2. Oil is acting up. The fall in its price has been more abrupt and
precipitous than anyone could foresee. Lower oil prices are
good for industry and consumers, but the market does not like
surprises, whether good or bad, and there is no denying that
the unexpected fall has caused widespread dislocation. This
article examines the strange new oil and gas landscape and
asks what has changed fundamentally and how suppliers can
best position themselves.
By James Chater
The Sleipner A platform in the North Sea. Photo: Øyvind Hagen / Statoil.
3. [ Oil & Gas ]
www.stainless-steel-world.net Stainless Steel World April 2015 33
First money, now oil
In a race to the bottom, several countries
have been cutting their interest rates
in an effort to stimulate demand and
grow their economy. Some countries
have even introduced negative interest
rates, so that costumers have to pay
the bank to hold a deposit account!
Normally, when interest rates are this
low, this would trigger massive inflation.
But demand is so weak that this has not
happened yet, with few exceptions.
And now it’s oil’s turn. Economic growth
for 2014 has turned out to be lower than
it was projected to be two or three years
back, when the investment decisions
affecting today’s projects were made.
At the same time, oil and gas output
has increased thanks to US shale. The
resulting supply-demand imbalance
triggered a drop of over 50% in the oil
price, taking the WTI price from USD
110 a barrel in mid-2014 to USD 48
per barrel in January; now it is around
50. Normally, OPEC would have cut
production to correct the imbalance,
but these are not normal times. To
maintain market share (at any price!)
and probably for political reasons as
well, the Saudis vetoed a production cut
at the OPEC meeting in November. Oil
producers are hurting, but so too are
the Saudis, who need oil at USD 93 per
barrel in order to balance their books
(other OPEC members need more!).
Who will blink first?
Effect on oil producers
Meanwhile there is pain down on the oil
patch, and no one can say for sure how
long it will last. The oil glut is squeezing
producers of shale oil and gas (mainly
concentrated in the United States), of
heavy oil (Venezuela) and of deepwater
oil (Brazil). Drilling in deepwater or
shale is scarcely profitable with oil
at USD 50 (table). Small, specialized
drilling companies are suffering the
most, but large, vertically integrated
companies, especially those with
refining or petrochemical interests,
should survive.
Oil service companies are laying off
employees. Halliburton, Baker Hughes
(recently acquired by Halliburton),
Schlumberger and Weatherford are all
cutting their work force, while globally
as many as 100,000 workers are thought
to have lost their jobs. Even in Norway,
companies are cutting oil projects by
14%, and 10% of oil-sector employees –
about 10,000 people – face redundancy.
What of the future? Current projects are
likely to be unaffected, as it is cheaper
to operate wells at a slight loss (at least
for a time) than decommission them.
It is on future projects that the axe will
fall, and some petroleum companies –
among them ConocoPhillips and Shell
– have already announced cutbacks
in exploration & development. Fewer
projects will be planned or initiated
until producers can be sure of a higher
price, and this will happen only after
demand once again surges ahead of
supply.
And this is where oil differs from
money. Whereas governments can
print as much money as they please,
trashing their currency for short-term
political gain, the amount of oil in the
world is finite, meaning that the current
imbalance will correct itself, sooner
or later, though we do not know when.
The danger lies in over-correction, that
there will then be too few oil companies,
workers and projects, leading to
shortages and high prices.
The Johan Sverdrup project. Photo: Øyvind Hagen / Statoil ASA
Table. Price below which oil
production is unprofitable
(US dollars per barrel of Brent
crude)
Oil type or region USD
Arctic 78
Canadian oil sands 74
US shale (Bakken and
Eagle Ford)
70
Middle East <30
4. 34 Stainless Steel World April 2015 www.stainless-steel-world.net
pipeline has been delayed indefinitely.
And many must be wondering whether
Shell will feel confident enough to
start drilling in the Arctic this summer,
assuming it gets permission. (Economic
factors apart, there is considerable
pressure from environmentalists.) That
said, the “low-hanging fruit”, whether
in Saudi Arabia or elsewhere, is fast
depleting, so the expertise acquired in
tight oil should stand North America in
good stead in the long run, placing them
ahead of their competitors. One way or
another, North America will be self-
sufficient in oil before too long. It is also
only a matter of time before the current
ban on US exports is lifted.
The need to cut costs is driving the
search for more efficient technologies.
