Why West is best hope for UKCS rebound

Luke Davis, Gregory Brown, Dr Roger Knight
Tuesday, January 5, 2010

Why has the inhospitable West of Shetland region consistently bucked the trend of enhanced conservatism felt throughout the wider offshore market? And what is driving this activity? Infield Systems' Luke Davis, Gregory Brown and Dr Roger Knight examine the case for opening the area as a spur for kick-starting a new round of UK offshore development.

The West of Shetland area field map. SOURCE: INFIELD ENERGY GATEWAY

The West of Shetland, an area of ocean on the edge of the North West European Continental Shelf is characterised by some fairly extreme environmental conditions at times. In winter strong winds, with storm waves averaging 18m and peaking at 33m, low water temperatures and the relentless pounding of the harsh Atlantic Ocean all contribute in the creation of an inhospitable operating environment. These natural conditions, matched with a basic lack of established offshore infrastructure, make any new projects in the area exceptionally challenging in terms of both construction and management.

And yet, amidst a general climate of cost-squeezing and delays in the wider market, the region has bucked the trend and seen extensive drilling activity with certain projects continuing apace. The region is now a battleground as subsea contractors compete for a major contract from Total and gas finds have been joined by potentially significant oil discoveries.

The North Sea – a staggered history
Ever since BP's Sea Gem jackup drilling rig struck gas in the West Sole field during the autumn of 1965 the North Sea has been a major source of wealth and security for the British economy. In the following years, E&P activity ballooned while massive financial investment led to technological breakthroughs allowing operators to overcome the barriers associated with the harsh environmental conditions. The glut of cheap indigenous energy that followed drove Britain out of its post-war blues on a wave of prosperity and security that was previously unknown.

Since the pioneering days of the late 1960s and early 1970s operators and their contractors have established a vast network of pipelines linking up an equally impressive infrastructure of production platforms and refineries. This infrastructure served the soaring demand for domestic and industrial natural gas during the 1970s and beyond as manufacturers sought to exploit this new affordable source of energy, yet not much of this extends to the west of the Shetland Islands.

During the early 1990s, the ban on gas-fired power stations was lifted and demand once again soared as gas turbine technology completely altered the face of Britain's electricity generation network. Today natural gas accounts for 43% of the UK's inland energy consumption and almost half of primary energy used for power stations during the coldest winter days. In short, Britain is heavily reliant on its indigenous reserves of natural gas.

Today the UK North Sea has matured and production rates of both oil and gas are in decline. Moreover, new discoveries are failing to keep pace with field depletion rates and the large range of fields yet to be brought onstream are becoming increasingly expensive to tap due to rising construction costs, the complexities of the reservoirs and the often remoteness of their locations.

But these fields do form part of an intricate jigsaw which the UK government is keen to piece together in order gain energy security through the diversification of supply. Operators around NWECS are sensitive to this message, and understand that demand for gas in the UK has not greatly diminished even during the current recession. This message is further compounded through the lack of near-term alternatives: conventional coal is out of the question; lead times of over 15 years for nuclear energy make it impractical as a shortterm solution, and alternative energy sources such as wind do not offer as good value in terms of Capex input and energy output. Gas is therefore the most attractive option and Majors and Independents have thus invested heavily in exploring potential fields previously deemed too marginal to be genuine prospects.

The UK's gas supply comes from a variety of domestic and international sources and while it is currently expected that the Nord Stream line, bringing has from the Russian Arctic, could provide around 4 billion cubic metres of gas per year by a speculative date of 2012, the driving force of energy security places the majority of interest firmly within homebred sources such as West of Shetland.

The key case study here is Total's Laggan-Tormore development and a group of fields such as Glenlivet and Tobermory that may just lead to opening up the last frontier game in town.

The last big game in town?
The Laggan field was first discovered by Shell in 1986 but is now operated by Total, the French major having been awarded the exploration licence in 1995. Total drilled its first appraisal well during 1996 before completing a further campaign in 2004. The Tormore reservoir that completes the Total development was discovered by an exploration well drilled in 2007 and, together, the Laggan-Tormore development represents one of the last major greenfield developments in UK waters operated by any of the majors.

The project is substantial in both its scope and potential, but particularly in its environmental challenges. The two fields will require extensive operations to build a new onshore gas terminal plus subsea facilities and pipelines to create a hydrocarbon recovery system. The current development concept revolves around a long-distance tieback of subsea wells connecting to the new processing terminal at Sullom Voe with further export of the processed gas to the UK mainland via the Frigg (FUKA) pipeline.

