OMC – a view from the Mediterranean

May 16, 2013

This year’s OMC conference ‘Charting a course in a changing sea’ attracted more than 560 companies from 30 countries to Ravenna, Italy, for 26 technical sessions and 120 speakers. But the changing gas market was on everyone’s mind.

US shale gas, EU market liberalization and the collapse of consumption in Europe have together upended the European region’s stable market in gas, ENI chief executive Paolo Scaroni told this year’s Offshore Mediterranean Conference (OMC).

Gas sales fell 15% in Europe in 2012 compared to 2008, due to the area’s ailing economy. Meanwhile, the potential for gas exports from the US is looming as a result of the country’s unconventionals boom.

And yet, said Scaroni, global gas prices remain dislocated.

For ENI, an integrated E&P and marketing company, the result has been a decision to renegotiate its contracts with all operators, including Norway’s Statoil, Libyan National Oil Corp., Algeria’s Sonatrach, and Russia’s Gazprom, by the end of this year, said Scaroni.

However, the Mediterranean has its own shifting market to contend with. North Africa, whose governments and IOCs were out in force at OMC, is emerging as a growing consumer to the south. The eastern Mediterranean and East Africa are also opening up new, significant gas provinces.

Both trends are challenging traditional supplier-consumer relationships, but could also create on opportunity for the Mediterranean, OMC attendees heard.

Bruno Lescoeur, chief executive, EdisonBruno Lescoeur, chief executive of Italian oil and gas group Edison, said: “Exploration and production could be the backbone of the economy in the Mediterranean, attracting investment. Italy has an opportunity to play an important role.”

Driving increased demand in the south are countries more accustomed to exporting their resources: Algeria, Libya, and Egypt. These countries are now, for various reasons, starting to struggle to meet their own, growing needs (for energy as well as receipts from exports) and are hungry for foreign investment to increase production and make new finds, said Lescoeur.

While countries in Europe will see domestic demand double between 1990 and 2030, production is expected to increase by barely 20%. Meanwhile, countries to the south, from Turkey to Algeria, will see demand for energy increase eight-fold, and production six-fold, he said.

“This complexity between north and south will increase. The pure producer versus pure consumer paradigm is no longer valid,” said Lescoeur.

“One thing is certain: The Mediterranean basin can be a game changer in the EU, if you look at the recent discoveries in the region and the change in relationship between producing and consumer countries.”

ENI already has a significant proportion of its upstream business in North Africa – 30% in fact, said ENI’s Scaroni, both onshore and offshore.

Libya, a member of the Organization of Petroleum Exporting Countries (OPEC), holds the largest proven oil reserves in Africa, at 47 billion barrels.

Egypt has large a proved and producing offshore hydrocarbon system, highlighted by BP’s current US$10 billion West Nile Delta Project, one of the largest projects in the Egyptian offshore basin, due on stream in 2014.

Algeria has an established and significant onshore exploration and production industry—a key resource for Europe—but it is now also looking offshore to increase its reserves.

However, even Scaroni admits the going is not easy for international oil companies in the region, following a series of uprisings in 2011, ongoing political instability, arguments over payments to IOCs in Egypt, and more recently, the attack on the In Amenas gas plant in Algeria.

Scaroni told OMC: “What is happening in North Africa is a cause for concern for us. I’m personally very optimistic. Algeria has not been as impacted by the upheavals. In Egypt, development of the political system is moving in the right direction.

“In Libya, production stopped but started again. I visit all the time and I see the situation is improving. I was there last week and there were fewer weapons on the streets and more willingness to jump-start the economy. I see the future of this country is bright.”

For Lescoeur it is fairly simple: “The challenges are in geographic turbulence and political turmoil and are amplified by economic and environmental risk environments. The trade-off is between risk and reward, between long-term vision and short-term constraints.”

It is not just North Africa that has suffered from political instability. Italy, home of OMC, only last year lifted its offshore exploration and production moratorium after ratifying Legislative Decree 83/2012, opening its formerly closed territory within 12 nautical miles of the coast to renewed activity.

The Mediterranean basin can be a game changer in the EU, if you look at recent discoveries in the region.The government is now taking the sector seriously. Claudio de Vincenti, undersecretary, Ministry for Economic Development, described the sector as “strategic and key” at OMC. However, a new National Energy Strategy aiming to return production to 1990s levels by 2020 failed to get through Italy’s parliament before inconclusive elections in March sent the country into a political vacuum with no majority government, OMC was told.

