Reserves Replacement & Cost: Drilling a $30 Billion Hole in Caspian Sea

Author: sicilian_kan Date posted Apr19th-2013, Friday 14:31 Hub, "There are plenty of dreamers out there - but when it comes to the reality. Selling the entire biz is not that easy with only 2 of 4 assets properly proven up imho." No asset is properly proven up. One only needs to listen to JG recently to understand this. Selling the business before it is proven up is easy. It gives the next man in some opportunity enabling a higher value to be set over the part of the asset that one has proven up already. Whether one can sell the company for good value and to what extent GKP are in control of that process is the $64,000 question. Let's look at this from the next man in perspective: At present, the next man in gets quite a lot. He gets: (a) an under explored Shaikan and AB (b) a very under explored SA; and (c) a very very underexplored BB; in addition to (d) any increase at the macro level e.g. due to the POO going up (e) gas The next man in can therefore pay perhaps too good a price for GKP based on the current value of SH and AB, because he is getting so much opportunity included as well. That opportunity has value. This is what happened when the Genel deal was struck. They paid $1.5/bbl for resources and $6/bbl for 2P reserves. We can debate until the cows come home the precise amount that will be due to companies under the PSC, but it is quite clear that Genel were not paying $6/bbl because it was worth paying that price now and up front for an asset that might take 1-25 years to extract out of the ground for only a little more return over and above what was paid in the first place. No, Genel paid that price because of the opportunity cost to increase what was known, to find and develop something much, much bigger. To convert resources into reserves and to generate more resources. The risk is not, by the way, can GKP sell the whole company. When the time is politically right to sell SH, the KRG would be only too willing to allow GKP to sell SA and BB to a supermajor. I cannot see Hawrami saying "no please Todd, please stay, we don't want Exxon to have SA, we want you". In fact it is far more likely that GKP will be dictated to. Rather the risk is what if anything can GKP retain, and what should we as shareholders want it to retain, assuming that hypothetically the KRG was generous enough to allow us to retain assets. We can all sit here tapping into our computers saying how terrible it would be to not prove up all the assets before sale and how we would all be vastly more rich by holding each asset until its optimal moment. BUT will this actually be the case: - We are not going to get $5/bbl-$6/bbl for each individual asset, SH, AB, SA and BB, once all have been fully proven up. Though yes more oil, and a large amount, will inevitably be found. - But the short to medium term pain on such a route will be high. Unlike a takeover, that money would not go to shareholders. It would go to GKP, who would spend a sizeable amount of it very quickly exploring and developing assets etc. The share price would also be affected by the political and exploratory risks involved, the lack of a proven asset and the likely time delays etc. Most holders here can't wait 1 month, let alone the 3-5 years required to hold on to assets like SA and BB. And there would be more bonuses and share options being handed out and more manipulation of the sp etc. over the years diluting holders and / or dampening sentiment. Also, on asset sales, a special dividend would be taxed at a higher rate and over all sums and not just an individuals capital gain over the annual allowance (or none if on a spread bet). The share price would then not reflect the amount of money coming in. Only with a company sale will this happen, because it is still worth someone else buying a share being bought in a takeover for £8 for £7.75 as there is profit to be had. And if one waits, one gets the full £8. On the other hand it is not worth paying anything near £7.75 for a company with £8 cash coming in. Much of this cash will disappear to the taxman and to the company's coffers and will not be included in the value. So Hub, I am not a dreamer for wanting a sale of the entire company this year. It would suit all parties. Shareholders get fairly rewarded and no longer need to hold large amounts of money at high risk for years to come. Todd gets his pay day. The KRG get supermajors in for all the stakes held by GKP. Personally, I think this situation to be the most likely. It will also sell well to shareholders who will be attracted by the somewhat higher price per bbl oil than the buyer should arguably be paying or which he might pay later. It will be a clean solution, and it will in my view, and contrary to your suggestion, be to our advantage. There will be no arguments about what should happen to the money coming in or