2013 Forecast: Strong sailing lies ahead, absent any problems

KURT ABRAHAM, Executive Editor

The global E&P industry is coming off a third consecutive year of prosperity, and it looks like a fourth year of worldwide drilling and production increases is on tap. If oil prices remain within a range of $82 to $100/bbl for West Texas Intermediate (WTI), then the projections contained within this forecast should be achieved. At the time of this writing, NYMEX price was around $95–96/bbl.

Once again, the driving force for the industry will be oil-directed activity. This is particularly true for Canada, as well as many portions of South America and Africa, plus the Middle East and Russia. However, not everything is oil-driven. Over in Australia and Southeast Asia, gas development tied to major LNG projects and carriage contracts is carrying the day. That trend should accelerate during 2013.

It is a telling statistic that while E&P spending in North America will take a “pause” during 2013 and remain even with 2012, the international markets in other regions will push spending 9% higher. This fact from analysts at Barclays Capital is reinforced by the schedules for delivery of a large number of new offshore rigs during 2013. In addition, most countries with hydrocarbons to exploit are experiencing increased activity. This will place heavy demand on oil service, equipment and drilling companies to deliver machinery and supplies, thereby raising prices for these goods. Please turn to page 45 for further spending details.

In terms of overall drilling, the leaders in posting significant well count increases outside the U.S. were Russia, Africa, the Middle East, parts of Southeast Asia and Australia, and Brazil (offshore). We estimate that drilling outside the U.S. totaled 57,025 wells last year. This year, we expect a smaller, but still substantial increase of 2.8%, to 58,637 wells. Every region will post an increase in wells drilled, some more than others. Meanwhile, worldwide crude and condensate production was up 1.5%, averaging 76.937 bpd. The greatest increases were in North America, Africa, the Far East and South Pacific.

Offshore, activity should remain strong. We forecast that offshore drilling will rise another 8.4%, to 3,315 wells. Areas where the industry should see the greatest percentage growth are North America, South America, Western Europe (making a comeback), the Middle East and South Pacific.

North America. Drilling was down in Canada last year, due to reduced gas-directed activity. This year, we are predicting a 7.5% increase in wells, to 11,510. Shale gas, tight oil and oil sands are driving investment. The Conference Board of Canada recently projected that shale gas resources may even overtake oil sands, stating that the country could attract up to $386 billion in investments by 2035.

In the fall of 2012, ExxonMobil announced a $3.0-billion deal to buy Canada’s Celtic Exploration and expand its presence in the British Columbia/Alberta shale fields. Foreign NOCs have also taken notice—for more details on Canadian E&P, please turn to the review article on page 77.

As regards Mexico, drilling activity last year was up more than 13%, to 1,191 wells. This year, we expect a smaller, 3.5% gain, to 1,233 wells. The increases are being driven by state oil company Pemex’s concerted efforts to increase reserves, after seeing production fall off steadily. Efforts have focused on the southeasten part of the country, where existing infrastructure allows for quicker development.

Thanks to these development efforts, plus output increases at Ku-Maloob-Zaap (KMZ) and other fields in the Bay of Campeche, the net effect has been to slow the decline, so that last year’s production was nearly even with the 2011 figure, averaging 2.546 MMbopd. The great hope for the future may lie in the deepwater Gulf of Mexico, where Pemex made a discovery last year. For additional details on Mexico’s E&P sector, please see the feature article on page 81.

South America. Regionwide, drilling will be up 7.1% this year, at 3,663 wells. This follows a year in which activity was about even with the level of 2011. South American production of crude and condensate was about even with 2011’s output, at 6.767 MMbpd.

Brazil is growing rapidly, and so is its energy sector. We expect on- and offshore drilling, combined, to jump more than 30% this year. EIA projects that total liquids production will hit 3 million bpd in 2013, although perhaps 20% of that will be ethanol. Exploration activity offshore remains at an all-time high, with recent discoveries in the Espiritu Santo, Santos and Campos basins. About 90% of Brazil’s oil is produced offshore. Of that, about half comes from the deepwater pre-salt fields of the Campos basin. Offshore drilling will be up sharply this year, according to ANP, with about 278 wells forecast. Recently, the Brazilian government announced that it will hold its much-anticipated auction of new oil and natural gas concessions this spring, on May 14 and 15, totaling 289 blocks.

