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    Upstream News

    Cost of building and operating upstream oil and gas facilities reaches record high

    The costs of building and operating upstream oil and gas facilities continued to rise over the last six-month period and have reached record highs, according to two cost indexes developed by IHS [NYSE: HIS]. The IHS Upstream Capital Cost Index (UCCI) rose 1% over the Q1 2012-Q3 2012 period to an index score of 230, matching its Q3 2008 high. Its counterpart, the IHS Upstream Operating Cost Index (UOCI), rose to 0.5% to a new high score of 190 over the same period.

    The indexes are proprietary measures of cost changes similar in concept to the Consumer Price Index (CPI) and draw upon proprietary IHS insight and analysis to provide a benchmark for comparing costs around the world. Values are indexed to the year 2000, meaning that capital costs of $1 billion in 2000 would now be $2.3 billion in current dollars. Likewise, the annual operating costs of a field would now be up from $100 million in 2000 to $190 million.

    The 1% increase in the UCCI over the six-month period ending Sept. 30 is muted compared to the increase during previous six months, which registered a 2.3% increase. While equipment costs and day rates for drill rigs and vessels have continued to increase, this has been muted due to the fall in steel products prices. Oil prices remained above the threshold price of production for most projects, keeping increasing demand for oilfield goods and services steady.

    The small rate of increase for the UCCI can be attributed to increased day rates for deepwater rigs. Despite new entries into the market these rigs are in high demand and with rising fuel and labor costs can command premium rates. High spec rigs continue to increases in day rates in North American driven by tight oil and unconventional activity.

    Among the 10 markets that the UCCI tracks, only steel (nine percent decrease) and engineering and project management (0.1 percent decrease) declined.

    Countries that require a high local content continue to experience the largest cost escalations as demand continues to outgrow local supply. Backlogs for equipment and subsea orders continue to grow, with little pass through of falls in raw material costs.

    Engineering and project management costs remain static as companies compete for new work. However, construction labor rates continue to rise as new projects are sanctioned.

    Recent project sanctions and new contract awards among contractors confirms the rising industry activity and spending levels. According to the IHS Upstream Spending Report, 2012 capital spending (CAPEX) is expected to reach $633 billion, rising from $557 billion in 2011.

    Operational spending (OPEX) for 2012 is $493 billion, up from $464 billion in 2011. Rising costs remain a major driver of the rise in industry spending, contributing to just under half of the year-on-year rise in E&P CAPEX seen during 2012.

    "As more projects continue to be sanctioned in 2013, we expect further CAPEX escalation," said Pritesh Patel, senior director of the IHS CERA Upstream Capital Costs Analysis Forum. "In 2012 we have seen more than 4% in cost escalations and we expect this trend to continue in 2013 as demand remains strong."

    The Upstream Operating Costs Index (UOCI) did increase slightly to 190 from 189 over Q1 2012-Q3 2012, despite mixed movements of each component market.

    Each of the markets was impacted by similar factors, namely a decrease in oil prices and uncertainty over the economy in many parts of the world. Nevertheless, activity levels are still high, resulting in tightness in supply chains for what can be very highly specialized services and equipment. The lack of availability of skilled labor has been an issue for the past few quarters, and Q3 2012 was no exception.

    "Our outlook on overall cost escalations are more muted now than it was at the beginning of 2012. Nevertheless, we see costs for skilled workers and technical personnel continuing to increase," said David Vaucher, IHS associate director, who leads the OPEX forum.

    IHS still expects upstream capital and operating costs to continue to rise by 4% to 5% in 2013.

    WoodMac: Record US$25 billion investment, 70% increase in M&A in Norway's upstream sector in 2012

    Wood Mackenzie's annual review of the Norwegian upstream sector shows that the country's oil and gas industry is thriving: 2012 was a record year for capital investment, M&A activity, and licences awarded. However, this was tempered by an underwhelming year for exploration and concerns about the sector overheating, as the ramp-up in activity on the Norwegian Continental Shelf (NCS) led to delays and increased costs.