Italy, which started exploring the Adriatic through Eni in the 1950s, has the biggest oil reserves in Europe behind the UK and Norway, according to OMC host Ravenna Chamber of Commerce. But most of it is within 12 miles of the shore – to get to this resource the country needed a new authorization system in addition to lifting the moratorium, Scaroni said.

Despite the delays on their own doorstep, Italian oil and gas service companies are not resting on their laurels. Just like North Sea or Gulf of Mexico operators, they have a global market to tap.

Innocenzo Titone, chairman of OMC 2013 and also of ENI, said the industry was also looking to the potential for it to capitalize on the major recent exploration finds in the eastern Mediterranean, in the Levant, as well as new areas such as Mozambique.

Platform and ship fabrication firm Rosetti has already been looking further afield. It opened a new yard in Kazakhstan in 2009 which now accounts for 30% of the firm’s business.

Rosetti has been moving into established markets in recent years. It was quick to step into a void in the North Sea left after the oil price slump in the 1990s. Rosetti moved in when activity started to rebound, carrying out projects for ConocoPhillips and Total, and is continuing to look at UK work, especially smaller brownfield projects.

Italian drilling firm Drillmec is currently working on three EPC contracts for complete offshore drilling packages for fixed platforms in the Gulf of Mexico and the Caspian Sea for PEMSA—Perforadora in Mexico—and Caspian Energy for Lukoil in the Russian Caspian Sea.

North Africa

The desire of North African countries to increase their reserves and production was reinforced by the numbers of delegates from Algeria, Libya and Egypt at OMC. Algeria sent government officials and representatives from state oil firm Sonatrach, with speakers from both and a large exhibition stand. It is already a well-established onshore producer. Operations in the south of the country made it the fourth-largest crude oil producer in Africa in 2010, following Nigeria, Angola, and Libya, according to the IEA. The hydrocarbon industry accounts for about 37% of the country’s gross domestic product and revenues from the sector cover two-thirds of the state budget, according to Sonatrach.

However, oil production has fallen and domestic demand for gas for power has increased, so the firm is keen to attract international operators to help explore its offshore acreage –93,000sq km spread along 1200km of coastline. To this end the country says a new law has been introduced offering better fiscal terms for new projects, specifically for offshore, as well as unconventional projects. Sonatrach is itself planning to invest $80billion between 2012 and 2016, 73% of which would be on upstream activities, OMC was told.

“Our goal is to continue production, but also further exploration to find new reserves,” said Abdelhamid Zerguine, the firm’s chief executive. “The challenge for Algeria is to meet domestic market needs in the long term. The rate of growth of the population has been 15%. The other challenge is to strengthen our position in supplying oil and gas to the world. We need partners.”

CGG will complete Algeria's 5000sq km, 3D seismic acquisition program in July.Offshore Algeria is considered a frontier area because there has been so little exploration, said Sonatrach geophysicist Nahim Khennaf during OMC. In the past, Sonatrach has claimed that successful exploration on equivalent basins Northern Tunisia and Southern Italy confirm the existence of hydrocarbons in its offshore territory.

However, the only exploration offshore to date has been a deepwater well in the 1970s (Habibas-1, drilled in 923m of water to a total depth of 4496m in Hercynian and inconclusive), which means there is little information available for any international companies to interpret, said Khannaf.

Algeria is now looking to change this, he said. It has a large amount of 2D seismic data across the area – shot ahead of a previous attempt to attract foreign investment - but the country recently launched a major 3D seismic acquisition program using French firm CGG. It is shooting 5000sq km; 4000sq km in the eastern area, 1000sq km in the west.

Offshore data acquisition began in February and is due to finish in July. Processing has already started but is expected to take at least a year, with potential plans for exploration drilling to start in late 2014 or 2015, said Sonatrach.

“Offshore, Sonatrach is working alone,” said Khennaf. “The southern (onshore) geology in the Sahara is less complex than the north and offshore, and the southern part is well explored. Only a few companies are working in the north and currently, not a single foreign company. It is thought offshore is similar to the onshore northern area where there was a discovery in the 1960s. Some believe there is some analogy with offshore Red Sea, also offshore Spain, off Valencia, and Sicily. We are hoping the new law will make it more attractive.”

A report by WesternGeco in 2003, following the 2D seismic program, summarized the deepwater margin of Algeria as “potentially hosting a favorable combination of factors for the development of an effective petroleum system.”

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