In Venezuela, the big question mark is the health of President Chavez, and the future of his presidency. Officials from state oil company PDVSA have said that government investment in the energy industry will reach US$18 billion this year. Given the political situation, we take this with a grain of salt, and expect that drilling will decline 9.5%, to 629 wells. Production of crude and condensate actually rose 2.4%, to 2.35 million bpd. Given the need to sustain current output levels, look for greater amounts of capital to be spent on production enhancement projects, including greater amounts spent by JV partners.

In Colombia, operators working in the country drilled 117 wells during 2012, according to petroleum regulatory agency ANH. We see a slight decline in Colombia this year, to 105 wells. More than 95% of wells drilled each year are targeted to oil. Crude and condensate production was up 2.7% to 940,000 bpd. There is talk that oil output could rise to 1.0 MMbpd by the end of 2013, but whether that actually happens remains to be seen.

Elsewhere, Suriname drilled 77 shallow wells last year for just over 77,000 ft. Activity focused during 2012 on continuation of the accelerated exploration program onshore; exploration near-shore; sustaining an average crude production of 16,000 bopd; and execution of EOR projects and studies. State firm Staatsolie produced 16,216 bopd. This year, 129 wells are slated to be drilled, at an average depth of 1,100 ft/well. In Barbados, six wells were drilled for 30,480 ft. The total includes five oil producers and one dry hole. This year, state firm Barbados National Oil Company says that no drilling is scheduled. Oil production was 743 bpd. Offshore the Falkland Islands, four wells were drilled, including two gas producers and two dry holes. No drilling is scheduled, so far, for this year. The British territory is now claiming 350 MMbbl of oil reserves.

Western Europe. Although prohibitive fracing regulations are slowing down drilling activity in Western Europe’s shale plays, operators are focusing on conventional oil deposits. We predict a 3.3% gain in Western Europe activity, to 529 wells. Regional oil production fell 5.8%, to 3.302 MMbopd.

In the UK part of the North Sea, although 2012 saw a 40% increase in exploratory drilling, there were only two discoveries. Nevertheless, the recent licensing round was very successful, and activity is expected to grow somewhat in 2013. The forecast calls for an 11% gain to 212 British wells, with about 90% offshore. The UK will need all the oil-directed drilling that it can get, as crude and condensate production last year was down about 10%, to 985,000 bpd.

With several successful licensing rounds during 2012 and record capital investment, Norway is seeing a steady level of activity. Operations on the Norwegian Continental Shelf, as well as a focus on Arctic exploration in the Barents Sea, will generate total investment of US$25 billion this year, according to Wood Mackenzie. The Norwegian Petroleum Directorate said that 167 wells were drilled last year, including 98 oil completions, 19 gas producers, 15 dry holes, and 35 service and suspended wells. There was a 19% decline in appraisal drilling. This year, said NPD, drilling will remain level at 168 wells, all offshore, of which 42 will be exploratory. Oil production was down about 3%, at approximately 1.9 million bpd.

Netherlands. Dutch drilling last year was down considerably from the 2011 total, and it failed to meet the expectations of the Geological Survey of The Netherlands. There were 38 wells drilled, compared to 56 in 2011. Of that total, 60% were offshore. This year, the Geological Survey has told us that they expect drilling to be close to last year’s total, with 35 wells predicted. Of that amount, 57%, or 20 wells, will be offshore. About 30% of the drilling will be exploratory. The largest operator, NAM, has been able to extend the lives of several small gas fields. This heightened activity has resulted in the company acquiring two new drilling rigs and increasing employment by 10%. Dana Petroleum last year put the Van Nes gas field onstream, offshore, in Phase 2 of the Medway project. By year’s end, it was producing 4,000 boed.

