germany, France and Denmark remain bright spots in the region.

United Kingdom. The United Kingdom Offshore Operators Association (UKOAA) said that the E&P industry continues to meet investment projections, with capital expenditures in new offshore developments expected to remain above the joint government-industry “vision” of £3 billion ($5.46 billion) per annum through to 2006. Capex in 2003 were estimated at £3.4 billion ($6.19 billion), with a small increase forecast for 2004 at more than £3.5 billion ($6.37 billion). ExxonMobil struck a gas discovery in Block 53/2, testing 65 MMcfgd. There were 266 wells (246 offshore) drilled last year, said the Dept. of Trade & Industry, down from over 300 in 2002. This year, 264 wells are projected, including 245 offshore.

Norway. From the Norwegian Petroleum Directorate's (NPD's) point of view, petroleum activities in Norway in 2003 showed a more positive trend than was expected at the beginning of the year. Last year, 22 exploration wells were spudded, seven more than the companies had reported to NPD at the beginning of the year. Eleven new discoveries were made – seven in the North Sea and four in the Norwegian Sea. Rig activity was identical to the previous year, at 18.8 active units. In 2004 , exploration activity is expected to be around 20 to 25 exploration wells, or approximately the same level as in 2003. These figures include a drilling campaign in the Barents Sea. Overall, drilling should rise 3%, to 172 wells.

EASTERN EUROPE/FSU

After two strong years of drilling growth, the Former Soviet Union will level out this year. In Russia, Surgutneftegaz is fighting off environmentalists, while Yukos is preoccupied with a governmental investigation. In the remainder of Eastern Europe, fewer outside factors are interfering with operators' activity, so these smaller countries should post nice gains. Regionwide, wells will increase 3%, to 5,804.

Russia. Although drilling has rebounded nicely over the last two years as operators rebuilt productive capacity, there are signs that activity is about to level out. Not all the reasons for this plateau in activity have to do with actual E&P operations. For instance, Surgutneftegaz is fighting off environmentalists that want to restrict the amount of activity that the firm can conduct on tracts that it already has rights to. In a different twist, Yukos is preoccupied with a governmental investigation into alleged corruption among several company officials. The investigation also derailed Yukos' acquisition of Sibneft. Among major operators, Surgutneftegaz was the leading driller last year, followed by LUKoil, Yukos and Tatneft. This year, a very slight decline to 4,630 wells nationwide is forecast.

Other FSU countries. Activity outside Russia will remain at about the same level as last year. In Kazakhstan , the leading driller, further development work continues at giant Tengiz and Karachaganak fields. Aurado Exploration also commenced drilling at East Tegen field. In Azerbaijan, BP awarded contracts last summer for development of Shah Deniz offshore gas field. First output is slated for third-quarter 2006. Georgia will see resumption in drilling with five wells after no activity in 2003.

Countries outside the FSU. Modest gains are forecast in virtually every small country in Eastern Europe, where activity last year was below expectations. In Albania, state firm Albpetrol, Premier Oil, Preussag and IFC are drilling 13 new wells during first-quarter 2003. Additionally, Albeptrol and Croatia's INA-Naftaplin are drilling a wildcat in the Panaja Block. Northward, in Czech Republic, local firms, UniGeo and MND, are expanding exploration in the Uherske Hradiste and southern Moravia areas. Both firms are convinced that new reserve potential exists in these areas.

AFRICA

Africa will continue to be one of the major E&P development areas, and exploration also continues to thrive. Egypt is the hottest spot of all, with a 16% increase expected, due to gas-oriented activity. West Africa has seen numerous successful wildcats, and that area will again be solid, led by Angola and Nigeria.

Egypt. Significant, concurrent expansions in gas and oil activities continue in Egypt, and the well count is rising, accordingly. Wells drilled were up 21% last year, totaling 265, including 51 offshore. There were 172 oil completions among the total. This year, state firm EGPC predicts a 16% gain, to 308 wells, including 66 offshore. The latter figure will include 23 exploratory wells. Reflecting a number of field projects, 181 development wells are planned.

Angola. The run of deepwater discoveries continues. Just one example is ExxonMobil's Clochas 1 oil find on Block 15. The well boosted the firm's reserves in the block by about 500 million boe, to 4 more than 4 billion boe. ExxonMobil has three development projects underway on Block 15 (Kizomba A, B and C), and the Xikomba project went onstream late last year. BP was also working on development schemes for its Plutao and Saturno finds on Block 31. ChevronTexaco is constructing a compliant piled tower for installation on deepwater Block 14. It will extract crude from four fields. Angolan drilling is estimated to have been below expectations in 2003, but a rebound to 75 wells is forecast.

Nigeria. The country's operators are still generating impressive deepwater discoveries that fuel an unbroken string of significant field developments. For instance, ChevronTexaco last October found a major extension of the Usan oil field. Usan follows behind the firm's other discoveries at Ukot, Nnwa, Aparo and Agbami. The giant among several field developments underway is Bonga, which will feature a $2.7-billion, 225,000-bopd FPSO. First oil is expected in late March. Nigerian drilling is forecast to total just above 2003's figure, at 110 wells.

Other countries. ExxonMobil's development drilling program in Chad will continue for two more years, even though first oil was achieved in October 2003. Sudan has announced plans for more development drilling to expand productive capacity to 300,000 bopd and beyond. China National Petroleum is also working on development of Blocks 3 and 7, to achieve first oil in 2005. In Cote d'Ivoire , Canadian Natural Resources is proceeding with development of Baobab offshore oil field. Output should begin in second-quarter 2005. And in Mauritania , Woodside Petroleum and partners are expected to proceed with development of the Chinguetti offshore oil field. First production would be in late 2005.

