February 2019 /// Vol 240 No. 2

Special Focus

Activity outside the U.S. to grow at moderate pace

Rising oil supplies and falling prices in second-half 2018 constrained global drilling, but activity should post a measured gain in 2019. Virtually all the global oil production increase is due to U.S. shale activity.

Over the last 12 months, the global upstream industry has featured rising oil and gas production (particularly in the U.S.); volatile, unpredictable oil prices (as in the final quarter of 2018); and slowly-but-steadily rising drilling activity.

Last year, global drilling, excluding the U.S., improved 1.6%, to 45,064 wells. This year, we think drilling will be up 2.5%, to 46,209 wells. Seven out of eight regions should increase this year. Regulatory frameworks are being loosened up and reformed in a number of countries, to attract more operators and investment. Exploration worldwide remains at a low level.

Worldwide offshore drilling will improve at a faster rate than the overall upstream market. We project that offshore activity will grow just over 6%, 2,204 wells. Some of the more active areas will be East Canada, Brazil, Norway, Angola, Nigeria, Saudi Arabia, Abu Dhabi, China and India.

Global oil production averaged 83.386 MMbpd, up 2.2% from 2017’s level. Five of the eight main regions had production gains. Nearly the entire worldwide gain can be attributed to surging U.S. output, which grew 16.9%.

NORTH AMERICA

Canada. Pipeline bottlenecks drove Canadian crude prices to record lows and prompted some producers to reduce output by 160,000 bpd. In late November, Alberta required producers to collectively cut output by 325,000 bpd, beginning in January 2019, to alleviate the backlog created by rising inventories with nowhere to go. Accordingly, we expect drilling to remain flat, as Canada works off the supply glut. Overall, Canadian oil output rose 13.4%, to 4.50 MMbpd.

Shell’s multi-billion-dollar LNG development in Western Canada is making swift progress. LNG Canada partners (Shell, Petronas, PetroChina, Mitsubishi and Kogas) agreed to project funding terms in September and reached FID the following month. The project is now approved for construction. For more details on Canadian activity, please turn to page 49.

Mexico. Things had been looking up in Mexico, since the government amended the constitution in 2013 to allow private companies to lease drilling rights. However, after taking office in December, new President Andrés Manuel Lopez Obrador has been reviewing all Mexican upstream contracts. And since the election, the National Hydrocarbons Commission has postponed three bidding processes for onshore blocks, previously planned for last fall. The bid processes were rescheduled for mid-February, but there is now uncertainty about the new regime’s direction.

Mexico’s rig count has increased the past several months, and there is still hope that reforms will continue. Production declined 7.8%, averaging 1.823 MMbopd during 2018.

SOUTH AMERICA

Economic instability has stifled the region’s ability to produce at full potential. Drilling activity is forecast to gain a meager 1.7%. Regional oil output was down 9.1%, at 6.17 MMbpd.

Argentina’s economic slump continues, amid a fiscal deficit, and demand is seen waning. Due to the recession, YPF has shut in many of its gas wells. A few companies are still experiencing exploration success in the Neuquén basin. We expect a slight drilling uptick this year. Oil production was up 1.3%.

Brazil. The E&P industry should make a comeback, with multiple offshore projects in the works. Although it is expensive to operate in Brazil’s deep waters, the pre-salt regions retain particular interest to explorers. Accordingly, we expect drilling to increase 1.8% in 2019. Oil output eased off 1.2%.

Venezuela. Upstream activity trended downward during 2018, as Venezuela is in political and economic chaos. Oil exports fell to a 28-year low. Oil production plummeted 29.1%, to just 1.422 MMbpd. We forecast a 15.8% drilling decline.

Guyana. With 12 recent discoveries (as of Feb. 6) by ExxonMobil, Guyana has become South America’s hot spot. ExxonMobil also announced that its recoverable resource estimate for the Stabroek Block grew another 1 Bboe, to more than 5 Bboe. However, there are also indications that the regulatory regime could become complicated, as various political factions fight over the anticipated oil riches.