    Wood Mackenzie's review asserts that once again Norway was a top destination for global upstream investment in 2012, with US$25 billion (NKr 146 billion) of development capital expenditure, or capex. Malcolm Dickson, Norway Upstream Analyst for Wood Mackenzie, elaborates: "Most of this was spent on producing assets, in particular on increasing recovery from giant fields like Ekofisk and Troll. Seven developments were sanctioned in 2012, which was lower than anticipated at the start of the year, but still healthy."

    Wood Mackenzie says 2013 is set to be another year of major investment, with development spend set to increase again as key developments including Åsgard, Edvard Grieg, Martin Linge and Ivar Aasen get underway. However, it warns that there are signs the Norwegian industry is overheating, with the service sector at peak capacity and costs increasing year-on-year. In 2012 this led to several projects being delayed, and cost overruns on many projects. This will not change in 2013: "Project delays and overspend will be a common feature on the Shelf, as companies struggle to access rigs and equipment on time or in budget," Dickson adds.

    Another key conclusion of the review is that exploration success and portfolio rationalisation have spurred M&A in Norway. According to Wood Mackenzie, the value of assets transferred in M&A reached a new high of US$3.9 billion (NKr 22.5 billion) in 2012, up 70% on last year's record. This was underpinned by Statoil's US$1.2 billion deal with Wintershall. Statoil continued with its strategy of portfolio rationalisation to focus on new, higher profile developments, while for Wintershall, the deal was transformational in Norway.

    Other companies sought to grow through M&A, most notably OMV through its acquisition of RWE's interest in Edvard Grieg. Tullow Oil and Cairn Energy acquired Spring Energy and Agora to enter the country, demonstrating the attractiveness of the NCS.

    "We expect M&A to continue to be buoyant in Norway in 2013 as the main catalysts will still be present: high activity levels, costs, and a tight rig market will push companies to evaluate and optimise their portfolios," says Dickson.

    After word-class exploration success in recent years, Dickson concedes that 2012 was a disappointing year for discoveries: "Exploration drilling was down and results were generally poor. Although 14 discoveries were made in 2012, yielding 709 million barrels of oil equivalent (mmboe), this was down 8% from last year, and was below the ten year average of 860 mmboe." Notable finds included Havis in the Barents Sea, Zidane-2 in the Norwegian Sea, and Skarfjell and King Lear in the North Sea. Drilling also decreased, as the number of exploration and appraisal wells dropped from 54 in 2011 to 43 in 2012. This was mainly because companies struggled to access rigs, and some drilling times overran significantly. Appraisal drilling at Johan Sverdrup was a major focus of the year.

    "Exploration is expected to increase in 2013, with up to 55 wells planned, including high profile prospects in the Barents Sea and the Utsira high – arguably Norway's most prospective areas. Licensing will reach a new record high as mature and frontier rounds are due to be concluded in the first half of the year," Dickson offers.

    Dickson adds in closing: "Although exploration success in Norway was lower than average this year, in comparison to the UK, the results look much better. In the UK, despite there being 23 more wells drilled, there were two discoveries made, with only 20 mmboe between them. The UK remains an attractive place to explore, as shown by the interest in the most recent licensing round, and we expect exploration there to be much better in 2013.

    "In both the UK and Norway, M&A activity was strong. However, the UK had a much higher number of deals, resulting in a huge overall value of US$9.3 billion of assets traded. There are more companies active and more assets to trade compared with Norway and there is no State involvement. The capital investment that both the UK and Norway attract is testament to the booming sectors. When combined, the UK and Norway North Sea totals mean that the North Sea had the third highest upstream investment in 2012."

    PXP will participate in offshore Morocco exploration play

    Houston-based Plains Exploration & Production Company said Jan. 2 that it has entered into a definitive agreement to participate in the highly prospective exploration play offshore Morocco. Subject to customary closing conditions including the receipt of Moroccan governmental approvals, PXP will make a cash payment of $15 million to farm-in to Pura Vida Energy's 75% working interest in the 2.7-million-acre Mazagan permit area offshore Morocco.