A word one hears more and more
frequently is “refracking”. Rather than
moving to a new well, producers are
saving money by giving fracked wells a
second pass. This can be done at about
25% of the cost of developing as new one
and, as technology evolves, costs could
come down even further (see box).
Recent developments in Brazil make
a stark contrast. Petrobras, apart from
being mired in a kickback scandal, finds
it cannot develop its recent oil finds
economically with oil prices this low.
So on 26 February 2015 it announced
divestments amounting to USD 13.7
billion. This did not prevent it from
announcing a new monthly oil production
record for January, of 669 thousand bpd
for the Campos and Santos Basins pre-salt
basins. (This output does not include
the natural gas volume.) In addition, it is
Uncertainty for suppliers
So we are faced with a volatile supply-
and-demand yo-yo, in which dearth of
demand leads to reduced supply, after
which a dearth of projects will trigger
a resurgence in oil prices. These wild
oscillations make it difficult for suppliers
to anticipate the demand for materials
and equipment. How many valves,
pipes etc. will be required in oil and gas
fields one year from now? How many
oil companies will be left to buy them?
Nobody really knows.
We can, however, provide a few
pointers. The glove that the Saudis
have thrown down has the word
“costs” clearly written on it. Producers
will turn to technology, especially
automation and robotics, to replace
the workers they have laid off. For
instance, unmanned wellhead platforms
have already been used on the Danish
and Dutch continental shelves, and
will soon be used by Statoil on the
Oseberg Future development. Rather
than starting new projects, companies
will tweak existing projects to improve
productivity and cut costs. Storage will
also assume greater importance, as oil
producers need somewhere to put their
excess production.
The Americas
The United States is one of the countries
most affected by the drop in oil prices.
Small shale producers, which have
borrowed heavily to finance expensive
well drills, are feeling the pinch. Given
current circumstances, perhaps it
is a good thing that the Keystone XL
Refracking
At a time of falling prices, refracking
existing wells rather than drilling new
ones is a natural way to save money. As
many as 50,000 wells may be candidates
for refracking. Companies are improving
their ability to pump fracturing fluid down
horizontal wells and identify the spots that
need to be blasted. In 2014, Consol Energy
employed Halliburton to refrack some
natural gas wells drilled in 2009. Halliburton
shot more holes in them and produced
more gas than the wells produced before.
Other companies using similar procedures
are Marathon Oil (13 re-fractured wells
completed), EQT and Pioneer Natural
Resources (re-fracking well in the Eagle Ford
basin). Crescent Point Energy will begin
refracturing its Alberta Bakken wells in 2015.
Russian gas pipelines.
A shale well in cross section. The shaded
blue areas are old fracks, plugged by
a biodegradable material produced
by Halliburton that seals off existing
pathways. That lets pressure build in
new areas, creating other pathways for
gas to travel to the wellbore. Image:
Halliburton.
5. www.stainless-steel-world.net Stainless Steel World April 2015 35
acquired Petrobras’ assets in Peru, and
CNOOC has a portfolio as extensive
and varied as CNCP. In 2013 it acquired
Nexan and entered the UK North Sea.
Sino-Russian gas deals
China is not greatly endowed with
oil and gas resources, so it is natural
that it should turn to its resource-rich
neighbour to the north to cater for its
demand, a process that tension between
Russia and the West will merely
accelerate. Russia has been exporting
to China for quite a few years, and the
process has recently been stepped
up with the signing of two important
contracts. On 21 May, CNCP signed a
30-year deal with Gazprom that will see
38 billion cu m of gas a year go to China
between 2018 and 2047. On 9 November
CNCP signed a second agreement with
Gazprom for gas imports along a more
eastern route. Lower prices mean that
the final details have yet to be worked
out, but Gazprom hopes to ship an
additional 90 billion cu m of gas a year
to China. This development will lessen
its dependence on European markets.
In response to sanctions, Russia is
reducing its dependence on western
markets. The Russia-China energy block
provides an eastern counterpoise to the
Canada-USA block in the west.
Stainless steel
In recent years it appears that oil
producers are depending more andWelding on a Gazprom pipeline.
The Christina Lake oil sands project is located around 75 miles south of Fort McMurray,
Alberta, Canada. Currently, there are five producing phases at Christina Lake, of which
this photo shows the last, Phase E. The project is operated by the FCCL Partnership, a
joint venture between ConocoPhillips and Cenovus Energy.
using an array of advanced technologies
to extract oil at great depth. These
include riser-free drilling, nanoparticles
to facilitate drainage of oil from rocks,
autonomous underwater vehicles and
installation of separators on the seabed,
which in some cases avoids the need for
platforms.
