Energy law was a star performer for the sector in the first quarter of 2013.
Only a spate of mega-deals in the technology, media and telecoms space kept energy sector legal work from once again taking the top spot in law firm activity in the first quarter of 2013 according to the latest rankings and data from Mergermarket. Keep reading →
A Department of Interior (DOI) report on Shell’s 2012 Arctic operations reveals inadequate management oversight and details key recommendations for conduct and oversight of future exploration projects.
On March 14, 2013, DOI released its 2012 assessment of Shell’s Arctic operations. The review identifies inadequacies that led to a series of problems related to containment system deployment, marine transport, and grounding of drilling rigs. DOI also provides key recommendations to recommencement of Shell’s drilling program and future exploratory activities in the Arctic. The U.S. Coast Guard is currently conducting a separate marine casualty probe to assess the currently grounded Kulluk drilling rig. Keep reading →
The multi-million dollar oil drilling rig named Kulluk that ran aground offshore Alaska on New Year’s Eve has been deemed stable enough to tow out of Kiliuda Bay to Dutch Harbor. The Kulluk will be brought to a purpose-built dock from which it can be safely prepared for “dry-tow transit to Asia” for repairs.
“The completion of the damage assessment revealed that the inner hull of the Kulluk was not breached and that all fuel tanks remain intact. The outer hull did receive damage as expected with a vessel being aground during adverse weather. In addition, the Kulluk encountered water damage to its superstructure which resulted in damage to technical equipment and a breach of windows and hatches. Over the past few weeks, all damaged windows and hatches on the Kulluk’s main deck have been secured, and where necessary, temporary steel structures have been put in place to ensure that the vessel is weather tight and prepared for the tow,” according to an update issued by the Unified Command in charge of the operation. Keep reading →
Accounting firm Ernst & Young released its Oil & Gas Center’s quarterly outlook this week highlighting the major trends expected in various petroleum industry sectors over the near term. It’s done on a quarterly basis and provides an overall view of main themes to be watching. It is primarily generated as an internal document, “so everyone knows what’s going on and highlights are sent to clients,” Foster Mellen, Senior Analyst with Ernst &Young’s Oil & Gas Practice told Breaking Energy.
Some points of interest include the long-overdue startup of Kazakhstan’s giant Kashagan field and how companies may cope with US natural gas prices that have persistently remained below historical norms. Keep reading →
Rex Tillerson, CEO of ExxonMobil recently met separately with Iraqi Prime Minister Nuri al-Maliki and Kurdistan Regional Government Prime Minister Masoud Barzani to discuss the company’s provocative stance within Iraq’s critical oil and gas sector. Exxon is simultaneously famous for its “my way or the highway” approach and for shying away from the internal politics of sovereign nations where it operates, so these high-profile meetings create many questions about the future of Iraq’s oil and gas development framework.
The disagreement and distrust between Baghdad and the KRG has gone on since the former regime fell in 2003, with the two sides unable to reach an agreement on oil revenue sharing, contractual terms with foreign oil companies, export routes and other issues.
Most of Iraq’s developed fields and export infrastructure is located in the south, but the Kurdish regional area in the north contains considerable undeveloped reserves and its border with Turkey offers additional export routes to European and western markets.
Baghdad has barred companies that sign contracts with the KRG from operating in the south, but ExxonMobil – having already established itself in one of the most prolific southern fields, West Qurna-1 – also signed production sharing contacts with the KRG in 2011. This infuriated the central government and Oil Ministry who barred Exxon from future licensing rounds and demanded the company sell its West Qurna-1 stake. Exxon has reportedly spoken to potential buyers.
In 2009 and 2010, Exxon – along with partner Shell – agreed to increase West Qurna-1 output from about 250,000 b/d to 2.825 million b/d within 7 years. “Initial field production of 244,000 barrels per day has now increased to 285,000 barrels per day, which exceeds the 10 percent improved production target established under the technical services contract,” Exxon said in a 2011 statement. The service contract terms provide the companies a $1.90/bbl remuneration fee for incremental output from developed formations and a $2.00/bbl fee from nearby discovered, undeveloped formations.
It’s hard to see why Exxon would risk its West Qurna-1 stake with hundreds of thousands of barrels of incremental daily production virtually guaranteed, but the prospect of bookable reserves could be a factor.
This was a major issue 10 years ago when Baghdad was trying to figure the best way to re-open the country’s oil sector to western companies. Ceding control of Iraq’s national resources by allowing foreign companies to book reserves would be politically toxic domestically and internationally. The nascent democratic government could not risk the fragile trust of its ethnically and religiously diverse population and western governments involved in Saddam Hussein’s ouster were sensitive to perpetuating the view that the war was about accessing Iraq’s enormous oil and gas reserves.
