Strong rig demand, especially in Norway, to keep northwest Europe bustle alive into 2008

By Jeremy Cresswell, contributing editor

There is no such thing as a steady state on the northwest Europe continental shelf (NWECS). Just when one thinks some sort of stability has been achieved, it is swiftly swept away by that absolute certainty … change.

Big changes are indeed happening, some with surprising speed, and, as can be expected, Norway and the UK overwhelmingly dominate the European stage. But, while Norway remains perceived as fiscally stable, the UK is now regarded as fiscally unstable and unfair.

It is becoming clearer by the year, perhaps even by the month, that if anyone believes this hugely important offshore region is growing old gently and gracefully, they should revise that view.

The most graphic evidence can be found in reported decline rates, notably of the UK Continental Shelf (UKCS) and Norwegian Continental Shelf (NCS), with stark numbers reported lately on both sides.

Early October saw the Royal Bank of Scotland Oil Index report a July year-on-year combined oil and natural gas output slump of 17.9% and a slide of 10.3% on the prior month.

Production that month stood at just over 2 million barrels oil equivalent per day, of which a mere 1.2 million bpd was oil. This compares with 4.5 million boepd in 1999, of which some 2.7 million bpd was oil.

While undoubtedly disappointing — shocking, even — fortunately, there remains much to play for in terms of yet-to-be exploited UK hydrocarbons resource.

A new report by drilling analysts Hannon Westwood (HW) supports this view. Encouragingly, HW says, “As of June 2007, we counted 225 E&A wells that are in some stage of planning for drilling between now into 2009.

“Only seven to 11 rigs are working on the UKCS at any one time (current overall population is 15), and the constraint on rig capacity and the need for third-party funding on a number of wells means that some of these wells will be pushed into future years or may be shelved. Having said that, the stock of planned wells continues to grow for now, and the arrival of new planned wells still exceeds the fall-out rate.”

But Norway is in a significantly stronger position than the UK, even though oil production for 2007 is put at 2.6 million bbl/day, the lowest level since 1994. However, and this is Norway’s key differentiator from everywhere else in northwest Europe, gas output continues to climb thanks to the Ormen Lange and Snøhvit projects coming on stream.

In an early October outlook statement, the Norwegian Ministry of Petroleum & Energy forecast a “considerable increase” in gas production on the NCS, from 88 bcm in 2007 to 108 bcm in 2008, with more increases expected.

Further evidence that northwest Europe is buzzing and will continue to do so in 2008 includes:

• The merger between Statoil and Hydro, a move calculated to strengthen both companies domestically and internationally.

• The DNO-Pertra engagement posted on 9 October to create Norway’s new No. 2 petroleum company.

• Shell’s decision to dispose of a large portfolio of producing and non-producing UKCS assets, which unlocks opportunities for other companies.

• Norway’s commitment to the Arctic resources race is being stepped up significantly.

• The Irish sector is coming alive again, both on the Atlantic Frontier and in the Celtic Sea.

• The UK Atlantic Frontier looks set for one of the most exciting years in its history.

• The anticipated arrival of a crop of new, high-specification semisubmersibles in Norway over the coming months, boosting the NCS population from 17 to more than 20 by late 2008, though the UK, Danish and Dutch sector rig populations are likely to remain fairly static (five to six MODUs each for Denmark and The Netherlands).

Picking up on the StatoilHydro and DNO-Pertra deals first, both are indicative of a dynamic, restless mergers-and-acquisitions market, with further similar transactions deemed inevitable.

This applies to the supply chain too; Abbot Group, owner of KCA DEUTAG, has confirmed that it has received proposals that may ultimately lead to an offer being made for the company. However, a company statement noted that it’s uncertain whether an offer will be forthcoming or at an acceptable price.

M&A deals have the potential to impact the NWECS drilling scene, although the collective view is, for example, that StatoilHydro will have no material effect in 2008 — or 2009, for that matter, because both companies have stable, long-term rig hire/drilling programme commitments.

On the other hand, DNO-Pertra should lead to a stepping up of exploration, appraisal and development effort. So might that kick in during 2008? It’s a possibility since both are small, fast-moving entities.