Low oil prices are also impacting oil
sands projects, perhaps even to a
greater extent than shale oil and gas.
Total, Statoil and Cenovus Energy
have all postponed projects; now Shell
has shelved its Pierre River project
in Alberta, Canada, preferring to
concentrate on boosting the profitability
of its existing operations.
Far East
A measure of how the world has
changed is the growing importance
of China as a market. There, oil and
gas companies have been diligently
buying up assets all over the globe.
The national petroleum company
CNCP has operations in 37 countries, in
Africa, the Americas, Europe, Central
Asia, Russia and Australia. In the last
few months it has signed agreements
in Russia, South Sudan, Myanmar and
Australia, where it has acquired Arrow
Energy. Its affiliate, PetroChina, has
Fracking bombs
This April marks the 150th anniversary of
the assassination of Abraham Lincoln. The
culprit, John Wilkes Booth, was a successful
actor and failed oilman. After investing in
an oil well in Pennsylvania, in an effort to
boost its yield, he detonated explosives
inside the well, thereby wrecking it. This was
shortly before the assassination took place.
If this early attempt at fracking had not been
botched, Booth may have thought twice
before shooting the president.
In 1967 a nuclear bomb was detonated
underground near Farmington, New Mexico.
The explosion was part of a programme
to see if nuclear bombs could be used to
stimulate the release of natural gas locked in
shale deposits. The experiment was judged
a technical failure, and concerns were raised
over radioactive contamination. Today’s
technology is better, by any standards.
6. [ Oil & Gas ]
36 Stainless Steel World April 2015 www.stainless-steel-world.net
more on duplex, especially super
duplex. The reasons behind this trend
include corrosion resistance, weight
saving and price stability (lower alloy
costs). Here are a few recent orders:
• IPP Scomark Engineering Ltd
completed a high-pressure
manifold made of hipped super
duplex for Total’s Martin Linge field
in the Norwegian North Sea.
• Outokumpu won a contract to
deliver 22,000 tonnes of duplex
2205 to a natural gas field project in
Oman, the largest duplex contract
in the company’s history.
• Technip Umbilicals has awarded
Vallourec a contract for Total’s
Edradour project in the UK North
Sea. Part of this order consists of
super duplex welded tubes for
umbilicals.
• Civmec has been awarded a
contract by Technip in Australia for
68 subsea jumper spools made of
Inconel clad pipe, super duplex and
carbon steel.
• Subsea 7 and Butting have
concluded an agreement on the
supply of metallurgically clad,
mechanically lined, duplex and
super duplex pipes. They are
being used on an offshore project
in Brazil.
Titanium
Because it is becoming cheaper to
process and fabricate, the use of
titanium in offshore oil and gas could
increase. Topside, it has long been
Premier Hytemp is to invest USD 20 million in its second manufacturing facility
in Singapore.
Sources
www.bloomberg.com/news/
articles/2015-02-10/drillers-take-second-
crack-at-fracking-wells-to-cut-cost-
energy; http://oilandenergyinvestor.
com/2015/02/saudis-will-regret-big-
oil-bet/#deeplink; http://powersource.
post-gazette.com; www.infomine.com;
www.norsktitanium.no ; www.timet.com.
About the author
James Chater
(D.Phil.) was
born and
educated in
the UK. He has
also lived and
worked in the
United States,
Canada and the
Netherlands.
From 1986 to 1997 he worked for the
record company Philips Classics in Baarn,
the Netherlands. He then worked as Editor
for KCI Publications from 2000 to 2008.
In 2008 James moved to France, where he
lives with his two children and works as a
freelance journalist. James researches and
writes feature articles for KCI publishing
and is a regular contributor to Stainless
Steel World magazine. His hobbies include
chess and music. James can be contacted at
j.chater@kci-world.com.
Gazprom’s Chayandinskoye oil, gas and condensate field. This field will feed the
Yakutia gas production centre, which will supply gas to China and the Russian Far East
via the Power of Siberia gas transmission system.
used in heat exchangers, fire protection
systems and chemical treatment lines.
As wells get deeper, we could see more
use of titanium in risers and stress joints.
Other application include the tooling
components of Remotely Operated
Vehicles (ROVs) and seismic equipment
used in exploration. In applications
where pressures and temperatures are
too high even for super duplex, titanium
is often a viable alternative because of
its high yield strength and resistance to
corrosion and cracking.