deductions along the way. It will go to shareholders who can each choose what to do with it. As for SA being manageable to get into production by GKP alone, how can you say that after just two drills and without seeing the FDP on Shaikan? We just do not know. Now there is lots to achieve in the coming months before a sale (though much less than there was previously). The completion of the pipeline, the conclusion of the court case etc. But it will not be long to wait, I hope, which is why I am here, and there is no guessing as to precisely when the sp will preempt the reality on the ground or what the end figure actually will be. ========== Reserves Replacement & Cost Fordian There is a fascinating article in the FT today re the struggle of the majors to replace their existing reserves, and the vast sums of cash they are spending to do just that. The average reserve replacement ration is at around 93% meaning that generally most company's reserves are declining. -Shell is said to have spent over 5 billion USD attempting to explore in Alaska yet has nothing to show for it. - Chevron's Gorgon LNG project in Oz has ballooned 41% to 52 billion USD so far (Chevron bucks the reserves replacement trend though as they have significantly upgraded over the past few years on the back of multiple gas finds in Oz) - Kashagan in Kazakhstan (phase 1..) has cost 46 billion USD so far (13 billion barrels recoverable). CNN estimated the cost so far to be 116 billion USD! These help put GKP and its resource in perspective. If a route to market is confirmed, then the multiples of billions in terms of value are easy to imagine. The gas issue is well understood and although not easy to deal with, can be effectively dealt with and safely handled. Kashagan has this issue and many others! how about pack ice, radioactive materials (NORM) and incredibly fragile ecosystems? GKP's oil is some of the cheapest to extract and treat for export in the world at between 4 and 6 USD a barrel, whilst in other parts, majors spend up to 25 USD barrel. The value is obvious to all and I'd expect Exxon, Hunt, Afren, MOL, Genel, GKP etc to be in some sort of discussions about they would all handle a single 'super-field'. i.e. rebalance their stakes, and back costs, take the operating role... We all wonder what, if anything, PW are doing on a day to day basis and I believe there is plenty to keep them busy behind closed doors. Exxon are notoriously secretive so if anything involves them, you can be fairly sure we wont find out until until the cat has been out the bag and run around the city a few times first! ====== Yes, but as the FT report shows, the options for IOC's and their shareholders are quite stark and becoming more so. Either they take the right options or their market cap will suffer greatly, also adding to that the huge risks that drilling in certain enviroments bring (just ask any BP shareholder) to their market cap and investment, certainly again in great contrast to what we have environmentally - politics aside. That still leaves a lot of potential happiness for us between £50 and a "I'll take £8 and run" mantra. Lets hope we all end happy, rather than out of breath, eh. ================ Total production by the top five oil majors has fallen by a quarter since 2004 Posted by Luis de Sousa on April 19, 2013 - 3:09am Topic: Geology/Exploration Tags: bp, chevron, exxon, matthieu auzanneau, shell, total [list all tags] This is a guest post by Matthieu Auzanneau, a freelance journalist in France, author of the Oil Man blog at Le Monde, where this post first appeared. The combined crude oil production of the five main international oil companies (Exxon, BP, Shell, Chevron and Total) hit an historic high in 2004. Since then, it has fallen by 25.8%, despite large increases in investments. Total crude oil produced by the majors was 10.760 million barrels per day (MB/D) in 2004. In 2012, it reached only 7.981 MB/D. It has decreased by 2.779 MB/D in 8 years (-1/4), as I have been able to calculate from figures that appear in the twelve latest annual reports of those five companies. Is this a clear early indication of an imminent decline in the worldwide production of black gold, a phenomenon predicted since 1998 by former oil company scientific executives, from the French Total group in particular? The majors are all facing a decline in their crude oil production, which began in each case before 2007. This comes despite extremely large growth in their investments, allowed by the significant increase in crude oil prices experienced since the late 2000s. Total, for example, has seen its production fall by almost 20% since 2007, although the French giant now has at least 40% more extraction wells. Since 2004, the total oil production by the majors has only increased once, between 2008 and 2009, and by just 0.13 MB/D, despite the unprecedented level of sales and purchases of oil