Stabilizing activity ushers positive outlook for Mediterranean

Discoveries, bidding rounds signal potential in established region

By Katie Mazerov, contributing editor

Tempered by challenges around political and financial uncertainty, the diverse Mediterranean region nevertheless continues to hold potential for robust exploration and production, with extensive oil and gas reserves still being discovered. In the three years since the Arab Spring uprisings in Egypt and Libya, drilling activity levels there have seen some stabilization. At the same time, a new discovery in Israel and the prospect of offshore bidding rounds in Egypt, the Republic of Croatia, Algeria, Bulgaria and possibly Lebanon are putting an optimistic spin on the 2014 outlook.

In December, Noble Energy announced a discovery at the Tamar Southwest deepwater exploration well offshore Israel. Located in the prolific Levant Basin, the well was drilled to 17,420 ft TD in 5,405 ft of water and netted 35 ft of natural gas pay within the targeted Miocene intervals. The well is Noble’s eighth consecutive discovery in the Levant Basin.

In a statement, Mike Putnam, Noble’s VP, Exploration and Geoscience, said the company’s discovered resources in the eastern Mediterranean total nearly 40 trillion cu ft (tcf) of natural gas. The Tamar Southwest discovery “underpins our ability to meet the growing market demand in Israel and within the region.” That includes Israel’s prolific Leviathan field, which remains the largest discovery in the operator’s history, with 18 tcf of gross natural gas mean resources.

Elsewhere in the Eastern Med-iterranean, exploration bidding rounds in areas such as Lebanon and Egypt are in pursuit of new discoveries but face political and economic headwinds. Political instability has led to the third postponement of Lebanon’s first offshore bidding round for oil and gas exploration in the Levant Basin. “There seems to be potential in Lebanon based on the significant discoveries in offshore Israel and Cyprus in the Levant Basin province, which is estimated to hold undiscovered resources of 1.7 billion bbl of oil and more than 120 tcf of gas,” said Rabie Khellafi, Lead Analyst, Upstream Oil & Gas in the Middle East for research and consulting firm GlobalData. Israel has been producing gas from Levant since 2004, he said.

“Perceived hydrocarbon potential in Lebanon has attracted 46 international oil companies (IOCs), including ExxonMobil, Chevron, Shell and Total, which have been prequalified by the country’s caretaker government,” he continued. “However, we will have a better idea of how interesting these exploration blocks are when companies submit their bids and the results are disclosed. The big round postponement and the recent caretaker government’s refusal to sign the decrees required for the round might prevent companies from bidding.” He added that Lebanon is considering establishing its own national oil company.

Egypt: Path back to normalcy

In Egypt, EGAS, a subsidiary of national oil company Egyptian General Petroleum Corp (EGPC), launched a bidding round in December, with a May 2014 deadline, for seven deepwater and onshore gas blocks, Mr Khellafi said. Egypt’s Ministry of Petroleum delegates licensing rounds and regulation of E&P activities to its state-owned oil companies.

The bid round includes five offshore blocks in the deepwater Mediterranean bordering Israel, with one block at 1,500-ft water depth and the remaining blocks in water depths estimated from 5,000 to 10,000 ft. The onshore blocks are located in the Nile Delta cone.

“There are indications that the production-sharing agreement (PSA) framework that has prevailed for years in Egypt may be changed to provide more incentives for outside investment and make discoveries more commercially viable,” Mr Khellafi explained. He noted that EGPC, with BP and German energy company RWE, signed an amendment to a PSA in 2010 to allow for more flexible concession terms for blocks in the West Nile Delta and Alexandria.

Incentives may be necessary because Egypt needs revenues to cover $5 billion in debt to several IOCs as a result of heavy government subsidies to the domestic oil and gas market, he said. However, terms of a new framework would need to strike a delicate balance between making investment attractive to outside operators while also appealing to the Egyptian people, who likely would not support a policy that removes subsidies or increases domestic prices, he added. “Incentives could result from renegotiations between the government and the IOCs by allowing investors to recover their costs and make a decent competitive return on their investments.”

Egyptian Drilling Company (EDC) is anticipating a return to some stability to drilling operations and security, CEO Jens Byrialsen said, particularly with the ratification of the new Egyptian Constitution in January and a leadership roadmap in place for the country. “The last three years have been difficult in the wake of the Arab Spring uprisings, but 2013 was better, with the second half of the year looking like the old days, with the police back in the streets. Up until 2011, we operated smoothly in Egypt for 35 years with the military in power. There will continue to be some unrest against the establishment, but on the petroleum side, we think activity will remain steady and maybe even pick up.”

EDC has 20 workover rigs and 33 onshore land rigs, each representing about half those respective markets in Egypt, operating at 100% utilization. EDC also has six jackups working in the region. The rigs are owned by a 50/50 joint venture between EDC and Maersk Drilling. Maersk has the 10,000-ft semi Maersk Discoverer working for BP in the Mediterranean.