In Italy, drilling totaled 28 wells last year, according to the Ministry of Economic Development. Of that total, 39%, or 11 wells, were offshore, and all were natural gas. Activity onshore included 2 oil wells, 10 gas wells and 5 dry holes. This year, the Ministry predicts that drilling will equal last year’s total. However, the distribution of wells will be far different than it was last year. Only 7 wells are forecast to be drilled onshore, while offshore wells will nearly double, to 21, all of them for development. Three of the seven wells onshore will be for exploration. Italian oil production last year averaged 100,584 bpd. Natural gas output averaged 827 MMcfd.

The Italian government has eased its offshore drilling ban, which was enacted in 2010 following the Macondo disaster in the U.S. Gulf of Mexico. While new operators cannot drill in waters 5 mi off the coast and 12 mi from protected shorelines, companies, who had projects active during the time that the ban was introduced, are exempt from the ban, although a 3% production tax will be imposed.

Eastern Europe/Former Soviet Union. In this combined region, activity continued to grow during 2012. Total drilling was up 4.1%, to 9,164 wells. Exclusive of Russia, the other FSU republics were roughly even with their 2011 total, tallying 1,067 wells. The smaller Eastern European nations gained 6.8%, to 328. This year, the entire region’s drilling should rise 3.2%, to 9,456 wells. The FSU countries outside Russia will be up 1.3% and the smaller Eastern European nations will gain 1.8%. As regards oil production, the FSU countries other than Russia saw their output actually fall less than 1%, to 2.794 MMbpd.

It was another good year for Russia’s upstream sector. Wells drilled in that country were up 5.5% at 7,769. Operators boosted development drilling 8.7%, to more than 65 MMft of hole, and they also increased exploration drilling 9%, to about 2.7 MMft of hole. This year, activity should rise another 3.5%, or a little less than half of last year’s growth rate. The big five—Surgutneftegaz, Rosneft, Lukoil, Gazprom and TNK-BP—continue to account for roughly 85% of all wells and about 82% of footage drilled. Russia's oil production and drilling volumes have reached post-Soviet peaks in each of the last three years. As noted by Barclays Capital in its capital spending survey, select companies in Russia will hike E&P expenditures 7% this year.

Rosneft should solidify its role as Russia’s largest oil producer following the acquisition of TNK-BP, accounting for about 40% of Russian oil output. In addition, it looks like several Russian companies will throw increasing amounts of investment into developing the Arctic, where feasible.

Outside of Russia, Azerbaijan and Kazakhstan continue as the largest drillers among other FSU countries. In Azerbaijan, state firm SOCAR reduced drilling 7.4% to 136,400 m (447,507 ft). That figure is close to the volume drilled in 2010. Within that total, exploratory drilling amounted to 7,473 m (24,518 ft), or about half the 2011 figure. Oil output fell another 3.7%, to just 872,003 bpd, said SOCAR. The Azeri-Chirag-Guneshli field in Azerbaijan’s section of the Caspian Sea, which provided 78% of total output last year, cut production 12% percent in the first half of last year, reportedly due to technical issues at the field. Operator BP has dispatched a new team of seasoned engineers to fix the problems.

In Kazakhstan, total drilling was up about 10% from 2011’s figure, but exploratory wells were down roughly one-third. Last November, India’s largest operator, Oil & Natural Gas Corp. (ONGC), bought into the $46-billion Kashagan field development project, in the northeastern Caspian Sea. ONGC purchased ConocoPhillips’s 8.4% stake in Kashagan for $5 billion. Considered the biggest oil find since the 1960, when it was discovered in 2000, the field is several years behind schedule. Last year, Kazakhstan produced 1.573 MMbopd, barely up from the year before.

Africa. The northern half of the continent continues to see political, social and terroristic (as in last month’s gas plant incident in Algeria) unrest. Yet, overall, Africa has a relatively solid E&P sector that is registering moderate activity gains from year to year. Last year, African drilling, overall, was up 8.3%, at 1,551 wells. A further increase of 3.8%, to 1,610 wells, is forecast this year. Thanks to gains in Algeria and Angola, plus a restoration of Libyan output, African oil production was up 5.9%, at 9.335 MMbpd.

