Market Report: January 2010

By: Sharyn Alden
Jan/Feb 2010
 
Uganda Moves Closer to Becoming a Top Oil Producer
 
The news came in late November that Uganda had taken a major step forward toward becoming a significant oil producer. Recently, an investment deal was struck with Italian energy giant Eni. The multinational oil and gas company has agreed to buy a share in two of Uganda’s large oil exploration blocks for a total of up to $1.5 billion.
 
Currently the country has nine exploration blocks, ranging from the Sudan on the northern border to Lake Albert on the country’s western edge with the Democratic Republic of Congo to the southern region at Lake George.

 

Uganda has a new frontier image when it comes to undeveloped resources. Several oil companies see it just that way. They are taking a close look at the former British Colony since about one third of the country’s licensed oil exploration areas have not been explored. Many geologists say the potential is huge for an upswing of successful explorations due to the abundance of oil. An energy fund manager in Uganda said there is talk that the country is sitting on about 6 billion barrels in addition to the 2 billion barrels already confirmed.
 
The country’s history with oil discovery goes back to the 1920s. That’s when oil was first discovered in the far northern area of the East Africa Rift system. It was 1938 when the first well was drilled, but World War II interrupted the flow of exploration.
In the subsequent decades, from 1940 through the 1980s, Uganda’s political situation vacillated between turbulent and unstable to being stable enough to attract independent oil exploration. Eni’s commitment to Ugandan oil exploration is big news, but they are not the first independent company to invest capital or expertise here. Over the last 10 years alone, several companies have drilled exploratory wells that resulted in finding oil. Tullow Oil, a British independent explorer is one of them. Tim O’Hanlon, the company’s vice president for Africa business, said his company’s blocks in Uganda have the potential for over 2 billion barrels of oil. Some industry insiders say those projections are on the low side.
 
But the development of the country’s oil industry has fallen short because of one word — cash. Until now, there hasn’t been enough capital to maximize the full potential of the local oil industry.
 
With the entrée of Eni, industry analysts expect that’s about to change. Thomas Permian, African energy analyst at HIS Global Insight, recently said it is unlikely that Eni would be interested in accessing Uganda’s oil if the company did not envision the prospects for development as being very good. Continued development to maximize the industry’s potential will undoubtedly take billions of dollars in investments.
 
Uganda has already attracted about $500 million exploration investment but it will take an infusion of billions of dollars to put it on par with the world’s oil producing leaders.
Still, Eni’s investment has given the local oil industry a shot in the arm. And with that, analysts foresee continued growth.
 
Lawsuit over contaminated drinking water is filed against Cabot Oil & Gas
 
Natural gas drilling companies in New York and Pennsylvania are taking note of a recent lawsuit that claims some area residents have contaminated drinking water — infused with methane, a consequence of natural gas drilling in their area.
 
In late November, fifteen families who live on one township road in Dimock Township, Pennsylvania, just south of the New York state border, filed the lawsuit against Houston-based Cabot Oil & Gas.
 
Earlier this year the Dimock residents named in the legal complaint said their drinking water had a peculiar taste and strange odor. Besides having concerns about their family’s health and safety, the residents said they felt “duped” because Cabot had violated their trust. They said the company assured them — some say “guaranteed” them — that their drinking water would be safe and not affected by the drilling process.
 
The families who entered into gas lease agreements with Cabot allowed the company to extract natural gas beneath their properties. In exchange for signed leases, the families were given monetary compensation.
 
The legal argument is mostly centered on the methane contamination. State environmental regulators have confirmed methane has contaminated well water in a nine-square mile area. The area includes the well water of the 15 families who are suing Cabot for damages.
The problems for Cabot started with a bang on New Year’s Day 2009. That’s when a well exploded allowing methane to leak into the drinking water aquifer.
 
Fast forward 10 months after the explosion and subsequent discovery of contamination. On November 4, Cabot was fined $120,000 by the state Department of Environmental Protection for allowing methane to enter the local drinking water. The extent of the contamination was discovered after the January explosion. Methane, a key component of natural gas, can be dislodged from its underground reserves if it is not properly contained.
 
On November 19, the lawsuit was filed in federal court demanding Cabot restore the nine-square mile well water to its original state prior to when the company started drilling for natural gas. The legal action was announced in a dramatic way at a press conference at the entrance of a natural gas pad on Carter Road where many of the residents with contaminated well water live.
 
The suit not only demands that Cabot restore the polluted area, it also requests the company help pay for purification systems needed to clean up the sites. There is more here than contaminated wells at stake. The families also want restitution for lost property value, emotional distress and personal injury. Regardless of how the suit plays out, the affected families may not jump at signing oil leases again. They are being represented by a prominent New York City law firm and a second Philadelphia firm.
 
In the interim, Cabot is supplying some of the affected residences with drinking water after being ordered to do so by the state environmental regulator. Stay tuned.
 
Somali pirates kidnap huge oil tanker headed to the U.S.
  
