The Royal Bank of Scotland unleashed a disturbing report for the United Kingdom in late August.


It said oil production dropped 4% from May to June and 13% from June 2005 to 2006. During the same periods, gas production toppled by 23% month-to-month and 24% year-to-year.


It also offered a conundrum, according to an article in The Herald. Higher investment spending over the past year did not result in a measurable growth. It added, “Soaring costs fail to explain the sluggish supply response, since higher input bills have not prevented a sharp pick-up in drilling activity.


“This is particularly puzzling given that drilling activity aimed at the development of new fields or at boosting production of existing fields, which has a more immediate effect on output compared to exploration drilling, has accounted for the lion’s share of the recent sharp increase. The relative weakness in exploration drilling in turn bodes ill for future production growth.”


Big projects take a long time to come onstream. Even on a fast track, the Alvheim FPSO took 5 years. (Photo courtesy of Marathon Oil Co.)

This is a serious production problem. Or is it?


The study is partly right. Weakness in exploration drilling bodes ill for future production growth all over the world, but now industry executives gaze at the US $70 price tag and figure higher production is the fastest way to get more barrels out of the ground.


But let’s take a closer look at the action. The latest licensing round saw 147 applications from 121 companies, 25 of them new to the United Kingdom, for production licenses, a 35-year high. The Department of Trade and Industry received 80 applications for traditional licenses and added 62 for promote license and five for frontier licenses. That’s up from 68, 60 and 7 in 2005. The industry is making the right reply to higher prices.


A couple of events may have skewed the May-June figures. According to Alison Sheppard, analyst for European research at Wood Mackenzie, including the temporary outage of the Rough gas storage facility. Gas production could have dropped because operators had no place to send the gas. It’s back online now and nearly full.


In addition, she said, Transco gas demand for electrical generation dropped during the months. It needed enough gas to generate 2.9 billion kWh during May in 2005 but only enough to generate 2.5 billion kWh of electricity in the same month this year.


Declines may continue, but the pace of declines should slow to less eye-popping numbers.


The number of wells drilled climbed 30% last year to about 300 and should rise again to 320 this year, but this isn’t a plug-and-play game. These wells need subsea equipment and, in some cases, platforms, in a market that’s tight for equipment and shipyard space.


New platforms typically take about 5 years on a fast track from discovery, and back orders for subsea equipment often delay delivery for years. Workboat and other service schedules may further delay operations.


Marathon Oil is putting the finishing touches on its Alvheim floating production, storage and offloading (FPSO) vessel at the Vetco Aibel yard in Haugesund, Norway. Let’s use that as an example of a 5-year project from the time Marathon adopted Norway as a core area in 2002 and began acquiring acreage. It added discoveries in 2003. It already was a major shareholder in the Heimdal complex on the UK side of the North Sea.


On a fast track, it had discovered and assembled the Boa, Kneler and Kameleon fields with 180 million boe. To those, it added Norsk Hydro’s Klegg, which later became Vilje, to raise resources to 200 million to 250 million bbl and form the foundation for the Alvheim field complex. It also might add the Hamsun discovery, renamed Volund.


With a promise for use of the Odin multipurpose shuttle tanker in hand, it received approval for its development plan in mid-2004.


The Alvheim is a conversion from a Statoil shuttle tanker called Odin. The conversion required basic FPSO hull work at the Keppel Shipyard in Singapore before the craft was ready to travel to Norway for topside modules.


During this time, the company drilled appraisal and development wells in the fields, installed subsurface trees and infrastructure, and generally got the place tidied up for the arrival of the FPSO.


The project required coordination with Keppel, Vetco Aibel, Marsk Contractors, Technip and APL to make sure all the pieces fell into place at the right time.


Now, when the Alvheim produces first oil in the first quarter of 2007, it will have the capacity to produce and store 120,000 b/d of oil and handle 125 MMcf/d (3.54 MMcm/d) of gas. The company plans to use up to 80 MMcf/d (2.27 MMcm/d) of gas for gas lift for the oil operations, but the remainder will go to the United Kingdom.


The company will use a 15-mile (24-km) gas export line to move the gas across the border to link with the Scottish Area Gas Evacuation (Sage) pipeline to St. Fergus, Scotland.


That project will be backed up in 2007 with the Langeled pipeline, the world’s longest subsea pipeline at 750 miles (1,200 km). The 44-in. line will bring Ormen Lange gas from Nyhamna in Norway to Easington in southern England.


That line, with a capacity up to 883 Bcf (25 Bcm/year) can supply up to 20% of the United Kingdom’s gas demand.

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