Long Wait for the Big One

Long Wait for the Big One pp 72-73

Long Wait for the Big One pp 72-73Valuable information for later use, if not commercial discoveries, are expected to result from this summer’s exploration activities offshore the Faroes, which kick into high gear with two prospects to be drilled — Brugdan II and Sula Stelkur.

One day the Faroe Islands could become successful oil and gas producers, just like their neighbor to the east, the Shetlands, which has already joined the ranks of North Sea regions producing oil and gas. Whilst oil and gas fields east of Shetland have faced decline, exploration to the west of Shetland has delivered a series of new oil and gas fields which are extending the lifespan of Britain’s oil industry by decades. As a result, the massive oil and gas terminal at Shetland’s Sullum Voe is being upgraded and is expected to operate for yet another fifty years, perhaps processing and exporting Faroese oil and gas in the future.

Unfortunately for the Faroese, this island group is in the very early stages of exploration and perhaps it will take at least ten years before it mirrors the oil and gas developments to the west of Shetland.

So far, investment in the Faroes since 2000 has only resulted in one well with useful results and another six have proved dry. Due to extreme weather prospects and technical difficulties, another well, Brugdan II, in 2012, was not completed and commercial interest in the Faroes is only now possible due to technological developments and decline in new opportunities in the North Sea.

Despite these limitations there is undiminished interest among the energy companies involved, who are now betting millions of Euros on finding oil and gas below the seabed which links the Shetland Islands with the Faroe Islands. Said Jan Müller, MD Faroes Oil Industry Group (FOÍB): “Faroese people don’t expect it to be a significant game changer to the islands’ standard of living.”

Statoil’s country manager for Greenland and the Faroe Islands, Rúni M. Hansen, however, noted that after considerable computer analysis based on earlier exploration results, “this summer we are planning to drill two wells in Faroese waters, Brugdan II Re-Entry and Sula Stelkur.”

Still early: The drilling season for Brugdan II Re-Entry will be April, May and June and for Sula Stelkur July, August and September. Brugdan II is seen as a potential gas well and the other as a possible oil well. Mr. Müller explained that this summer’s drilling “is for fresh geological information; it is unlikely there will be a commercial find.”

“The fact that we are drilling two wells this summer is a large commitment,” Mr. Hansen said. “We are using local supplier industry and working with the authorities to provide positive impact to the Faroe Islands.”

The results of the two wells will be important milestones for evaluating the future.

Norway’s energy giant Statoil is not alone in investigating the Faroe Islands sea bed for oil and gas. Others include America’s super-major ExxonMobil, Danish based DONG Energy, Austria’s OMV, and Faroese independent Atlantic Petroleum. Apart from the Faroese Continental Shelf, Atlantic Petroleum has oil and gas interests in the UK Continental Shelf, the Norwegian Continental Shelf, the Irish Continental Shelf, and the Netherlands. It has made no discovery yet in local waters, but its most recent discovery was the Langlitinden well in nearby Norwegian waters this February.

Most of the activity lies in the waters close to the Faroe-Shetland Basin, close to the boundary that divides the Faroes from from UK. However, exploration activities on the Faroese Continental Shelf are still in the early phases, due to the complexity of drilling in a harsh environment and the perceived high-risk of commercial failure. On the other hand, large oil and gas discoveries in the West of the Shetland area, adjacent to Faroese licensed acreage, give some cause for confidence in the potential of the region.

Reducing dependency: The case for commercial quantities of oil and gas being found in the Faroes portion of the seabed between Shetland and the Faroes is based on several factors, the first of which is that oil and gas discoveries have been made on the UK side of the boundary. It was originally thought that the Faroe seabed was a mirror image to that of the Shetland side of the continental shelf. On the Shetland side of the seabed, Britain has already developed three oil and gas offshore fields; in waters of 400m plus depths. These are the approximately 425 million barrels Schiehallion, the 250M-600M barrels Foinaven field and the 640M barrels Clair, since 1998, with the support of such oil giants as BP, Chevron and Total. The nearby Laggan-Tormore and the Rosebank-Lochnagar discoveries (respectively estimated to hold about 230M and 240M barrels of oil equivalent) are now in the process of being further appraised for development.

Long Wait for the Big One pp 74-75At present output from oil and gas fields from West of Shetland is produced from sub-sea wells via manifold and rigid flow lines to a location underneath a floating production, storage and offloading vessel (FPSO). From this point, flexible risers carry the production stream to the FPSO unit. Gas from these fields is transported by pipeline via Shetland to markets in the UK, whilst oil is exported via an FPSO type vessel known as a Sevan Stabilised Platform (SSP) floating production platform, for onward transport by oil tanker. This method is used since the water depths are too great for rigs fixed to the seabed. No doubt a similar solution will be needed for exporting Faroes discoveries since the local population of 50,000 is too small to make much use of such output. However, the expected oil and gas revenues will no doubt help the Faroes Islanders’ ambitions to reduce their dependency on Danish government subsidies and on fishing.

Early access of scale: Since the beginning of the century many energy exploration companies have been convinced that there must be commercial quantities of oil and gas in the tough environment of the waters that surround the Faroes Islands. Since the Faroese authorities issued the first licenses and the first exploration took place on the Faroese Continental Shelf in 2001, several drillings have taken place. However, so far, no commercially viable discoveries have been made but expectations remain high.