assets experienced in recent years. So-called production sharing contracts, which allocate a larger share of production to the host country when the price per barrel rises, do not appear to explain the lowering of production by the majors, far from it. The production share of the five majors in worldwide production dropped from 13.39% in 2004 to 9.98% in 2011. It diminished further in 2012. Worldwide crude oil production rose by 4% between 2004 and 2011. It has hardly increased at all since 2006, however: since then it has been on an undulating plateau, within a small margin of less than 1.25%. The significant decline in extractions by the majors has been compensated for by the OPEC countries (+ 2.189 MB/D), primarily Iraq and Saudi Arabia, and also by the countries of the former Soviet Union (+ 2.131 MB/D). In the rest of the world, where the majors often occupy the key positions, oil production (excluding agrofuels) has fallen by 1.104 MB/D, once again between 2004 and 2011. In 2012, worldwide production appears to have increased significantly, firstly thanks to the boom in shale oil in the United States; full detailed information is not yet available (to follow). The case of BP Since 2011, the decline in the total production of the majors has been significantly amplified by the sale to the Russian national company Rosneft of parts of the BP group with TNK-BP, an important joint venture established in Russia in 2003. The sale of TNK-BP alone has eliminated around 40% of BP's previous production. This production reached its record level in 2005. If this sale had not taken place, total production by the five majors would have still declined by 17.7% in 8 years, reaching 8.86 MB/D in 2012. And BP's production would still have been in sharp decline. Since 2011, BP has had to sell other major production assets in order to settle the account for the oil spill in the Gulf of Mexico in 2010. In this case, as in that of TNK-BP, it is the need to go in search of intact sources of oil in increasingly extreme conditions that has hindered BP's development: the drill site responsible for the catastrophe in the Gulf of Mexico holds a drilling depth record; the conflict between the TNK-BP shareholders at the root of the sale of parts of BP was about the opportunity of a huge drilling campaign in the Arctic Ocean, where the oil majors, notably BP, have recently met with a number of failures. The "seven sisters" have aged Exxon, Shell, Chevron, BP and Total are still forces to be reckoned within the oil industry, as much for their still considerable outputs, for their investment capacities and technical expertise, as for their strategic role as the preferred providers of consumers in the old Western industrial powers. These Western majors, starting with the most powerful, Exxon, remain, now more than ever, at the top of the ranks of the largest private companies on the planet. The majors came into existence between the late 19th century and the early 20th century. Long dubbed the "seven sisters", they are now only five in number as a result of the mega-mergers that have taken place over the last two decades. Until the 1960s, the Anglo-Saxon majors, as well as the forerunners of the French company Total, largely dominated worldwide production. The OPEC cartel of oil producing countries was created in 1960 to stand up to the restricted and secretive cartel of the "seven sisters", which reigned supreme outside the United States for half a century. Throughout the 1960s, and especially in the 1970s, as the OPEC member countries nationalised their oil fields in the wake of Algeria, Libya and Iraq, the control wielded over production by the Western majors was reduced. The response at the end of the 1970s broadly stabilised the balance of the market share, thanks in particular to the launch of the North Sea and Alaska, two extraction areas that have been in significant decline for more than a decade because of the exhaustion of their crude oil reserves. OPEC is now content with a little over 40% of worldwide production. But it controls more than 70% of the planet's proven reserves. Consequently, as the known oil fields are getting depleted, production should become more and more concentrated in the major OPEC countries, starting (or finishing) with Saudi Arabia, as well as, to a lesser extent, in the former Soviet Union. It seems unlikely for the moment that the development of non-conventional and extreme sources of oil, in particular shale hydrocarbons, will be able to change that fact. We will come back to this again. For this translation, a very big thank to Laura Bennett: culturetranslation.com ============== You are here: Home » Politics » Oil Policy » Oil autonomy spreading to Iraq’s provinces Oil autonomy spreading to Iraq’s provinces An oil worker walks past a line of trucks used for conducting seismic survey at the al-Ahdab oil field in Wasit province