WESTERN EUROPE

Last year saw a slight increase in regional drilling activity. This is due mostly to considerable interest in, and high activity on, the Norwegian Continental Shelf (NCS). Accordingly, regional drilling will be up 3.9% during 2019. Regional oil production declined 2.3%, to 2.842 MMbpd.

Norway’s upstream sector had a big year during 2018, Fig. 1. Aasta Hansteen field went onstream, and an additional 83 producing fields were active on the NCS by year’s end. In addition, a record 87 new production licenses were awarded, and 53 exploration wells were spudded, up 32% from 2017. Eleven discoveries were made. Nearly two-thirds of the undiscovered resources are in the Barents Sea. Investments are set to rise 13% in 2019 to more than $16.35 billion, excluding exploration. Johan Sverdrup and Johan Castberg fields have estimated start-ups in 2022. Norway’s drilling increased 11.6%, and we forecast a 0.4% increase for 2019. Oil output fell 6.2%.

United Kingdom. As British companies improve production efficiency and reduce maintenance costs, they are using data from a joint industry data analytics and digital technologies study to help save $1.94 billion in asset maintenance and operational costs. An opportunity to utilize these data would be in BP’s Alligin development, approved to proceed west of Shetland. It should produce 12,000 boed at peak after going online in 2020. Equinor has acquired Chevron’s 40% operated interest in the Rosebank project, west of Shetland, while Apache has initiated production from its Garten development in the North Sea. In 2018, UK drilling increased 5.7%, and we forecast a similar gain for 2019. Oil production crept back over 1.0 MMbpd.

EASTERN EUROPE/FSU

Five states reached an agreement on sovereign rights to the Caspian Sea, paving the way for new oil and gas extraction. The region increased drilling 4.3% during 2018, and should gain 1.4% for 2019. Regional oil production was up 1.7%.

 

Russia. Drilling in 2018 hit an all-time, post-Soviet high of more than 10,000 wells, due largely to a ramp-up by Rosneft. Embracing digital transformation, Gazprom Neft plans to invest $19.2 billion upstream, with $13.9 billion intended for capital investments. The spending will apply to development of gas production centers on the Yamal Peninsula and eastern Russia, and several major gas pipeline projects. In addition, Gazprom Neft, Mubadala Petroleum and the Russian Direct Investment Fund formed a JV to develop oil fields in Western Siberia.

In an accord with OPEC, Russia will reduce oil output 228,000 bpd by the end of first-quarter 2019 and through June. Output averaged 11.009 MMbopd last year. In 2018, Russian drilling increased 4.6%, and it should gain 1.5% during 2019.

Other FSU countries. In 2018, among the remaining FSU countries, BP discovered a giant gas field in the Caspian offshore Azerbaijan. In Kazakhstan, Chevron’s Future Growth Project–Wellhead Pressure Management Project should increase Tengiz field’s production capacity. Lukoil and KazMunayGas have signed agreements on cooperation and financing of the Zhenis project in Kazakhstan’s sector of the Caspian.

AFRICA

Africa is turning the corner. The number of rigs working reached a three-year high in 2018. Close to $200 billion in capital expenditures is anticipated through 2025. World Oil forecasts drilling to increase 8.7%. Oil output averaged 8.052 MMbpd.

Angola. An independent regulator, the National Oil and Gas Agency, has been formed to manage concessions. Additionally, the National Gas Regulatory Framework was enacted, establishing policies for monetizing natural gas. World Oil expects an 8.8% gain in drilling. Although Angola’s production was down 6.5% in 2018, new supplies are going onstream. Last July, Total started up the Kaombo project in Block 32, where an FPSO is producing 115,000 bopd. A second FPSO is expected to start up later this year.

Nigeria. Despite start-up of giant offshore Egina field last month, the nation struggles with risks from sabotage, kidnapping and crude theft. Accordingly, the country now plans to focus on offshore fields. State firm NNPC says about two-thirds of production will come from deepwater deposits by 2022. Drilling should decrease 4.0%. Oil output rose 2.0%, to 1.984 MMbpd.

