Hard to reach

By Huw Thomas, Editor

Unfortunately, many of the most promising sites are located in some of the world’s most challenging operating environments, with ultra deep water, freezing temperatures and political instability just a few of the obstacles companies face as they try to bring new facilities online. Here, O&G takes a look at some major projects that illustrate the challenges – and the potential rewards – of exploration at the frontier.

Sakhalin II

Scheduled to begin full operation in 2008, Sakhalin II is a combined gas and oil project that exploits the Piltun-Astokhskoye oil and Lunskoye gas fields. The project is managed by the Sakhalin Energy Investment Company (SEIC), in which Shell is operating partner. Japanese companies Mitsui and Mitsubishi are also involved, with Russian giant Gazprom recently joining as majority shareholder.

Due to its remote location and lack of infrastructure, even getting to Sakhalin is a major operation. It takes nine hours to reach the island from Moscow and a further 15-hour train journey to reach the town of Nogliki, from where workers are transported to the offshore rigs. Getting equipment to the site has been no less arduous. Everything needs to be imported, from the smallest components to the huge platforms that must be towed in across the sea. In winter, the ocean freezes as temperatures drop to -40C, while summer sees highs of 30C. Engineers had to take these extremes of climate into account while designing the offshore platforms and fight a constant battle with the elements during their construction. Such is the severity of the cold that icebreakers are stationed at every rig.

In addition to the hostile climate, Sakhalin sits on an area of seismic activity on a par with New Zealand and the Persian Gulf. The ability to safely withstand a major earthquake therefore had to be built into every aspect of the project’s infrastructure. The offshore rigs can withstand the powerful quakes that occur in general once every 200 years without failure or disruption. Even the more intense quakes that strike only once every 3000 years should cause only limited damage.

This resilience has been achieved through an innovative cradle system that uses friction pendulum bearings. The system reduces the horizontal loads on the platform during quakes by helping to isolate the topside from the most damaging ground motion. More commonly found in major constructions such as highways and bridges, this is the first time the technology has been used for an offshore platform. Similar precautions have been taken at the LNG processing plant, which is built to withstand the kind of massively powerful quake that happens once every 10,000 years without major loss of containment.

The site’s seismic instability also has major implications for pipelines. Onshore lines cross known faults in several places. To protect against rupture at these locations, thicker walled pipes and a special trenching system have been employed. In addition, the project is setting up a seismic monitoring plan that will cover a large portion of the island. Data from monitoring stations will be transmitted directly to the pipeline control center to aid quick emergency response in the event of an earthquake.

Environmental concerns are another big issue in such an untouched wilderness. With oil pipelines crossing more than 1000 streams and rivers, extra effort has to be made to prevent potentially damaging spills. There are also problems caused by the small population of rare western grey whales that feed off the northeast coast of the island during summer. To avoid disturbing the whales, installation of the offshore pipeline was delayed and eventually rerouted. All of these pipeline measures cost somewhere in the region of $300 million.

These factors have seen the Sakhalin II’s costs double to $20 billion, something that has not gone down well with the project’s hosts. Under the terms of the 1994 production-sharing contract, Russia will only start reaping Sakhalin’s potentially enormous tax benefits once the project’s setup costs have been recovered. The bigger the price tag, the longer Russia will have to wait. And there are signs of impatience. Operating in a frontier environment as guests of a country that is rapidly waking up to its power in the energy market comes with certain risks. It was only a few years ago that the Kremlin used questionable back tax claims against Russian operator Yukos to bring the company down and seize its assets. Sakhalin Energy is protected from tax claims by the terms of its production sharing agreement, but that does not mean it will always remain safe. In this light, the recent alliance with Gazprom can be seen as a way for Sakhalin’s foreign partners to protect themselves from governmental interference.

If the dangers are great, the potential rewards are even greater. The next stage of production should see Sakhalin II producing 340,000 barrels of oil per day alongside an annual 9.6 million tons of LNG. Sakhalin Energy has already signed an agreement with Japan’s Osaka Gas Company to provide a long-term supply of LNG. The majority (98 percent) of Sakhalin II’s future production capacity has effectively been sold off in advance, a deal that will see the company annually shipping 0.2 million tons of LNG to Japan for the next two decades. Further gains will be made once other companies start operating in the area and begin to use Sakhalin Energy’s expensive LNG plants and terminals.