on March 11, 2009. (THAIER AL-SUDANI/Reuters) By Ben Lando, Patrick Osgood and Staff of Iraq Oil Report Published Friday, April 19th, 2013 Oil workers threaten Rumaila, Majnoon shutdown Workers of the South Oil Company have erected a tent outside the company headquarters to protest pay and working conditions. (ALI ABU IRAQ/Iraq Oil Report) By Ali Abu Iraq of Iraq Oil Report Published Saturday, April 13th, 2013 ============ $30Bn and still no oil flowing... broadford bay There are many posters who express positive opinions regarding the ultimate value and TO potential of our Kurdistan oil finds. A lot of other opinions highlight the Capex involved, how long or short the production plateau could be in relation to the contract length, what RF will be realised, the low API grade, the H2S problems, etc., etc. - all very pertinent, important but negative aspects. However, can I point out a very interesting article in today's WSJ that illustrates just how other major IOC's are also finding the going hard in other areas - an article which hopefully should bring some balance to the discussion about our chances of converting our assets into a good amount of cash when the time is right? http://online.wsj.com/article/SB10001424127887324050304578412760496098192.html?mod=WSJ_hp_us_mostpop_read The article concerns the N. Caspian oil field "Kashagan", and as they say in the article: "Early exploration revealed more than 10Bn recoverable barrels of oil -along with great challenges. The reservoir is about 12,000ft below the NE Caspian sea floor and mixed with toxic sulphur gas..." Wait, the Schadenfreude is still to come: "And now, after a decade of work and more than $30 billion in expenses, it isn't clear when one of the world's biggest untapped fields will produce its first drop of oil." Backers are: Exxon Mobil, Eni and Shell. In comparison to Kashagan I must say our "heavy oil field" now looks and smells as sweet as a rose. I found the article VERY uplifting, quite makes my weekend! BB; Tengiz ( Chevron ) is a 'sister' field to Kashagan and was a doozy from the get-go with extreme depths, high-temps, high-pressure and H2S. One well blew out and the field taxed the shi't out of the Russians first and then Chevron / Mobil / Exxon and it still does. My business partner was one of the first Westerners to visit Tengiz in the early-1990s when the Russians were in control. Shaikan area is a walk in the park in comparison to these bleeding-edge sub-salt reservoirs. ============= April 18, 2013, 8:27 p.m. ET . A $30 Billion Hole in the Caspian Sea? After 10 Years, Setbacks Continue to Plague Massive Project to Find, Pump Oil in Kazakhstan. By JUSTIN SCHECK NCOC/Associated Press The offshore Kashagan project is drilling for oil about 12,000 feet below the Caspian Sea floor. . For more than a decade, the promised bonanza from Kazakhstan's giant offshore Kashagan oil field has been a costly mirage for its developers. And the wait still isn't over. The companies backing the project—which include Exxon Mobil Corp., XOM +0.96%Eni Spa ENI.MI +0.23% and Royal Dutch ShellRDSB.LN +0.51% PLC—in March missed the startup date Eni predicted last year. And now, after a decade of work and more than $30 billion in expenses, it isn't clear when one of the world's biggest untapped fields will produce its first drop of oil. Eni CEO Paolo Scaroni said last month the operators "are going to begin production in June." A spokesman for the North Caspian Operating Company BV, which represents all of the oil companies in the project, says "we are confident that we will deliver oil in the course of this year," though he said he isn't sure when. A person close to KazMunaiGas, or KMG, the Kazakh state oil company that owns close to 20% of Kashagan, said it may be 2014 before significant amounts of oil flow. Delays beyond Oct. 1 could subject the companies to new financial penalties on top of tens of millions of dollars worth of concessions they have already given the Kazakh government for missing earlier deadlines and cost overruns, according to energy consultancy IHS CERA. Setbacks could also heighten tensions with a frustrated Kazakh government, say several people close to the project—and will make it difficult for the firms to make more than a marginal profit from their investments. Kashagan is an example of the challenges energy companies face in a world where the easy oil has already been pumped. To find big new fossil-fuel deposits, companies must look in places that are remote, technically challenging or politically thorny, making huge upfront investments for uncertain returns. In Kashagan, cold weather, difficult supply routes and friction with government officials have contributed to the lag time. A spokesman for the North Caspian Operating Company said the biggest cause of delays is Kashagan's technical complexity and a cautious approach by the companies to avoid problems like