    PXP will earn a 52% working interest and act as operator in exchange for funding 100% of the costs of certain specified exploration activities that will include a commitment to fund and drill two wells, and if agreed, various additional exploration operations subject to a maximum of $215 million. The first exploration well will primarily target the Toubkal prospect and is expected to be drilled in 2014.

    The Mazagan permit area lies off the coast of Morocco in the Essaouira Basin and includes numerous Mid Miocene and Lower Cretaceous prospects identified based on recently reprocessed 3D seismic data. An independent resource assessment completed by DeGolyer and MacNaughton in September 2012 estimated the gross unrisked mean prospective recoverable resources at over 7 billion barrels, including the 1.5 billion barrel gross unrisked mean prospective recoverable resource Toubkal Mid Miocene prospect.

    PXP is an independent oil and gas company primarily engaged in the activities of acquiring, developing, exploring, and producing oil and gas in California, Texas, Louisiana, and the Gulf of Mexico.

    Cobalt International, Total make oil discovery in North Platte

    With its strategic partner Cobalt International Energy, Total has made an oil discovery at the North Platte prospect on Garden Banks Block 959 in the deepwater Gulf of Mexico. The discovery well encountered several hundred feet of net oil pay in Lower Tertiary sands which included several high-quality intervals.

    While further appraisal is needed to confirm the discovery's size and commerciality, Total estimates the find could result in several hundred million barrels of oil.

    Total is in a strategic alliance with Cobalt International Energy to explore for oil in the Deepwater Gulf of Mexico. The North Platte discovery is the first Lower Tertiary Wilcox formation well drilled by the alliance. The results of the well confirm the northern extension of the Wilcox formation and the presence of liquid hydrocarbons.

    North Platte is located in a water depth of approximately 4,400 feet and was drilled to a total depth of approximately 34,500 feet.

    Total holds a 40% interest in the North Platte discovery along with Cobalt (60%, operator).

    The news of a discovery comes a bit overdue, said Peter Hutton, an analyst at RBC Capital Markets on December 5. While the company has "switched into bolder exploration strategy; most announcements have been about acreage acquisition rather than discovery," he said.

    Hutton offered a rough guide to the materiality for Total at this stage of the discovery, noting that, assuming 400mb x 40% stake and $8/boe, $1.3 billion, or 45 euro cents per share could be implied.

    Israel moves ahead with IEI oil shale project

    Israel Energy Initiatives Ltd. (IEI), a subsidiary of Genie Energy Ltd., said it is pleased by a favorable ruling issued Dec. 24 by the Supreme Court of Israel. The court's decision clears a major legal roadblock and enables an important oil shale project to move forward to the permitting phase.

    In its ruling, the Israeli Supreme Court rejected a petition filed by the Israel Union for Environmental Defense against various ministries of the State of Israel, IEI, and another Israeli oil and gas company, seeking to cancel the regulations governing the permitting process of oil and gas exploration, and seeking to cancel the exploration license granted to IEI.

    In October, the court rejected a previous petition filed by the organization challenging the issuance of exploratory licenses, including IEI's license, issued pursuant to those regulations.

    IEI said that it now looks forward to the issuance of regulations by the Ministry of Energy that will enable it to prepare the environmental documents needed to file its pilot test permit application with the Jerusalem District Planning Committee.

    IEI is an Israeli company based in Jerusalem. IEI is developing an environmentally acceptable approach to produce clean transportation fuels from oil shale utilizing its in-situ conversion technology. IEI holds an exclusive exploration license granted by the Israeli government pursuant to Israel's Petroleum Law. The license area is located in Israel's Shfela basin, and is estimated to contain over 40 billion barrels of oil equivalent. IEI says it has assembled world-class oil shale scientific and management teams.

    CNOOC begins production at 2 locations in Pearl River Basin

    China's CNOOC Limited said Dec. 28 that it has commenced production at two locations in the Pearl River Mouth Basin of the South China Sea, the Panyu 4-2/5-1 oil field adjustment project and the Liuhua 4-1 oilfield project.