Rig markets specialist Adrian Goodger of The Stewart Group believes there are economies of scale to be harvested from mergers such as StatoilHydro, though not in the near term with regard to rigs on hire.

“But many of the (drilling) contracts already in place are multi-year, and I’d guess that buying out (such contracts) will be expensive, even if the option exists,” Mr Goodger said. “I think as far as 2008 is concerned, the impact of the mergers is unlikely to dramatically affect the current (market) status.”

While StatoilHydro will continue to put the backbone into the NCS drilling programme during the year ahead, and other IOCs will make a contribution, the power of independents and mid-rank players is increasing.

Consider Revus, which participated in five E&A wells in 2007 and expects to be involved in eight during 2008, of which it will operate at least one — Salamander (using the Bredford Dolphin).

Other currently identified wells in which Revus is participating are: Ipswich – operator DONG (rig Maersk Guardian); Jorbaer – BG (Bredford Dolphin); Trow – Talisman (Transocean Winner): and Aubrey – Talisman (Maersk Giant). The last named is scheduled to start in 2007 and complete in 2008.

Revus has a further eight wells penciled in for 2009 as operator/participant.

Returning to Pertra because it illustrates the speed with which small companies can move: In October, the company signed an agreement with ExxonMobil to acquire a 25% interest in the NCS Eitri prospect. Subject to approvals, Pertra could be drilling Eitri by Q2 2008.

Additionally, on 28 September Pertra reported a successful wildcat on PL 337, the Storskrymtem probe.

“We will now investigate if the volumes are sufficient for a commercial development” Pertra CEO Erik Haugane said in a statement. “The discovery is very promising for the other Paleocene prospects mapped in this area, including the Pertra-operated PL 408 just north of this discovery.”

The result suggests that the company, with partners Revus and Dana, will be keen to drill as soon as possible, probably tossing another opportunity into the drilling fraternity’s in-try for 2008.

In the Norwegian sector, the growing commitment to the Arctic augurs well, not just for 2008 but way beyond. And the heavy metal needed to mount that push is starting to arrive.

Rod Hutton at ODS-Petrodata is confident that six newbuild semisubmersibles will arrive in time to make a contribution to the 2008 Norwegian drilling effort.

They are: West Phoenix (Seadrill); WilPioneer and WilInnovator (Awilco), Aker Spitzbergen (hull has just arrived in Norway) and Aker Barents; plus Deepsea Atlantic (Odfjell Drilling).

There are 17 semis in the Norwegian sector at the moment, plus one drillship, according to Mr Hutton. “By the end of 2008, there will be around 21 semis; that’s a material increase in capacity as some of the older tonnage will continue there. The Norwegian market is completely sold out until early 2009.”

On the Norwegian newbuilds, Stewart Group’s Mr Goodger is just as bullish and goes a step further, saying: “In the next 18-24 months, we anticipate nine newly constructed units as a minimum. That’s almost a 25% increase, with very little scheduled to depart.”

Energy bank Simmons is more cautious about delivery schedules, particularly for 2008, though the net impact is the same — more high-class tonnage is due to enter the NCS arena.

As for the overall 2008 E&A plus development drilling forecast for the Norwegian sector, there appears to be considerable reticence from the Oslo/Stavanger “Establishment” to stick its neck out quite yet.

THE UK MARKET

Turning to the UK, despite the fact that opportunities are not on the same scale and because the Shell assets sale and weak Southern Gas Basin commodity prices are generating uncertainty, 2008 drilling prospects are looking good. But will there be enough rigs to do the work?

At the beginning of September 2007, analysis pointed to a UKCS spare capacity of 149 rig months for jackups and 26 rig months for semisubmersibles in 2008.

However, by early October, the position had already changed significantly, with jackups cut to 105 spare rig months on the expectation that various units, probably ENSCO 85, Noble Kolskaya and Rowan Gorilla VII, may depart the North Sea; whereas semi capacity had increased to 46 months, even allowing for the possible departure of Glomar Arctic III for Libya.