Egypt is finding new ways to attract investment. In October, Egypt said it plans a contract overhaul as part of a bigger strategy to free up its industry. Under the new system, companies would accept the cost of E&P in return for a share of output. World Oil projects a 12.5% drilling increase.

MIDDLE EAST

Regional energy companies are expected to borrow more in 2019 to finance expansions. During 2018, regional drilling increased 1%. We forecast a slight decrease for 2019, but this will still be a very strong year for the Middle East. Regional oil production was up 1.2%, at 27.858 MMbpd.

Saudi Arabia last year granted Saudi Aramco a 40-year concession to exploit hydrocarbon reserves as part of preparation for a potential IPO. Saudi Arabian reserves total 268.5 billion, up from the previous 266.3-Bbbl figure. Gas reserves were revised upward to 325.1 Tcf from 307.9 Tcf. In 2019, we see a 5.4% drilling increase, as heavy development work continues. There is an increased emphasis on natural gas development. Oil output was up 1.8%, at 10.312 MMbpd.

UAE-Abu Dhabi. During ADIPEC, ADNOC agreed to many partnerships in alignment with its 2030 Growth Strategy. Eni and partners will invest at least $230 million to explore and assess offshore blocks. In addition, ADNOC also announced a $1.4-billion investment to upgrade and expand Bu Hasa field to 650,000 bopd. Drilling should increase about 1% during 2019.

Iraq surpassed Canada last year as the world’s fourth-biggest producer, averaging 4.548 MMbopd, Fig. 2. In late 2018, Halliburton signed two contracts with Eni Iraq BV to provide integrated drilling services at Zubair oil field in southern Iraq. In addition, DNO ASA reported that production at Peshkabir field in Kurdistan has ramped up to 50,000 bopd. Drilling jumped 15.9% higher in 2018, and we forecast a 2.5% increase this year.

FAR EAST/SOUTH ASIA

Shale volumes are set to increase, as PetroChina works to meet its 2020 target and Sinopec starts development. Shale production could hit 12.5 Bcm this year, but reducing drilling times and alleviating service sector bottlenecks will be critical. In 2018, regional drilling rose 12%. We forecast a 3% gain for 2019. Regional output averaged 6.572 MMbopd.

China. IOCs are projected to increase budgets. Gas will remain the major strategic focus, and domestic production should rise 6%. The Sichuan basin will contribute one-third of 2019’s output growth. Shale will account for less than 10% of gas production. CNOOC has signed deals with nine firms to develop 64,000 km² in the Pearl River basin, to boost output to 2 MMboed by 2025. Chinese drilling increased 4.9% during 2018, and should rise 2.5% in 2019. Oil output was 
3.674 MMbpd.

Indonesia. During first-quarter 2018, Indonesia’s Ministry of Energy and Mineral Resources launched a road show to recruit investors to bid on 26 onshore and offshore blocks, but interest was sparse. Yet, the country has streamlined regulations. BP’s 4.4-Tcf Tangguh gas field in Bintuni Bay is targeted to reach production of 7.6 MMt of LNG. Eni’s Merakas gas field has a gas-in-place estimate of 2 Tcf, for which the company has fast-tracked its development plan to drill six subsea wells. We forecast a 5.1% drilling increase for 2019. Oil production fell 2.5%.

SOUTH PACIFIC

After some rather fallow years, the region appears to be on the upswing. Drilling should improve 3.0%, to 276 wells. Regional oil production averaged 407,600 bopd during 2018, down 0.1%.

Australia. Progress was made last year on several significant Australian projects, including FID for Exxon’s West Barracouta gas field in the Bass Strait. Senex Energy also announced FID for two natural gas projects in the Surat basin. Shell’s Prelude FLNG is among seven export projects sanctioned during the last decade. We expect a 2.0% drilling increase this year.

Papua New Guinea. A gas agreement should be finalized during first-quarter 2019 for the Papua LNG Project. It will include two LNG trains of 2.7 MTPA, each, and be developed in conjunction with existing PNG LNG project facilities. Total is set to drill the Mailu-1 well for oil in 6,500 ft of water. 

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