The Faroe Islands’ first licensing round was held in 2000. Since then, research activity has been ongoing, exploration attempts have included data acquisition, scientific work and the drilling of exploration wells. So far, seven wells have been drilled (not counting Brugdan II) and an active hydrocarbon system confirmed. The geology of the licenses granted tends to be sub-basalt and have a varied geology within different plays.

During 2012, Statoil as operator, working in partnership with ExxonMobil and Atlantic Petroleum, drilled the Brugdan II exploration well. As Mr. Hansen said: “The last offshore activity in the Faroes was Statoil’s Brugdan II well in 2012 that had to be stopped before reaching the target due to adverse weather conditions.” The well is located around 80 km offshore from the Faroe Islands and was the second drilled in the 223 square-mile license.

Statoil has been one of the leading oil companies operating in Faroese waters. By far the largest license holder, whether measured by acreage or activity, the company has played a vital role in the Faroes exploration activity. Its position in the Faroes is in line with the company’s exploration strategy of early access of scale and establishing a leading position in frontier areas.

Eighth well: License 009, which was awarded in January 2005, was finally relinquished in January 2014. The license acreage had been actively explored but results were not encouraging for the license holders — Statoil (operator), Exxon Mobil and OMV — to continue.

In November 2013, Statoil signed an agreement to “farm down” five exploration licenses in the Faroes and two in Norwegian waters with Austrian energy company OMV. The Faroese licenses are L006, L008, L009, L011 and L016, and the Statoil-OMV agreement is a result of a larger 2.65 billion usd OMV transaction, announced in August, where it was agreed to look for cooperation in exploration opportunities.

Long Wait for the Big One p 76 In June 2013 the Faroese Minister of Trade and Industry Johan Dahl awarded six blocks in the Faroe-Shetland Basin to DONG Energy under the Open Door license round. DONG E&P was awarded a 100% interest and operatorship in the blocks, west of the producing British fields Foinaven and Schiehallion. DONG E&P grew interested in these license blocks once a re-examination of the data from previous exploration attempts sponsored by the Faroese government was completed.

“Maybe DONG could start drilling in two years,” Mr. Müller suggested.

Together with a recent license award in the UK 27th Licence Round, this new award confirms that DONG Energy’s oil and gas business, DONG E&P, is a major player in the Faroe Islands and in the West of Shetland region — the company with most license interests in this prospective region.

Also in June 2013, Atlantic Petroleum announced that ExxonMobil had acquired a 6% interest in License L016 from Atlantic Petroleum. The revised ownership interests in the license are Statoil (operator) 40%, DONG Energy 30%, ExxonMobil 26% and Atlantic Petroleum 4%. The license, originally granted in the Third Licensing Round in 2008, covers an area of 3,870 square km.

“This deal is part of our continuing portfolio management to optimize the allocation of capital within our exploration budget,” Atlantic Petroleum CEO Ben Arabo commented. “Our strategy is to fund participation in three or four exploration wells each year within North West Europe. We are very pleased to be able to continue our work on the Faroese shelf with our L016 partners, Statoil, ExxonMobil and DONG, as the area remains a part of our portfolio with significant potential at a suitable exposure for Atlantic Petroleum.”

In November 2012, Statoil and its partners ExxonMobil and Atlantic Petroleum decided to suspend operations on the Brugdan II well offshore the Faroe Islands. The Brugdan II well has drilled into the sub-basalt section, but the primary objective has not yet been reached. The decision to suspend the drilling was based on the expected bad weather and technical issues at the time. The Faroese authorities have approved a suspension until end 2014. Statoil has 50% equity in the Brugdan II prospect, while ExxonMobil holds 49% and Atlantic Petroleum 1%. The Brugdan II well is the eighth exploration well drilled in Faroese waters since 2001.

Expiring licenses: There are several problems facing energy companies operating in the Faroes apart from extreme weather conditions and remote location. These include uncertainty about the size of potential discoveries, the remoteness of the fields, and local content policies. Statoil has been a good operator employing local staff and companies in its exploration activities. The company has eight employees in the Faroe Islands, according to Mr. Hansen and has used the locally based airline Atlantic Airways for delivering staff and supplies to rigs by helicopter.

Another local content proposal under discussion is for all oil and gas output to be landed on the Faroes. “This is unlikely to happen, unless there are significant discoveries made,” Mr. Müller said. Instead, he said, it is likely that any Faroese gas production will connect up with the British pipeline network via Shetland or Saint Fergus on the Scottish mainland. Meanwhile any oil output is expected to follow the practice of West of Shetland oil fields, with oil exported via FPSO and tankers to refineries in Rotterdam and elsewhere.

One more issue is that of the licenses, for most of the exploration licenses are due to run out soon. The government needs to renew or extend existing licenses. “There are discussions to extend existing licenses,” Mr. Müller said. “Nor does it help operators that the total tax takes, when you include royalties and corporation tax could perhaps reach 58%, if finds are significant.”

As for the future, if oil and gas is found in the next few years, it is likely that existing exploration companies will shift their interest to the northern-most license L016 that adjoins the Faroe-Shetland seabed boundary, according to Mr. Müller. In addition, the Faroese government plans to proactively market the region to potential investors, NOCs and IOCs by attending major oil and gas conferences such as the National Oil Company Congress this May in London.