In November 2009, naval authorities reported that the 10th ship to be hijacked in recent months was seized 600 miles offshore Somalia. Is there no end in sight to hijacking and kidnapping on the seas off the African mainland?
 
The news out of Nairobi, Kenya in late November was grim. According to European naval reports, an enormous oil tanker bound for New Orleans from Jidda, Saudi Arabia, was attacked and seized by Somali pirates.
 
The oil tanker, owned by a Greek company and listed at 300,000 tons, is reported as being one of the biggest ships ever hijacked. The tanker is similar in size to the Sirius Star, a ship that was ransomed for $3 million in 2008. So far it is not entirely clear who hijacked the tanker or where the ship has been taken.
 
Somali pirates are not only boldly taking command of enormous ships, they are increasing the geographical size of their operation. Maritime authorities say the pirates have also become more elusive by staying out at sea longer than they did in the past.
 
The numbers of ships attacked and hijacked in 2009 speaks for itself. During the last two months of 2009, 38 ships had been attacked in addition to the 10 hijacked ships.
 
The International Maritime Bureau recently said on average 20 warships a day cruise the waters off Somalia. Since the expanse of open water is so large, naval patrol ships have a tough time keeping up with the pirates.
 
Earlier in 2009, there was an obvious lull in attacks by Somali pirates. Some naval reports mistakenly projected that piracy was declining because of the increased presence of boats patrolling the area.
 
Unfortunately, that speculation is unfounded. Piracy may be on the wane in one area, but at the same time it’s moving into new highly targeted geographical areas.
 
Here’s a look at how Somali pirates stay ahead of the catch-me-if-you-can game. The Gulf of Aden used to be the pirates’ home base — dozens of ships were attacked in this region in 2008. Now they are focused on the vast stretch of ocean between the African mainland and Seychelles. The area covers 2.5 million square miles making it extremely difficult to monitor and police.
 
On top of that the pirates have “improved” their open seas operation. They’re doing that by using several “mother ships” positioned in the middle of the ocean. From there they send out motorized dinghies to attack large ships hundreds of miles of away.
The glut of numerous fast-moving small boats gives the pirates an advantage — what some naval strategists call “more reach and capability.”
 
Is there an end to piracy in sight? As long as there is money to be made in these waters, piracy appears to be thriving. The Somali pirates are poor young men who are drawn to trading large amounts of cash for hijacked ships. When you have that combination of being young, needy, daring and dangerous, you’ll likely find hijackers looking for ships worth a tidy ransom.
 
Beyond the Bakken — horizontal drilling makes North Dakota’s Birdbear a promising target
  
It may not happen for several years down the road, but some industry analysts say the Birdbear, an oil formation in North Dakota’s Williston Basin, may someday become a booming oil patch.
 
In the interim, it’s already on the horizon for several drilling companies. Some see it as an important tertiary target. For others, it may be an alternate target if the Bakken Shale and Three Forks-Sanish formations don’t meet expectations. Other companies see the Birdbear as a future target if they exhaust all their Bakken acreage.
 
The state of North Dakota sees it exactly that way. As a matter of fact they are already pitching the Birdbear as another area to consider for potential production when companies are looking for something new.
 
The Birdbear is located in southwestern North Dakota more than two miles beneath the Bakken and Three Forks formations.
 
The crude-bearing cache originated about 350 million years ago but it wasn’t discovered until the 1950s. Solomon Bird Bear, a Fort Berthold reservation landowner discovered the oil patch beneath his property. Throughout the Williston Basin it maintains its founder’s name and is known as the Birdbear. Where it extends into Saskatchewan and Montana it’s typically referred to as the Nisku.
 
Starting in the 1960s, the Birdbear has been drilled using conventional techniques. For the past 30 years vertical wells have been the common method of operation here. But times are changing due to the advent of horizontal drilling. Geologists project horizontal wells may be even more prevalent here in the future.
 
Horizontal drilling is well suited for the Birdbear. The oil formation is locked in muddy limestone and dolomite deep underground. Even though the majority of companies in the area are focused on the Bakken and Three Forks the Birdbear is front and center for some operators. One of those companies is Denver-based Whiting Petroleum Corporation. They already have about 50 horizontal wells in Billings and Golden Valley counties. These wells are producing up to 400 barrels a day. While those are small numbers compared to the company’s Bakken and Three Forks wells that can come in at 2,000 barrels a day, it’s hard to ignore the alternative production value the Birdbear offers.
 
Lynn Helms, director of the state Department of Mineral Resources has said that most operators in North Dakota are focused on the Bakken and Three Forks because the capital they’ve raised is aimed only at these areas. As we all know it’s not easy to raise additional capital to drill another cache.
 
Jack Stark who heads exploration for Continental Resources Inc., an Enid, Oklahoma-based company agreed with that assessment. He has stated that while his company is active in the Bakken and Three Forks, down the road, the Birdbear is on the company’s radar.
 
Still, many oilmen are too busy and so wildly enthusiastic about the Bakken and Three Forks, it may be years before the Birdbear is a hotly contested competitor.
 