MIDDLE EAST

In the Middle East, rig availability is becoming a major factor, as operators arguably could drill more wells than planned, if only more units were available. Even so, this will be another good year, with Oman topping out at 450 wells and Saudi Arabia posting a 5% increase. An activity explosion is also underway in Yemen, sparked by Nexen's oil development plans. Regionwide, activity will rise 2.5%.

Saudi Arabia. State firm Saudi Aramco has an ambitious development strategy for the next five years. The firm plans to bring onstream five new crude reservoirs from new and existing fields. Aramco also has significant gas development plans. On its own, the company will operate $1.7 billion gas field projects. In addition, there is the Rub al-Khali area upstream gas round, which includes foreign operator participation. Already, Shell and Total are signed up for the southern Rub al-Khali tract. Bids were due late last month for three more packages covering a total area of 120,000 sq km. Winning bids will be awarded in second-quarter 2004. Overall, Saudi drilling will be up about 5%, to 325 wells.

Oman. For yet another year, the sultanate will lead the region in drilling, with 450 wells expected. This will equal last year's total, and it is indicative of the aggressive effort being mounted by dominant operator PDO to maintain oil output that has slipped in the last couple of years. In a move to boost crude and condensate reserves, the government tendered three Gulf of Oman deepwater concessions last September, but there were no bidders. Officials have been studying how to re-tender those blocks while also offering additional tracts.

Iran. Last summer, state company NIOC said that a giant oil find had been struck among three neighboring oil fields near the southern city of Bushehr. However, there was great disagreement among experts as to what reserves figure should be attached to the find. Meanwhile, Iran collected pre-qualification proposals for a 16-block, onshore exploration tender. It followed on the heels of an eight-block offshore round, for which NIOC was evaluating bids from about a dozen companies. NIOC also issued bid invitations for additional phases of the South Pars offshore gas/ condensate field.

FAR EAST

In the Far East, China continues to operate at full drilling utilization, with more than 10,000 wells slated again. Off-shore, CNOOC will keep its efforts at a 60-well level. Among other countries, Indonesia, Malaysia and Thailand expect moderate increases, while India will be flat. Offshore activity will be up 2.7%, while the region, overall, will increase 1%, to 12,198 wells.

China. Much like consumption trends in the US, natural gas may be the future energy source for China. The national government plans to double gas usage in the country by 2010 while cutting dependence on coal. At the moment, gas meets only 2.7% of China's energy needs, about the same level as 20 years ago. In line with this goal, state offshore firm CNOOC announced a major gas find last year near Guangdong. The firm will develop two fields at a cost of $500 million. CNOOC will also build a pipeline linking gas fields with Shanghai in consortium with Sinopec, Shell and Unocal. The company expects to put six development projects onstream in 2004 and another seven in 2005. Overall, Chinese drilling will total nearly 10,200 wells, about the same level as in 2003.

India. State-controlled oil company, ONGC, is expected to be looking for additional rigs in early 2004. The firm already hired two additional drillships last summer, to launch its deepwater program in the Arabian Sea and Bay of Bengal. ONGC plans to drill 37 exploratory wells in its blocks spread throughout the two offshore areas. Overall, Indian activity is expected to remain at last year's level, totaling 415 wells. About a quarter of that will be offshore.

Indonesia. Unocal made a significant gas/ condensate discovery on the deepwater Gehem prospect, 3.5 mi south of Ranggas field offshore Kalimantan. The firm said the well had an unrisked resource potential of between 2 and 3 Tcf of gas. The well also increases the prospectivity of Unocal's deepwater oil tracts. The company also will develop a series of deepwater fields offshore East Kalimantan, including Merah Besar, Gendalo and Ranggas. Meanwhile, Santos picked up additional acreage in the offshore East Java basin. The forecast calls for a 5.4% gain in Indonesian wells to 975, of which about 18% will be offshore.

SOUTH PACIFIC

The South Pacific region should achieve another small gain (1.9%), at nearly 270 wells. In Australia, offshore activity may be up as much as 31%, but this will be offset by a minor decline onshore. Drilling in New Zealand and Papua New Guinea will be close to last year's levels.

Australia. Approval came last year for the $11-billion development of Gorgon offshore field, Australia's largest natural gas reserve. The scheme will utilize 1.3% of Barrow Island's surface for production and processing facilities, after a deal was hammered out by federal and state officials in Western Australia. Meanwhile, approval of the $1.5-billion Bayu-Undan gas development project in the Timor Sea was secured by operator ConocoPhillips. The project will recover 400 million bbl of condensate and LPG, and 3.4 Tcf of gas. Together, the two developments will ensure that a high level of drilling continues offshore Western Australia.

Looking at other states, Victoria expects a doubling of wells to 31 from 16, with a majority of them exploratory and offshore. In Queensland, drilling totaled 106 onshore wells, and another 100 are forecast for 2004, of which 20% will be exploratory. South Australia also expects to replicate last year's activity, when 61 new wells were drilled, including one offshore. In the Northern Territory, drilling will recover to seven wells (three onshore and four offshore) after only three wells were drilled in 2003. Overall, Australia is poised to push last year's strong drilling rate a notch higher, to 245 wells.

New Zealand. The Crown Minerals Department reports that 14 wells were drilled last year, including two offshore. The outlook is for 15 wells this year, of which three will be offshore. One of the largest operators, Shell Todd Oil Services, is cutting back funding in one area while adding investment in another. The firm said that its parent, Royal Dutch Shell, decided to reduce the level of exploration funding through third-quarter 2004, based on poor results from recent exploratory efforts. On the other hand, Shell Todd will develop the Pohokura wet gas field offshore northern Taranaki at a cost of $520 million. Two wellhead platforms will be required to produce the field's gas and condensate.