First gas is expected in 2014 with an initial plateau production rate of 500 million ft3/day. Construction costs for the two pipelines linking the fields to the Shetland Islands and the FUKA line (to the mainland) are likely to be close to $900 million.

The basic engineering contract for Laggan-Tormore was awarded to a joint venture involving Offshore Design Engineering and Doris Engineering in February 2009. Further awards are expected to be announced in 1Q and 2Q 2010 including contracts to supply the subsea system and lay the pipeline to tiein the development to the existing FUKA line.

The window for offshore installation in the area falls between April and September so the laying of the 234km pipeline linking the Shetland Islands and the FUKA line could take place over a three-year period between 2011 and 2013. At present, subsea production system installation and drilling activity is expected to commence during 2012 with first gas due in 1Q 2014.

Final gross development costs are expected to be in the region of $5 billion. Total originally planned these to be shared by a number of third parties, but so far it has been unsuccessful in securing any firm commercial partners. Current projections lean towards Total going it alone, thereby highlighting its confidence in the West of Shetland region in terms of economic viability and potential revenue generation.

Further afield
The Laggan-Tormore fields themselves are relatively small and lie in water depths of around 600m. They are also far removed from current gas infrastructure. The project's $5 billion price tag is costly when considered as a two-field standalone development, but looking at these fields in isolation has never been the case: the key to the West of Shetland developments is that by developing one field the barriers to development further west and north are diminished.

Around Laggan-Tormore are several other medium-sized, but important gas fields. These include Torridon (Chevron), Laxford (Total) and Tobermory (Total). When combined, these developments have an estimated 2-3tcf of additional gas reserves, making them the largest yetto- be developed gas project in UK waters and the third largest in the North Sea expected to come online in the next ten years. Grouping the projects together highlights the importance of the overall development and when linked to the fact that they potentially represent the final play in the UKCS for the majors, their importance is only heightened.

The West of Shetland region does not only contain significant gas finds though. To the south of Laggan-Tormore lie BP's producing fields of Schiehallion (pictured), Foinaven and Loyal while the first phase of Clair is situated to the east. Second-stage production of the Clair field is expected to start tapping the next 400mmbbl or so oil reserves in around five years time.

As with the gas finds, recent activity has been buoyant. In November 2009 Austria's OMV group completed a sidetrack well in the deepwater Tornado discovery and this confirmation followed Hurricane Exploration's earlier announcement of a 'potentially significant' find at the Lancaster prospect. Although questions could be raised surrounding the development of a fractured basement in Lancaster's case, the discovery of two potentially commercial deposits in such close proximity to each other further underpins Infield's positive sentiment towards the region, whilst the presence of light oil highlights the variety of potential hydrocarbon facilities on the West of Shetlands shelf area.

Future projections
West of Shetland is perceived to be a frontier of considerable importance for the near- and long-term future of the UK offshore industry. The key to the whole region is the laying of pipelines and the installation of an infrastructure that will allow future developments to go ahead.

The Laggan-Tormore line linking the two fields to the Shetlands is likely not just to serve Total's developments but also the Rosebank/Lochnagar field areas and its gas content. Chevron is taking the lead in the Rosebank fields and the US major also holds a stake within the Laggan-Tormore project. It would come as no surprise to see the fields use the same infrastructure to export the processed gas into the FUKA pipeline and onto the UK national grid. There is also the possibility that extending the infrastructure so far to the northwest will open up an avenue of export for any finds that are made in the Faroe Islands sector in years to come. That is truly a new frontier region with great potential for the decades ahead.

The present global economic downturn has eroded much of the appetite for largescale Capex-intensive projects which had become fairly commonplace over the last decade. This has only been compounded by recent weakness in gas prices and its delineation away from a volatile oil price. However, Infield sees continuing strength in the fundamental drivers for development West of Shetland, with good potential for an agreement to be reached to fund the exportation infrastructure required to unlock Laggan-Tormore and its neighbouring fields, establishing an important step towards gaining a greater degree of energy autonomy in the UK.

For although the UK relies on less than 10% spot gas imports to top up its supplies at the moment, by the end of the next decade, if things remain as they are, this figure could skyrocket out of control leaving the UK very vulnerable to the world market as highlighted by the expectation that it may need to import as much as 50% of consumed gas this winter from countries such as Norway and Qatar. The UK needs this West of Shetland gas and the jobs it will bring. OE

Categories: Energy Deepwater Activity Europe

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