Jack 2

Another major exploration breakthrough has arrived in the shape of Chevron’s successful production test of the Jack 2 oil well in the Gulf of Mexico. The well test is the first time that oil has been successfully extracted from the ancient tertiary trend in the deepest waters of the Gulf and has bolstered hopes that companies will soon be able to tap the giant reserves that lie there.

It is estimated that the deepwater area of the Gulf of Mexico could yield between three billion and 15 billion barrels of oil, making it potentially the biggest US discovery since that of Prudhoe Bay in Alaska nearly 40 years ago. If production comes in at the upper end of that estimate it will boost US reserves by 50 percent. The Gulf has long been seen as an area with serious promise, but the difficulty of accessing the reserves in such deep water has been a major stumbling block.

Before Jack could be tapped, there was the problem of deciding exactly where to drill. In addition to the thousands of feet of water, the potential discovery was under many more thousands of feet of rock salt. A common problem in deep-sea exploration, salt deposits distort seismic sound waves, making accurate geophysical imaging extremely difficult. Chevron has developed their own proprietary technologies that deliver much clearer data than was previously available.

But of course, data is worthless if you don’t have the means to quickly and accurately interpret it. To this end, Chevron also invested in super-powerful cluster computers that enable seismic data to be processed up to seven times faster than with previous systems. With this technology, Chevron was able to convert raw data into high-resolution images more quickly and at a lower cost than anyone else in the industry.

To open the test well, the company had to break more than half-a-dozen drilling records. Both the opening of the well and the hydrocarbon extraction presented significant challenges. The Jack 2 well was completed in 7000 feet of water and was drilled to a depth of 28,175 feet below the ocean floor, breaking Chevron’s previous depth record, set in Tahiti in 2004. In order to successfully drill at such a depth, existing technology had to be pushed to new levels in order to withstand the incredible pressures, temperatures and geologic challenges involved.

Difficulties existed on the surface too. The kind of drill ship required to open such a well is an exceedingly rare commodity. They have to be capable of lifting the weight of 28,000 feet of metal pipe, as well as pumping fluids to that depth and back to ensure the drill bit remains lubricated and rock cuttings can be brought to the surface. Only 20 or so such ships exist. The meteorological conditions in the Gulf can also be extremely volatile. During the Jack drilling, rigs had to be disconnected and evacuated five times due to hurricanes and storms.

Drilling such a deep well required being able to deftly navigate a technical obstacle course. There can be serious implications when a drill bit encounters a new rock layer or a fault zone that may contain unanticipated pressures or fluids. If the drilling system is not prepared to handle these changes, the drill pipe could become stuck, the well could collapse, or well liquids and gases could start flowing unexpectedly to the surface. To counter these risks Chevron used their Well Design and Execution and Collaboration Center (WellDEC). Based in Houston, WellDEC’s team of drilling engineers, geologists and geophysicists can analyze data in real time, optimizing performance and avoiding potential problems. WellDEC was in direct contact with the drilling team throughout the process, providing invaluable support and ensuring maximum efficiency.

Though full-scale production is a little way off, the results of the Jack 2 test are promising. During the test period, the well sustained a flow rate of more than 6000 barrels of crude oil a day, raising hopes that the Gulf of Mexico could be producing a daily yield of 800,000 and accounting for 11 percent of US oil production by 2011.

But operating at the very limits of technology also has major financial implications. Completing the Jack 2 well test cost more than $100 million dollars, while constructing a production facility in the area could run to anywhere between $250 million and $500 million. Add in a series of production wells at as much as $120 million each and you are left with an extremely hefty price tag. That companies like Chevron are prepared to spend so much on such risky and experimental exploration is a clear indication of how far they will go to secure valuable new energy supplies.

Nigeria

Geographical and geological concerns are not the only factors that make locating and securing energy supplies such a challenge. It is an unfortunate fact of life that some of the places which hold the biggest reserves of energy are also among the most politically and socially volatile places on earth.

