Market overview: Mena looks offshore

19 February 2010

As Middle East and North Africa oil and gas producers increase output, offshore projects play an increasing part in development

The oil and gas producing countries of the Middle East and North Africa (Mena) region control more than 60 per cent of world’s hydrocarbons reserves. They have built some of the world’s strongest developing economies around these resources.

In 2008, the Mena countries produced some 36.2 million barrels a day (b/d) – 44 per cent of the 81.8 million b/d of oil produced worldwide, according to the UK’s BP.

In numbers

  • 36.2 million - Barrels of oil produced each day in the Middle East and North Africa
  • $2.9m - The average cost of drilling an onshore well in Saudi Arabia
  • $16m  - The cost of drilling an offshore oil well in the Gulf

Some 82 per cent of its output came from the region’s onshore oilfields. The remaining 18 per cent came from offshore production. Seven countries in particular – Saudi Arabia, Qatar, the UAE, Iran, Algeria, Egypt, and Libya – produced by far the greatest part – 95 per cent, according to analysts at UK energy consultancy Douglas-Westwood.

While onshore oil production will continue to be the main revenue earner for the region, the shallow waters of the Persian Gulf and the deeper waters of the Mediterranean are set to become an increasingly important source of oil.

Of the 9.8 million b/d of new production capacity due to be added in the region by 2015, an estimated 29 per cent will come from -offshore oilfields, raising the proportion of offshore oil production from 18 to 25 per cent.

Cost differentials

Easy to find and easy to access oil reserves have long been the mainstay of production in the region, but some producers are now seeing a fall in their onshore production levels, which has prompted a move towards exploiting less easily accessible supplies, says Rod Westwood, senior analyst at Douglas Westwood.

Others, the UAE and Saudi Arabia, for example, are trying to bolster their positions as energy producers by increasing their overall production capacity.

“Global demand for oil is set to grow, and grow rapidly,” says Westwood. “India and China will lead the growth out of recession and [the international oil cartel] Opec recognises the necessity to significantly boost production levels in order to maintain its ability to control the price of oil and thereby create the financial return necessary to fund the region’s economy.”

Global demand for oil is set to grow rapidly. Opec will boost production levels to maintain price controls

Rod Westwood, senior analyst, Douglas Westwood

Although offshore oil and gas production has long underpinned overall production levels in the region, it has not been considered as attractive an option as onshore development for two reasons – cost and ease of access.

According to Westwood, the average cost of drilling an onshore oil well in Saudi Arabia is $2.9m, whereas drilling a similar well in the Gulf can cost up to $16m.

“The prime factor for this cost differential is the expense of the rig and crew. Average contracted rates for offshore rigs operating within Saudi Arabian waters were about $130,000 a day in 2009,” he says.

“This is four to five times more costly than onshore rigs. Most offshore wells are deviated by nature – a fact that necessitates additional expense, relating to directional drilling equipment, additional tool rental and extra time to drill each well, which compounds the total costs. Well completions [the process of making wells ready for production] are also more expensive.”

Salah al-Bufalah, head of projects at Abu Dhabi’s Zakum Development Company (Zadco), says it costs 20-30 per cent more to produce oil offshore than onshore in the emirate.

Rig count in December 2009
Abu Dhabi301812
Saudi Arabia786315
Source: Schlumberger

Zadco, along with fellow state offshore oil and gas producer, Abu Dhabi Marine Operations Company (Adma-Opco), plans to launch $24bn worth of new projects to boost the emirate’s offshore oil production to 1.75 million b/d in 2015. The current level is about 1.1 million b/d. The project is part of a wider scheme to increase the emirate’s total oil production capacity to 3.5 million b/d by 2018, from the current level of about 2.7 million b/d.

Executives at Adma-Opco and Zadco tell MEED that the number of offshore oil and gas projects planned in the emirate and the wider region do not reflect a lack of onshore opportunities, but rather a desire on the part of national oil companies (NOCs) to boost their production capacity in preparation for the anticipated growth in demand. “A lot of the projects in Abu Dhabi and the region have been going on for years but are just coming to fruition now,” says David Hobbs, vice-president and director of global research at US energy consultancy IHS CERA. “But it is a bit of a coincidence that they are all at the starting line just now.”