    Panyu 4-2/5-1 has an average water depth of about 100 meters (328 feet). The adjustment project was designed to share the existing facilities to develop the Panyu 4-2/5-1 oil field more effectively. The adjustment project is expected to hit its peak production in 2014.

    CNOOC holds a 75.5% interest in the project and serves as operator of the Panyu 4-2/5-1 oil field. Burlington Resources China holds the remaining 24.5% interest.

    The Liuhua 4-1 oil field has an average water depth of about 268 meters (879 feet). In view of the features of the oil field, CNOOC built a new subsea production system while sharing the surrounding facilities for overall development. This project is expected to hit its peak production in 2013.

    The Liuhua 4-1 is an independent oil field in which CNOOC holds 100% interest and serves as operator.

    BHP Billiton to sell its interest in East and West Browse joint ventures

    BHP Billiton said Dec. 12 that it has signed a definitive agreement with PetroChina International Investment (Australia) Pty Ltd to sell its 8.33% interest in the East Browse Joint Venture and 20% interest in the West Browse Joint Venture, located offshore Western Australia, for a cash consideration of US$1.63 billion.

    The transaction is subject to regulatory approval and other customary conditions. Completion is expected in the first half of calendar year 2013.

    BHP Billiton CEO Petroleum, J Michael Yeager, said: "This is an excellent opportunity for both companies. PetroChina has acquired an interest in a world class gas resource and BHP Billiton has exited a non-strategic asset."

    The Browse JV participants hold a right to offer to match the transaction with respect to BHP Billiton's interests in the East and West Browse Joint Ventures and have a customary period to consider whether to make an offer to match.

    PetroChina Company Limited is China's largest oil and gas producer and distributor, playing a leading role in the oil and gas industry in that country. It is also one of the largest oil companies in the world. It is listed on the New York Stock Exchange, the Stock Exchange of Hong Kong Limited and on the Shanghai Stock Exchange.

    Rosneft, consortium sign TNK-BP acquisition agreement

    Russia's Rosneft and the consortium of Alfa Group, Access Industries, and Renova (AAR) signed a sale and purchase agreement for the 50% stake in TNK-BP on Dec. 12. The transaction price is set on the basis of the valuation of AAR's TNK-BP stake at $28 billion. Completion of the deal is expected in the first half of 2013 after receiving approvals from Russian and EU anti-monopoly regulators.

    Commenting on this agreement, Rosneft President Igor Sechin said: "We consider the acquisition of TNK-BP to be strategically attractive for the shareholders of Rosneft. The agreements signed [Dec. 12] enable Rosneft to fully consolidate the business it is acquiring and realize significant synergies. The agreements reached put us in the position to immediately begin preparing the integration process."

    Viktor Vekselberg, chairman of the Renova Group, said: "Through this transaction, Rosneft acquires not only high-quality oil and gas assets, but also a unique corporate culture and operating experience accumulated by TNK-BP during the decade of the existence of our joint venture. These will no doubt help the transformation of Russia's largest oil company into a global leader."

    German Khan, TNK-BP executive director and member of the board of Alfa Group, said: "A deal of this scale has never been done in Russia. The very fact that it is taking place attests to the growing potential of Russia's economy, and reflects Russia's leading role in the global oil and gas industry."

    The law firm Skadden, Arps, Slate, Meagher & Flom LLP is representing AAR on the approximately $56 billion sale of the TNK-BP joint venture to Russian state-owned oil company Rosneft. Members of the Skadden M&A team from London, Moscow, Brussels, and Hong Kong were involved in executing the sale.

    This is the largest M&A transaction globally for more than three years. AAR's 50 % stake in TNK-BP is valued at approximately $28 billion. Rosneft's acquisition of TNK-BP brings to an end a joint venture between AAR and BP which was highly successful economically, but which was fraught with practical difficulties and political controversy. In 2011, AAR used a High Court injunction to prevent BP from forming a strategic alliance with Rosneft to exploit oil reserves in the Arctic Circle.

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