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Supply and demand

Hydrocarbon Engineering,

Global demand for energy is inexhaustible. In developed countries, populations continue to rise putting pressure on water, sanitation and other requirements. A growing taste for comfort and convenience demands air conditioning and heating systems, transport solutions, entertainment activities and a range of other related energy-hungry luxuries. The less developed world is also becoming more sophisticated and more populous and demand is growing from the BRIC nations, South Africa and other areas to place even more pressure on natural resources.

Renewables such as solar, wind and tidal options present an alternative to traditional fossil energies, but these are expensive and still largely in their infancy. This means the world must continue to look to oil and gas for the immediate solution. Existing oil fields in the more accessible regions are now mature, so the options are to improve techniques to squeeze the remaining reserves from these fields or to explore more remote parts of the world.

Going farther afield into deeper and less accessible offshore oil fields presents a range of challenges. Not least is the remoteness itself. Drilling in the Brazilian Basin involves using difficult deepwater techniques, but these fields have an established network of support facilities to hand. Exploring in the polar regions, the Falkland Islands or East Africa may offer no such support. Establishing an offshore operation requires support vessels, port facilities, warehousing, workshops, a supply chain and, of course, facilities for the workers themselves. And when the product is extracted, a shore-side production and transport infrastructure will also be needed. This support infrastructure comes at an enormous cost which is, itself, increased if the region in question lacks basic services such as a road network or any domestic facilities. With an offshore operation costing anywhere up to US$ 15 billion, the added cost of building the initial shore-side infrastructure is often enough to make some fields uneconomical to exploit.

Figure 1. Deepwater SPM buoy under tow.

Questions of investment

This raises the question of who pays. In general, the asset holder – the entity developing the field – pays for the offshore infrastructure required to extract the energy. But is it fair that they also pay to create the shore facilities required to support the offshore work, particularly if local services are non-existent? The answer is complex and involves many issues including the local government’s ability, or willingness, to invest. But without such investment, an offshore operation can either be stifled or hampered by costly delays, particularly if the supply base is some days sailing away.

With billions spent on developing and installing an offshore facility – and, perhaps, shore-side infrastructure as well – the asset holder must be assured that they will be allowed to continue their work without interference or significant increases in tariffs and taxes. Less stable regimes are sometimes a cause for concern.

Political implications present their own particular challenges. Oil majors have less clout than in years gone by and national oil companies and local governments are exerting more influence. Governments issue contracts, set tariffs, impose taxes and can even force mergers, partnerships or nationalisation. Political tensions between countries can cause difficulties and delays with nations competing with their neighbours to provide optimum operating environments in return for a slice of the action. But less experienced governments might insist on a price that makes extraction just too costly.

Increasingly, governments are demanding that local content is included in any contract – and this applies equally to developed and less developed regimes. Local content is a requirement for local people to be employed on projects and for local suppliers and contractors to be used. Insisting on this helps grow the economy and up-skill the workforce but problems arise when no such talent is available. Offshore production is a highly specialised operation and skills must be imported to ensure its safety and integrity. Sometimes it is simply not possible to identify enough local people with the required level of skills on which to build. Unfortunately, operators in some regions have been forced to fulfil local content requirements with low-level manual workers. This will not help economies develop in the long term.

Figure 2. Transportation of a module before subsea installation.

Technical challenges

Aside from the political challenges of exploiting new energy reserves, the technical implications are also significant. Drilling in 1000 m of water was once considered to be deep but it is now common, and 2500 m is becoming a reality. But drilling to those depths in regions which enjoy relatively benign weather conditions and good shore support is a completely different prospect to conducting such operations in more far flung areas such as northern Russia or the Falkland Islands. In these fields, producers may be battling with high winds impacting on large structures, extremes of temperature, high sea states and deep water bi-directional currents. Structures can be developed to cope with these adverse conditions but an added difficulty arises when transporting them from their place of build (often Korea or China) to their offshore location. A tight weather window of two or three months is all that is generally available for transport, installation and making safe before winter conditions return.

Once extracted, the oil and gas must be transported from the installation and stored or processed. In areas with a good shore infrastructure this is not generally an issue, but in more remote fields moving the hydrocarbons is not easy. In these waters, oil can be offloaded into shuttle tankers for onward transportation and, whilst a proven solution, operating these vessels is expensive and requires a particular skill set. But the real problem arises when having to cope with by-products such as gas. No longer can gas simply be flared off – for environmental and energy conservation reasons it must be processed. In fields with an established shore-side infrastructure the gas can be piped ashore for processing, but this is not possible everywhere. Natural gas is a relatively high volume, low energy product and is not economical to transport by ship without initial processing. Ideally, the gas should be converted into LNG – which has a higher energy density – and then transported by LNG tanker, but offshore gas processing is still in its infancy. In Australia, Shell is currently developing a large floating LNG (FLNG) processing facility called ‘Prelude’ which might solve the problem, but proof of concept is yet to be achieved. Even if Prelude is a success, its cost (estimated to be in excess of US$ 10 billion) is likely to prohibitive in all but the most lucrative fields.

If the gas cannot be taken ashore or processed in situ, the only alternative is to re-inject it into the undersea reservoir. This is a complex and costly activity, particularly at depths of 2000 m or more and is likely to put further pressure on the economic viability of the project.

As demand for energy increases, oil companies are developing more sophisticated techniques for energy extraction. Often it is not the technology itself that is holding back the exploitation of the remote and challenging fields, but the costs associated with the activity. In the North Sea region, an increasing amount of subsea technology is being introduced. Statoil’s Åsgard subsea gas compression is a good example of where instead of installing a large fixed or floating facility on the surface, a much smaller facility can be utilised on the seabed. Placing the compressor nearer the well increases efficiency. This is also useful in areas such as the Arctic where ice and low surface temperatures cause problems. In shallower waters, the possibility of locating processing and transportation facilities on the seabed is being seriously investigated but these ‘subsea factories’ create additional challenges in deeper waters. The need to ensure containment requires all equipment to be exceptionally high quality as deepwater maintenance is difficult and an escape of hydrocarbons is environmentally damaging and very expensive as seen in the Macondo incident in the Gulf of Mexico. The cost of such functionality must be weighed against any future profits, however. Even if the cost/benefits of subsea technology stack-up, a shore facility is still required to receive the gas and a supply base is needed to service the installation. And in places with little or no shore-side infrastructure, this is simply not an option.


Luxuries such as air-conditioning and motor vehicles, which were once ‘nice to have’, are now essential elements of many people’s everyday lives. Coupled with a steady growth in population, this has created an unprecedented demand for energy and a need to explore ever more remote corners of the globe. When investigating whether or not to exploit an energy reserve, oil companies must consider exploration, development, production and abandonment activities and cost the entire project as a long-term package. To do this, they need political and fiscal stability and surety across the term of the project as well as the technology and shore-side infrastructure to be able to operate effectively. Although headline financials may make oil and gas look like easy profit, it must be remembered that a portion of the profits must be re-invested into new exploration and R&D activities to ensure the next reserve can be worked and the world’s energy supply maintained.

Challenges will continue to stretch the offshore oil and gas sector and whilst most technical issues can be overcome given sufficient time, the political and economic factors are those most likely to hinder progress.

Written by Brian Jones and Warren Inniss, LOC, UK.

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