oil or gas leaks. Kashagan's potential upside is enormous, said Laurent Ruseckas, a consultant with IHS CERA who advises companies in Kashagan. Oil is now trading at close to $90 a barrel, and the 370,000 barrels a day Kashagan is projected to produce in its first phase is supposed to triple as companies make further investments. But technical challenges and strained relationships among the operating companies and with the Kazakh government have made the project "a nightmare for almost 10 years," said Fadel Gheit, an oil-company analyst with Oppenheimer & Co. When production does start, it will largely be in Shell's hands, since a joint venture between Shell and KMG is operating that phase, according to the companies. A spokesman for Shell declined to comment. KMG didn't respond to requests to comment. Kashagan's challenges were evident from the time big oil companies—including Eni, Exxon, Shell, Total SA, FP.FR +0.74%StatoilSTL.OS +1.65% PLC, BPBP.LN +1.11% PLC and BG GroupBG.LN -0.48% PLC—explored the area after the Soviet Union's breakup. Companies signed a production-sharing agreement with the Kazakh government in 1997 that expires in 2041 and allows companies to recover much of their costs before paying a big portion of oil revenue to the government. Of the initial foreign oil-company players, only Eni, Exxon, Total and Shell remain. Early exploration revealed more than 10 billion recoverable barrels of oil—along with great challenges. The reservoir is about 12,000 feet below the northeast Caspian Sea floor and mixed with toxic sulfur gas. The sea freezes for several months a year, requiring companies to build concrete drilling islands since the deep freeze would destroy normal offshore equipment. The north Caspian harbors endemic seals and rare sturgeon. The companies debated who would take the project's lead, settling on Eni, though it had less experience with giant oil developments than Shell and Exxon. The companies projected first oil in 2005, though Eni soon began pushing back the projected startup date due to technical problems. Reuters Workers at the main processing hub for the Kashagan project last year pected when the project began. . Missteps, cost overruns and controversies have dogged the project. Eni has disclosed in public filings that Italian authorities are investigating whether it has paid bribes in Kazakhstan. An Eni spokeswoman said the company "has zero tolerance towards illegal acts and bribery" and is fully cooperating with the authorities. In 2003, Saipem SpA SPM.MI +1.57%—a company in which Eni owns about 43%—formed a joint venture with a company co-owned by a former Kazakh deputy energy minister, Nurlan Kapparov. Last year Mr. Kapparov became Kazakhstan's minister of environmental protection. Oil companies including the Kashagan operators have since 2003 awarded more than $100 million in contracts to the joint venture for projects like building pipe racks and rigs for Kashagan and other Kazakh oil projects. In an email, the Kazakh Ministry of Environmental Protection said Mr. Kapparov resigned from his management positions at his company when he became environment minister, and that his shares are in a trust that Mr. Kapparov doesn't control. The joint venture "is regularly checked by the Ministry of Environmental Protection, but Minister Kapparov has never taken any role in the review," the ministry said. The Eni spokeswoman said Saipem "has always been managed at arm's length" from Eni. She said the joint venture received the Kashagan work after a competitive bid process. A Saipem spokesman declined to comment. Meanwhile, some partners such as BP, Statoil and BG sold their stakes in Kashagan, as Eni pushed back its first oil production to 2008, and then to 2010. The Kazakh government briefly suspended construction in 2007 over environmental concerns. By 2008, Eni's projected budget for the project's first phase had risen from less than $10 billion to $25.6 billion, according to IHS CERA. That year, the companies renegotiated the management structure, taking Eni out of the lead role and putting North Caspian Operating Company, in which each company has a voting stake, in charge of development. The Kazakh government imposed increased penalties on the companies for production delays beyond October and said it would no longer sign production-sharing agreements that let companies recoup most costs before paying large percentages of profit to the state. Since then development has progressed and the companies finished drilling their production wells last year. But they have continued to delay oil production amid technical problems. Perhaps most significantly, the Kazakh government hasn't agreed to extend the Kashagan companies' production-sharing agreement past its 2041 expiration, according to the person close to KMG and a consultant advising companies in Kashagan. Without the extension, it would be difficult