New frontiers in Egypt

EDC’s land fleet consists of mostly 2,000-hp rigs, with some 1,500-hp models, and range from older rigs built in 1982 to newer cyber-drilling AC rigs. The rigs are drilling “a little bit of everything,” including horizontal wells, Mr Byrialsen said. “The trend is toward deeper gas drilling because Egypt is short of gas for domestic use while also needing to meet export commitments.

“Out fleet is concentrated in Egypt’s northwestern desert, but we are anticipating much more oil and some gas exploration in the large region of Egypt south of Cairo that has not been explored yet,” he continued. “This is primarily because activity was focused on the Gulf of Suez, which was extremely successful for many years and is still producing significant amounts of oil and gas. We also consider the fields in Egypt’s western desert to be not yet fully developed, as exploration in that region began just 30 years ago.”

In Libya, EDC has three onshore drilling rigs that are not working due to unrest that has forced several major operators to exit the country. “The few that are staying behind are those with ongoing production activity. For companies still in the exploratory phase, it is much easier to leave. With huge reserves in Libya, the potential is there, but the political situation and lagging infrastructure are simply not accommodating.”

EDC’s other major market in the region is Saudi Arabia, where it operates five land rigs and two jackups, with another land rig on the way. The land rigs, including one 1,500-hp, three 2,000-hp and one 3,000-hp rebuilt rig, are drilling 20,000 ft or deeper gas wells as part of the country’s ramp-up in gas production. Both offshore rigs also are drilling for gas.

“We are in a good position now in the region, with 100% utilization and dayrates that are providing a reasonable return on most operations,” Mr Byrialsen said. “There are opportunities for going into new areas, but we are not planning any immediate expansions for newbuild activity as we are focusing on doing good jobs in Egypt and Saudi Arabia, and in Libya when we get back into operation in that market.”

In Algeria, the region’s largest producer and exporter of natural gas, a bidding round has been opened for 31 concessions, with 92 blocks, including areas with significant unconventional potential, said GlobalData’s Mr Khellafi. The new round follows 2013 amendments to Algeria’s hydrocarbon law.

“Under the new law, priority will be given to Algeria’s domestic market supply, and national oil company Sonatrach will be confirmed as a majority shareholder in all Algerian oil and gas assets,” Mr Khellafi said. “Given the latest terms and other fiscal measures laid out in the amended law, such as cost recovery limits and an average government take of around 70%, the Algerian fiscal terms are within world standards when compared to other countries with equivalent prospects.” He cited PSA terms for Qatar, the United Arab Emirates, the Nigerian shelf, Syria and Libya as examples.

Opportunities in Croatia

In Croatia, the Ministry of Economy’s announcement of an offshore licensing round for Q2 2014 has attracted interest from several major IOCs and operators from Europe, North and South America and Asia, according to ministry spokesman Tomislav Cerovec. Croatian operator INA, which was privatized in 2003, will be on equal footing with other oil and gas companies in the upcoming bidding round, he said.

Prior to the tender call, the newly established Croatian Hydrocarbon Agency will identify the blocks that will be offered and will publish concession charges and selection criteria. The bidding round follows the completion of a significant seismic study of the eastern Adriatic by Spectrum, a provider of seismic services and imaging for the oil and gas industry.

“The seismic survey, for the first time, provided modern long-offset two-dimensional data for offshore Croatia that yielded a better understanding of the subsurface and ultimately resulted in the identification of undrilled hydrocarbon structures along the entire Croatian Adriatic,” Mr Cerovec said. “These structures are similar in character to those occurring in carbonate margin and slope setting on the Italian side, from which oil is already being produced.”

The region includes two main basins, the Northwest Peri-Appenninic Foredeep Basin in the north and the Durres Basin in the southeast sector. The main intervals being targeted are the Jurassic and Cretaceous carbonates and Miocene and Pliocene sandstones.

It is likely the fields are part of the same formation that has been explored on the Italian side of the Adriatic, but ongoing interpretation and correlation of the new seismic data will help confirm whether the plays are equivalent and also may identify new plays. Production from the Italian side has shown there are proven, working oil and gas systems in the Adriatic, Mr Cerovec noted.

“Oil production has been ongoing on the Italian side of the Adriatic since 1982,” he said. “More than 1,300 wells and recoverable reserves of 3.6 billion BOE have been discovered, and there is excellent potential for further discoveries. Meanwhile, the Croatian Adriatic is of comparable size, yet has seen less than 10% of the discovered recoverable reserves and number of wells drilled in Italy.” A new mining law passed in April 2013 and a hydrocarbon law passed in July that year have provided the legislative infrastructure for facilitating exploration and production activity in the region, he added.

Austrian operator OMV announced in January that its joint venture partnership with Total and Repsol had completed the largest 3D seismic survey in the western Black Sea. The survey was reported to be a significant development in exploration of the Hans-Asparuh block, located in the Bulgarian sector of the Black Sea, spanning an area of 5,490 sq miles (14,220 sq km) with water depths up to 7,200 ft (2,100 m).

“The interpretation of the data will enable us and our partners to define the drilling locations for two exploration wells that are planned in 2015 and 2016 in order to assess potential hydrocarbon resources in this area,” Jaap Huijskes, OMV’s Board Member responsible for E&P, said in a statement.

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