A particularly striking example of this can be found in Nigeria. The African country is the 11th biggest oil producer in the world and the fifth biggest supplier to the US. There is an estimated reserve of some 30 billion barrels, mostly found in the swamps of the Niger delta but also at a number of deepwater sites off the country’s coast. Oil accounts for 90 percent of Nigeria’s export earnings, bringing in $40 billion dollars in revenue annually. However, due to deeply ingrained corruption, very little of this oil revenue finds its way into the hands of Nigeria’s 27 million inhabitants. Average per capita income stands at only around $300 per year.

Oil companies seeking to access Nigeria’s oil reserves must contend with a wide range of obstacles. With such widespread poverty, the idea that the country’s oil revenues are being plundered by foreigners and crooked officials provokes considerable anger in the inhabitants. Ordinary Nigerians suffer the environmental damage sometimes associated with oil extraction but rarely feel any of the benefits. As a result, there is a widespread feeling that they should have a much larger stake in their country’s energy reserves. Armed groups such as the Movement for the Emancipation of the Niger Delta (MEND) stage attacks on pipelines and facilities, costing millions of dollars in lost production. There have even been assaults on deepwater rigs miles off the coast. Oil company employees are taken hostage and held for ransom. Some have even been killed.

Theft of crude oil from pipelines, a practice known as bunkering, is a massive illegal industry. It is estimated that up to 100,000 barrels of oil a day are siphoned off to be sold on the high seas, fuelling bloody turf wars between armed gangs. The trade is well organized and extremely lucrative, involving government officials, police and members of the military. In effect it is the largest private business in the country, with daily revenues of as much as $3 billion. But the damage is not only financial. Oil bunkering is a risky business, often leading to spillages and pipeline explosions, further damaging an environment that has already been scarred by decades of sometimes-reckless exploitation.

Producing almost half of Nigeria’s oil, Shell is the largest energy company working in the country. It controls over 1000 wells in the Niger Delta and it is the operator and 55 percent shareholder in the Bonga field, Nigeria’s first offshore deepwater project. Shell also has a stake in the Nigeria Liquefied Natural Gas (NLNG) company, which supplied eight percent of the world’s LNG in 2005. The company knows only too well the difficulties of operating in such an unstable environment. “We have been a major investor in the country for more than 50 years and are committed to helping it meet its ambitious goals to increase oil and gas production.” explained Basil Omiyi, Managing Director of Shell in Nigeria recently. “We are equally committed to supporting the government in tackling the many challenges in the Niger Delta. Bringing development to this region of 27 million people, with an area almost the size of England, remains the biggest challenge. Corruption, ethnic conflicts and the activities of heavily armed criminal gangs severely complicate this task.”

Security issues remain a major concern for Shell. Despite a crackdown by government forces that saw incidents reduce by almost 50 percent in 2005, 2006 has seen an upsurge in attacks. “Since December 2005 the situation has deteriorated significantly, following the bombing of a major pipeline by local militia.” said Omiyi. “This marked the start of a series of attacks on SPDC and other oil and gas producers’ facilities by militants. Their demands included: the release of two people being held by the Nigerian authorities, a bigger share of oil revenues for the Niger Delta and payments for alleged environmental damage by SPDC. The attacks have killed two contractors, shut in more than 40 percent of SPDC’s production and forced the evacuation of all field staff and contractors from the Western Delta. We are deeply concerned about the safety of staff and contractors, the large oil spills caused by the attacks and the impact on development. We continue to consult with government and other stakeholders to explore options to resolve the crisis.”

As long as oil and gas supplies remain to be exploited in dangerous and chaotic places like Nigeria, energy companies will take risks to access them. It is down to the industry to work with governments and local communities to help improve the situation on the ground. Shell is attempting to tackle corruption with its commitment to transparency and the company is also promoting initiatives that provide jobs and assistance to Nigerians. Though progress is clearly slow in many areas, there have been some encouraging results and the work continues.

The future

So while the era of easy oil may be over, companies continue to evolve in their search for alternative supplies. Through the use of innovative techniques, political maneuvering and increased local knowledge, the oil and gas industry is rising to the challenges prompted by this new age. While some of the hurdles will be harder to clear than others, in particular those of a social or political nature, the industry seems to be moving in the right direction. Reserves that would have been inaccessible a decade ago are now within reach. Companies are constantly looking for ways to improve their operations and as long as they keep moving forward, they should be able to continue to meet the world’s energy needs.