According to Ian Burdis, AGR division manager for well construction, the UK jackup market is now pretty much in balance with little going spare, but demand for semisubmersibles continues to significantly outstrip supply.

Indeed, AGR said at Offshore Europe, “UK semi demand in 2008 exceeds supply by 96 rig months (8 rig years).” If anything, that position has worsened, Mr Burdis said.

But, while he and others see considerable certainty in a good year for rig owners in Europe, Mr Burdis said it is important to distinguish between different geographic areas of the UKCS. For example, while the Central North Sea (CNS) is booming and Northern North Sea picking up nicely, the Southern Gas Basin is much less healthy due to gas prices and the failure of the UK government to adjust its fiscal system to take account of the gas issue. This is now feeding into the market and dampening jackup demand for 2008.

He sees the role of independents and energy minnows strengthening as the selling down of portfolios by majors such as Shell continues and that AGR and its peers will play an increasingly important role in pulling together cohesive multiclient drilling programmes that drilling contractors should find attractive.

As a result, this company expects to drill more than 20 E&A wells on the UKCS in 2008, possibly as many as 25, of which the bulk is already confirmed. Contrast this with the anticipated 2007 tally of 17, which is roughly one-third of the forecast UK total drilled by all-comers.

But it is not yet clear if the anticipated big increase in next year’s UK tally for the company will be attributable to rising market share, though the likelihood is that it will be as more oil companies contract out E&A well management activities.

Among the hottest plays on the UKCS going into 2008 is the reviving interest in CNS heavy crude finds and the rejuvenating Atlantic Frontier.

Leading the way in the CNS is StatoilHydro (via Norsk Hydro), which has struck a deal with mini-independents Silverstone Energy and Wilderness Energy for close cooperation on UK North Sea licences in Quadrant 9.

The Norwegian major will pay for further exploration in exchange for up to 50% equity in these licenses, as well as the option to take over the operatorship.

This is the latest step in a strategy designed to build sufficient critical mass in Quadrant 9 to enable a viable multi-field heavy crude development with the Bressay and Mariner discoveries at its centre. With an exploration well on the Mermaid prospect started in Q4 2007, further drilling activity might happen on Quadrant 9 in the coming year.

Mr Burdis said, “There’s a lot of Quad 9 activity anticipated, although, as yet, no-one has gone out to the market and said they want a rig … yet.”

On the Atlantic Frontier, it looks as if 2008 will become one of the busiest in years, buoyed by Shell starting its “Big Cat” hunt using the hi-spec semi Leiv Eiriksson.

But there are caveats as Shell is seeking a farm-in to its P799 UKCS licence in order to spread risk on its South Uist probe. Indeed, Shell is seeking to do the same with its 007 and 009 licenses in the Faroese sector, plus it wants to reduce risk attached to its Irish sector licenses 2/94 and 2/05. The Dooish discovery (still classed as a tight hole) and West Dooish prospect lie in 2/94, while the Middleton prospect is on 2/05.

In addition, Andrew Vinall of Hannon Westwood expects wells to be drilled on the UK Frontier Cambo (a 2002 discovery by Hess) and Tornado (OMV with Faroe Petroleum) prospects, plus Chevron will continue appraising its large Rosebank/Lochnagar discovery.

TOTAL may be keen to appraise its Tormore gas/condensate find (well 205/5a-1) of 2007 as it lies 15 km southwest of its Laggan asset, which was successfully appraised in 2004 and is now at the threshold of becoming commercial.

Further, according to Mr Vinall, Hess may be about to drill south of the BP-operated Schiehallion field and, on the Irish part of the Frontier, Eni will likely drill two wells — one at Slyne/Erris, the other at South Porcupine, while StatoilHydro may also drill Slyne-Erris.

With such good portents for northwest Europe, the last thing anyone wants is for rig rate inflation to set the market back. However, AGR’s Mr Burdis is relaxed on this point.

“On balance, I think rates will remain fairly flat, which is a good thing. We’ve seen a definite reduction in the appetite among smaller players to hire rigs at rates over $350,000 per day. It’s a psychological barrier, even for the gung-ho Canadians,” he added.