As such, the technical service contract became the preferred legal construct under which international oil companies would operate. As contractors they would receive a fee for services rendered, but could not book reserves, similar to the terms governing service companies like Schlumberger and Halliburton in their dealings with oil companies.
The majors were not thrilled with the generally tough terms dictated by Iraq’s Ministry of Oil, but the hope was that by getting their foot in the door to some of the world’s largest oil reserves and doing a good job things might open up down the road. At least this arrangement was better than the situation under Saddam Hussein when there was no access at all.
However, the KRG offers more attractive terms to foreign operators than Baghdad. Traditional production sharing contracts typically allow companies to book a portion of the reserves being developed. Regional operators have discussed the possibility of booking reserves. For example, Calgary-based E&P firm Western Zagros stated in its most recent Annual Information Form it “believes that there is excellent potential for the establishment of significant reserves and production on its PSC Lands.”
The exact details of Tillerson’s meeting with Barzani are unclear, but the potential to report Kurdish reserves on Exxon’s books could represent the added value required to walk away from West Qurna-1.
It is also possible that Exxon is attempting to hasten a grand bargain between the KRG and Iraq’s Central Government that would arguably be in everyone’s best interests, but the regional and central leaders appear to remain far apart on the issues.
Meanwhile, Kurdish leaders have reportedly been meeting with Turkish government representatives to discuss oil and gas transport possibilities, which if solidified, would reduce KRG reliance on Baghdad and put them in a stronger bargaining position, as some have recently suggested. Potentially lucrative petroleum pipeline deals in the north coupled with service contracts in the south could also be a desirable outcome for the oil majors operating in Iraq.
Iraq’s importance in global oil markets cannot be understated as the country’s export volumes play an increasingly crucial role in fundamentals and price discovery. Exxon’s foray into Iraqi politics highlights the valuable stakes,and whatever happens could alter the course of regional oil and gas development.
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Your favorite Exxon station is very likely not owned or operated by Exxon and the same is true for the rest of the major oil companies. The Chevron’s and BP’s of the world largely distanced themselves from the branded retail gasoline business following the mega-mergers of the late 1990′s and early 2000′s due to financial and regulatory factors.
In fact, these businesses – that most people still refer to as gas stations – are now thought of by the industry as convenience stores that sell motor fuels. The downstream segment – refining and marketing – of the oil and gas business has been marginally profitable for decades. But the vertically integrated model first championed by John D. Rockefeller’s Standard Oil remains attractive to the majors because owning refineries provides a guaranteed market for their often highly-profitable upstream businesses of finding and developing oil and gas. The upstream was often thought of as subsidizing the downstream, as Steve Coll described it in his book about ExxonMobil, “Private Empire.” Keep reading →
Shell spent billions of dollars and significant political capital to obtain the licenses and approvals required to explore for oil and gas off the coast of Alaska.
The company’s problems in the region were compounded when a drilling rig ran aground in rough seas on December 31st as it was being towed from Alaska to the port of Seattle, Washington for scheduled offseason maintenance – the rig was not drilling at the time. Although there does not appear to have been a petroleum release, the risks associated with operating in the Arctic have been highlighted by the incident. Keep reading →
The global fleet of ultra-deepwater oil rigs was increasing steadily until April 2010, when regulatory aftershocks from BP’s Macondo disaster slowed its overall growth rate. But now, two years after the Gulf spill, there are indications that drilling in the ultra-deep could be poised for a long-term surge.
One of the key indicators is rig demand. And a Barclays equity research report says oil companies are clamoring for rigs designed to operate in water depths of 7,500 feet or more – the generally accepted threshold for the ultra-deep space. Keep reading →
All politics is local, the old saying goes, and that is particularly true with energy. Energy has become a major issue in the US elections, and how voters perceive energy issues is often influenced by the infrastructure they see around them.
As the US economy continues to measure the impacts of the shale gas and oil boom, new investments are being made in everything from pipelines to transportation fueled by natural gas to proposed data centers lying atop burgeoning gas fields. The transformational effects of the investments on local economies is obvious, but the debate over everything from water quality to truck traffic continues to grow in volume too. Keep reading →
Royal Dutch Shell plans to spend at least $1 billion a year exploiting China’s potentially vast resources of shale gas, the firm’s top China executive said, part of an aggressive strategy to expand in the world’s biggest energy market.Shell in March secured China’s first product sharing contract for shale gas, hoping that getting in early will allow it to be a big beneficiary from the sort of boom in shale that has transformed the U.S. energy market. Asked if the firm remained committed to a plan to invest $1 billion a year in China’s shale gas over the coming few years, Lim Haw Kuang, Shell’s top China executive, said in an interview: “Yes, yes and yes.”
Jared Anderson
Conway Irwin
Peter Gardett