for the companies to make the profits that they expected when the project began. Write to Justin Scheck at justin.scheck@wsj.com A version of this article appeared April 19, 2013, on page B1 in the U.S. edition of The Wall Street Journal, with the headline: Drilling a $30 Billion Hole in Caspian Sea?. ================== UPDATE 1-China eyes ConocoPhillips' Kashagan stake-Kazakh minister Tue, Apr 16 02:20 AM EDT By Raushan Nurshayeva ASTANA, April 16 (Reuters) - China has shown an interest in buying the stake of U.S. oil major ConocoPhillips in a multinational consortium developing Kazakhstan's giant Kashagan oilfield, Kazakh Oil & Gas Minister Sauat Mynbayev said on Tuesday. "Kazakhstan has not yet taken such a decision, but there is such a possibility," Mynbayev told reporters. He declined to say which company or government body represented China in talks with Kazakhstan over Kashagan. Kazakhstan, Central Asia's largest oil producer and the second-largest post-Soviet producer after Russia, has the pre-emptive right to buy out the 8.4-percent stake owned by ConocoPhillips in Kashagan. ConocoPhillips, which has been shedding overseas assets to cut debt and increase its investment in lower-cost domestic shale oil and gas, has said it intends to sell its Kashagan stake to India's state-run oil and Natural Gas Corp for about $5 billion. Kazakhstan has until late May to decide whether to buy out the stake of ConocoPhillips, and Mynbayev said that further options would depend on the terms to be proposed by other parties also wishing to own this stake. He declined to speculate whether India or China would have a better chance of owning the stake. "If the terms offered by one side are significantly better than those of the other potential buyer, then the logic (of choice) of the authorities of Kazakhstan will be crystal-clear," Mynbayev said. Kashagan, the world's biggest oilfield discovery in more than 40 years, holds an estimated 30 billion barrels of oil-in-place, of which 8 billion to 12 billion barrels are potentially recoverable, with first production expected in the middle of this year. Kazakhstan, a vast nation of 17 million, is home to 3 percent of the world's recoverable oil reserves. It has moved in recent years to exert greater management control and secure bigger revenues from foreign-owned oil and gas developments. Kazakh state oil firm KazMunaiGas first entered the Kashagan consortium in 2005 as a shareholder in 2005 and later doubled its stake to 16.81 percent. Identical stakes are held by Italy's Eni, U.S. major ExxonMobil, Royal Dutch Shell and France's Total. Japan's Inpex owns 7.56 percent. UPDATE 1-Indian state firms make joint bid for Mozambique gas stake Thu, Mar 14 13:34 PM EDT * ONGC, Oil India submit bid for 20 pct in Mozambique block * First rounds of bids due Thursday By Prashant Mehra MUMBAI, March 14 (Reuters) - Indian state-owned oil companies ONGC and Oil India Ltd have bid for a 20 percent stake in a Mozambique oil and gas field being offered by U.S. explorer Anadarko Petroleum Corp and India's Videocon Group, a source directly involved in the matter told Reuters. Recent discoveries have turned the Rovuma offshore field into a major draw for global energy producers and boosted Mozambique's gas reserves to around 150 trillion cubic feet, enough to supply world number-one importer Japan for 35 years. First round bids for the Rovuma gas block that could fetch about $4.5 billion took place on Thursday. PetroChina , Royal Dutch Shell Plc and Exxon Mobil Corp are among others expected to submit indicative proposals, industry sources said last week. The source, speaking on Thursday on condition of anonymity, did not indicate the likely bid price by ONGC and Oil India. Project operator Anadarko is planning to trim its stake in block 1 of the Rovuma offshore field to 26.5 percent in order to share the cost of developing the project. Videocon, controlled by Indian billionaire Venugopal Dhoot, is also looking to sell its 10 percent stake. Italian oil firm Eni connected east Africa's gas riches to energy-hungry China on Thursday with the sale of a 20 percent stake in its Mozambique offshore project to Chinese oil company CNPC. Last year Thai state oil company PTT Exploration and Production PCL paid $1.9 billion for Cove Energy Plc and its 8.5 percent of the field, trumping Shell in a hotly contested battle. Officials at ONGC Videsh, the overseas arm of ONGC that is making the bid, and at Oil India, could not be reached for comment. State-owned ONGC, which is facing depleting supplies from its old oil and gas fields in India, has been on a buying spree in the past year to secure interests in overseas assets. It agreed to pay $5 billion for ConocoPhillips' 8.4 percent share of the Kashagan field in Kazakhstan in November, and months earlier signed a $1 billion deal for a small stake in oil fields in Azerbaijan. =============