Algeria made 31 oil and natural gas discoveries last year, including 24 by state-run Sonatrach compared with 20 finds in 2011. Since the start of 2013, the nation has been revising its hydrocarbon law, in an attempt to encourage more international investment in exploration, including the introduction of tax incentives. However, our forecast of a 30-well increase this year, to 345 wells, was made before the recent tragedy at the In Amenas gas plant, where 38 foreign hostages were killed. This has brought a new level of instability to the area.

Last November, Egypt awarded the first new exploration licenses since its 2011 revolution, with Shell , RWE and TransGlobe Energy emerging as the new leaseholders. And although both BP and U.S.-based Apache have announced multi-billion-dollar E&P budgets for Egypt, we believe that the country’s drilling activity will remain hampered by financial and geopolitical hurdles, lowering the amount of 2013 wells 5.9%, to 621.

As Africa’s largest oil producer, Nigeria produced 2.37 MMbpd last year, down from a 2.42-MMbpd level in 2011, and below its 3.0-MMbpd capacity. While Nigeria holds Africa’s largest natural gas reserves, development of infrastructure is still in early stages. In 2012, Nigeria introduced a Petroleum Industry Bill to establish a strategic growth plan for E&P activities within the nation, including offering acreage through bid rounds. Angola is facing similar issues.

Offshore Brazilian pre-salt discoveries have piqued investor interest in Gabon’s pre-salt potential. The country’s pre-salt had been untapped until recently, when U.S.-based Harvest Natural Resources struck oil at its Ruche-1 wildcat in the pre-salt layers offshore Gabon in June 2011. The government is finalizing new regulatory terms to facilitate new deepwater exploration.

Middle East. Yet another drilling record was set last year in the Middle East, where wells drilled climbed 9.6%, to 3,286. This year, activity will be very similar to 2012’s level, with 3,291 wells forecast, just enough to set another record. Regional oil production was down 1.0% last year, to 24.449 MMbpd.

With 20% of the world’s proven oil reserves and the largest production capacity, Saudi Arabia served as OPEC’s swing producer during 2012, with a production rate as much as 9.8 MMbopd during 2011-12 to cover the drop in output from Libya. New investment in field extensions is driving activity, and we predict a 2.8% increase to 517 wells.

Oman remains the top driller in the region, having boosted activity nearly 30% to about 1,220 wells last year. For 2013, the Ministry of Oil and Gas is predicting about a 14% reduction in drilling, to approximately 1,045 wells. The lion’s share of drilling is operated by Petroleum Development Oman, the JV between Shell and the government. Production last year averaged 918,500 bopd and 3.47 Bcfgd.

Iraq is one of the success stories of 2012. Iraq’s crude production averaged 3.35 MMbopd in December 2012, while Iran’s daily output declined to 2.7 MMbopd, due to U.S. and EU sanctions. As a result, Iraq jumped two spots to become OPEC’s second-leading producer after Saudi Arabia. Overall, Iraqi output averaged 3.1 MMbopd during 2012.

Iran has the world’s second-largest reserves of natural gas (1,050 Tcf) and fourth-largest reserves of crude oil (140 Bbbl). Economic sanctions over Iran’s nuclear development have hampered oil and gas exports and, to some extent, the country’s E&P activity. During 2012, National Iranian Drilling Company operated 65 onshore rotary and workover rigs, and planned to increase the total to 75 in 2013. With that in mind, along with a rise in natural gas drilling, we expect a slight (3.4%) increase to 150 wells during 2013.

South Asia. Amid drastically declining natural gas production, several new discoveries—in India’s onshore KG field and Pakistan’s Badhra Area B exploration concession—have sparked new E&P interest. Accordingly, we predict a near-5% increase in South Asia, to 499 wells. Regional oil production was down about 5,000 bpd, to 831,000 bpd.

India is producing close to 800,000 bopd, but due to growing consumption, must import 2.5 MMbopd. Reliance and ONGC are seeking partners for both onshore and offshore development. Accordingly, we expect drilling, overall, to remain close to where it was last year, at 417 wells. In the offshore sector, a slight rise to 82 wells is also anticipated.