  
New drilling technology is expected to improve subsea oil recovery
  

How would you go about extracting more oil from subsea fields? Drilling more wells is one answer, but that is an expensive solution. What if you could reuse old subsea wells? Now that would be a simpler, less expensive solution.
 
New technology is the answer says those who are currently developing and testing the subsea drilling technology. They see it as a more efficient means to recover oil.
 
StatoilHydro is one of the companies using the technology in the Norwegian Sea. Currently they have over 40 percent of their oil and gas production in 500 subsea fields. They say when oil rigs are equipped with the most advanced drilling technology there will be better subsea recovery rates than ever before.
 
The new technology, which was first used last summer, is called “through tubing rotary drill” (TTRD). It enables drilling operations to recycle old sea wells in a unique way. The technology allows for drilling a new well directly through the production tubing in an existing well. Voila! The technology increases the lifetime of the existing well, enables recovery from marginal fields and increases the potential for more income per well drilled. Additionally, TTRD decreases the need to handle heavy equipment.


The complex Asgard field, operated by Statoil in the Norwegian Sea, has already tested the new technology. The field consists of 57 wells and 17 subsea templates. Some of the newest subsurface drilling and well technologies have been developed by Statoil and FMC Technologies. The advanced equipment can drill as deep as 500 meters, but the goal is to drill even deeper. Beyond drilling in the Norwegian Sea, Statoil is looking at deep waters in other global arenas including the Gulf of Mexico.

 
Brand new rigs that are outfitted with TTRD will likely have an audience of enthusiastic operators since interest in subsea concepts is growing. Industry analysts say TTRD is reportedly better adjusted to performing subsea operations than equipment currently used on conventional drilling rigs. Operators see the technology as aiding production of oil not normally recoverable.
 
After several years of technological advancements, subsea drilling is becoming simpler and less expensive to operate. Now with the advent of TTRD, subsea drilling is on the cusp of seeing significant changes. When rigs are specifically built for TTRD technology, they are expected to outperform the equipment currently used.
 
In the Asgard field, Statoil used Stena Don, a conventional rig to test the technology. The company expects efficiency of subsea well operations to greatly improve when a TTRD rig is built that is custom tailored to deep-sea operations. The plan is to have such a rig in place in 2012 or 2013.
 
In the interim, the company is taking bids to build a brand new rig that will only be comprised of equipment for subsea well drilling.
 
 
Activity heats up in the Marcellus Shale
 
 
Natural gas drilling rigs are common sights in north central Pennsylvania, and should be because 2009 was a banner year for Marcellus Shale drilling. The number of drilling permits issued in 2009 were more than triple of those issued in 2008.
 
Through late October, 1,592 Marcellus Shale drilling permits were issued by Pennsylvania’s Department of Environmental Protection. In Susquehanna County alone, over 120 permits were granted. Compare those numbers with the grand total of 476 permits issued by the state in 2008 and you can see evidence of the boom in the Marcellus play.
 
Most of the drilling activity has been centered in the counties of Susquehanna, Tioga and Bradford where natural gas is trapped in the shale thousands of feet below.
 
Consider how drastically things have changed in just a few years. In 2002, the Department of Conservation and Natural Resources offered 218,000 acres of gas leases to be bid on in northern Pennsylvania. The asking price then was $30 an acre. Too high said some potential drilling operators. Consequently, only a quarter of the land received bids at the time.
 
Last year the agency auctioned 74,000 acres for a total take of $166 million, with one of the tracts going for $5,837 an acre.
 
Department of Conservation and Natural Resources officials say that they expect Marcellus drilling to exceed all expectations in 2010 with no downward spiral in sight. On one hand that’s very good news. But on the other side of the fence, some environmentalists, politicos and residents are cautiously optimistic about the Marcellus hotbed of activity. As drilling increases so do their concerns.
 
While some see the boom as positive on many fronts, Susquehanna County Commissioner Mary Ann Warren has called increased Marcellus Shale drilling “worrisome at the same time.” It worries Warren and others as permit activity rises and more drilling-related equipment and manpower is brought into the area. Their stance is that natural gas development is taking its toll on the environment. Every time a drilling company comes in and clears the land for wells and pipelines, they say the environment takes a hit. So far three Marcellus wells have been completed on state forestland. Still, environmentalists are concerned because 660,000 acres of state forests are under lease.
 
In the interim, in late November, the state Department of Environ-mental Protection was reviewing permit applications for 12 Marcellus gas drilling wastewater treatment plants. The treatment plants would be built to treat chemical-tainted waste water from drilling operations.
 
So as traffic of water trucks, residual waste trucks, and drilling and hydraulic fracturing continue at a boom growth rate, Marcellus drilling is keeping pace with accelerated activity.
 
That could change if Pennsylvania ever decides to put a moratorium on gas leases. Some say it’s the only way to protect the natural environment. But until, or if, one or more studies are conducted to analyze what impact drilling activity has on the environment, it is unlikely the drilling permits will cease anytime soon.