Onshore schemes are in decline, but the age of the offshore megaproject is just around the corner

US engineering firm executive

Hobbs says that several offshore projects in the region have been delayed in recent years while the NOCs looked for international partners to join them on the schemes.

“The projects involved had issues to do with pressure, or the kind of gases they were going to be producing and so on and you want to have international oil companies [IOCs] involved with these,” he says.

Hobbs offers the example of Libya, where ExxonMobil of the US started drilling offshore in July 2009. The water in the Gulf of Sirte, where the company is working, reaches depths of 2,100 metres and is classified as a ‘deep-water’ drilling area. “[Libya] doesn’t have any experience of deepwater work, so it needs to recruit people with that experience,” he says.

Output pressure

These offshore projects were delayed for a variety of reasons. The US only lifted the last of its economic sanctions against Libya and opened the door for international companies to work there in 2003.

In Abu Dhabi, negotiations over which IOC would work on the development of the Upper Zakum field took several years to conclude. ExxonMobil finally signed on as a partner in 2006.

“The onshore work has suffered fewer delays,” says Hobbs. “There were no international partners to worry about.”

He adds that the IOCs are currently pushing aggressively for new opportunities across the globe and in Mena in particular. And NOCs are also under pressure to increase output.

For example, Saudi Arabia’s plans to develop the offshore Manifa field to yield 900,000 b/d of viscous, heavy oil had been put on hold in 2008 after oil prices fell below $70 a barrel. But state energy giant Saudi Aramco now plans to start construction work on the scheme in 2013, with commercial production scheduled to start in 2015.

Elsewhere, Iranian plans to develop offshore gas supplies have been hit by international trade embargoes and a series of stand-offs between the country’s government.

“Iran is an extremely difficult place to work,” says a senior executive at one European IOC. “We are all interested in the country, because of the oil and gas reserves they have, but it is volatile and there are political considerations to take into account.”

Co-operation is expected to continue with the smaller regional countries that do not currently produce from offshore fields but are keen to boost their own production in the coming years. Algeria and Libya both want to develop their relatively under-exploited offshore resources, while Yemen claims to have an abundance of offshore oil which has yet to be tapped into.

In Yemen’s case, however, the offshore exploration and production blocks it hopes to offer for development are located in the Gulf of Aden, recently a hotbed of piracy, making new developments in the area in the short to medium term unlikely.

The next five years are set to witness significant growth in the region’s offshore oil and gas industry, with NOCs including Abu Dhabi National Oil Company (Adnoc), Aramco, and Qatar Petroleum preparing offshore ‘mega-projects’ – schemes worth $1bn or more.

The Upper Zakum development scheme in Abu Dhabi and the Manifa scheme in Saudi Arabia will each cost around $15bn, with both Adnoc and Aramco using artificial islands to drill for oil, rather than traditional steel rigs.

These developments in particular show that NOCs are becoming more serious about spending on offshore projects, says a senior executive at one international engineering firm based in the US. And contractors are taking note.

“Before, most offshore projects ran into the hundreds of millions of dollars at most,” he says. “Most of the megaproject work was concentrated onshore.

“Now, we are seeing that shifting slowly as the number of massive onshore schemes declines slightly. The age of the offshore megaproject is just around the corner.”

Exponential growth

With oil prices now firmly back above $70 a barrel after falling below $35 a barrel in early 2009, companies are more likely to sanction big offshore projects, the executive says, and IOCs across the world are returning to deep-water projects which had been put on hold during the economic downturn in 2008.

“Now we have a better fix on prices and we know that demand is returning, so it is clear that capital expenditure put into any oil production is going to be well spent,” he says.

“It isn’t a case of offshore oil being the more important market, but it will certainly attract more than its fair share of investment.”

Separately, an executive at a UK-based engineering firm which gained its experience in the North Sea says that the Mena region will be increasingly attractive to firms which have experience in offshore work in harsh environments.

“With all the infrastructure that is being built right now, we expect that there will be a lot of work on brownfield projects and maintenance projects, which will bring a lot of people over from the North Sea,” he says. “The amount of work available offshore is going to grow exponentially.”

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