Despite political instability, due to bomb attacks by a branch of the Taliban, Pakistan is experiencing increasing demand for oil and gas. The largest IOC operating in Pakistan, Eni, announced a significant gas discovery onshore in the Badhra Area B exploration concession. The Italian national has also signed a deal with the Pakistan government, where Eni will provide expertise and technology exclusively to its Pakistani state partners, in return for access to fields under national control. The forecast calls for a 16% increase in drilling, to 71 wells. Meanwhile, Pakistani oil production was down less than 2% last year, averaging 55,200 bpd.

Far East. Due to China’s numerical dominance, this region’s drilling total tends to move in lock-step with that country’s activity. Accordingly, drilling rose less than 1% last year, to 26,405 wells. For 2013, a slight increase to 26,509 wells is forecast. Output of crude and condensate was up 0.5%, at 6.228 MMbpd.

China. Based on best information available, we believe that yet another drilling record was set by China last year. The country drilled an estimated 24,800 wells, an increase of just 240 wells, from 2011’s figure. We predict another minute gain in wells drilled this year, to 24,924. As the world’s most populous country, China is the second-largest oil consumer and drills almost a quarter of all the world’s wells. Production last year squeezed out a gain of 1.6%, to 3.919 MMbopd.

State-owned CNPC has made major discoveries in the country’s eight basins, adding more than 500 million tons and 300 Bcm of proven oil- and gas-in-place. In 2012, China had 36 ongoing joint exploration and development projects, consisting of 15 conventional oil projects, 11 conventional gas projects and 10 CBM projects. The partners involved in these projects include Shell, Apache, Chevron and Total.

In 2012, Indonesia approved 47 proposals for the development of oil and gas blocks. Chevron will spend $850 million to develop six of those areas. Offshore in the West Java Sea, CNOOC made an oil discovery in a shallow-water zone. On the western side of the Makassar Strait, Eni made a significant gas discovery in the Muara Bakau PSC. Drilling totaled 760 wells last year, including 197 offshore. This year, the forecast calls for a 7.2% decline to 705 wells. Offshore activity is projected to decline nearly 11%, to 176 wells. Indonesian production fell 5.2%, to 871,000 bopd.

Malaysia produced 601,000 bopd last year, allowing it export about 60,000 bopd. It is also the third-largest LNG exporter in the world, capable of exporting about 1.1 Tcf of gas annually. In 2012, Malaysia started pumping oil from the Shell-operated Gumusut deepwater oil field off the eastern state of Sabah. To spur E&P activity, state-operated Petronas plans to invest $59 billion in new projects. Drilling in Malaysia remains all offshore and totaled 119 wells last year. For 2013, a 7.6% increase to 128 wells is predicted.

South Pacific. All of this region is seeing growth and development, from new discoveries onshore and offshore, to construction of LNG terminals and pipeline infrastructure. Accordingly, we predict a 7.7% increase in drilling this year, to 309 wells. Regional oil production was up 8.5%, to 595,000 bpd, thanks exclusively to a rebound in Australian output.

Drilling activity, both onshore and offshore Australia has experienced growth over the last couple of years. Drilling last year jumped 17.6% higher, totaling 241 wells, of which 105 were offshore. This year, a smaller 3.3% gain to 249 wells is predicted, including 112 wells offshore. The Goldwyer shale, in the onshore Canning basin of Western Australia state, contains the largest estimate for any basin in Australia—764 Tcf of risked gas in place and 229 Tcf of risked recoverable gas. ConocoPhillips and New Standard Energy recently drilled exploration wells in the area.

Offshore, operators are focusing on deep water. In 2012, Chevron announced two more natural gas discoveries in the Exmouth Plateau area of the Carnarvon basin, off Western Australia. Australian oil production was up 13% last year, recovering to 470,000 bpd.

In December 2012, New Zealand awarded 10 exploration permits in the the Taranaki, Pegasus and Great South basins. The licenses represent an expenditure of $82 million, which, if initial work is successful, could lead to the expenditure of a further $776 million within five years. Another licensing round is scheduled for fall, 2013. This flurry of licensing activity has caused drilling to perk up, with a 40% increase to 49 wells predicted by the New Zealand federal government. Production, said officials, was down 3.3% last year, at 47,000 bopd.