FocusNorth Sea heavy oil could support bitumen, base-oil production

20 July 2011 16:13  [Source: ICIS news]

LONDON (ICIS)--European producers of base-oils, lubricants, transformer oils and bitumen are likely to see costs fall in coming years, as heavy oil discoveries in the North Sea are fast-tracked to production and the output from current heavy oil fields declines, traders said on Wednesday.

Heavy crude oil – oil with an American Petroleum Institute (API) gravity below 20° – is making a resurgence in the North Sea, buoyed by rising crude oil prices, falling heavy oil production and diminishing reserves of light and distillate-rich crude. As a comparison, Brent crude in the North Sea has an API of 37.9°.

Heavy crude oils cannot be distilled by smaller refineries, as it normally contains high levels of corrosive sulphur and acid. While some updated refineries can handle heavy crude, a large portion of its buyers are specialist refiners which produce lubricants, bitumen, transformer oils and base-oils.

Much of the drive to utilise heavy crude is coming from alternative investment market (AIM)-listed developers such as Nautical Petroleum, Providence Resources and Xcite Energy, due to the high-risk, high-reward nature of developing heavy crude oil fields. Norway’s state-run Statoil is developing the Mariner/Bressay heavy oil fields located in the UK Continental Shelf.

London-based Nautical Petroleum is currently developing the Kraken oil field, located on the east Shetland Platform. Kraken is expected to contain between 485–1,337m bbl of crude with API of 15°. The first oil from the site is expected in the fourth quarter of 2014.

Oil exploration company Xcite Energy’s Bentley oil field could potentially contain about 160m bbl of crude, with an API of 10–12°. Production from the field is expected to commence in 2012.

Ireland-headquartered Providence Resources is studying its Ardmore/Nemo field, which could contain up to 230m bbl of 16° API crude oil. In 2010, Providence farmed out 65% equity interest in the block to Nautical Petroleum.

Statoil has a 81.6% stake in the heavy oil Bressay field and a 65.1% stake in the Mariner field, which also contains heavy oil. The company acquired the fields in 2007, with the objective of developing a production hub for heavy crude.

Work at the field was temporarily postponed earlier this year, after the UK Government’s Chancellor of the Exchequer, George Osborne, raised supplementary tax levels from 20% to 32% in the 2011 UK Budget. However, Statoil continued the work after the treasury announced an incentive which neutralised the initial tax hike.

Some larger producers, such as US-based major Chevron, already operate some heavy oil fields, such as Alba – with an API of 19.4° – and Captain, with an API of 19.1°. However, production at many of the existing heavy oil fields has already peaked.

Production from the Chevron-operated Captain field averaged just under 40,000 bbl/day in 2010, down from average 2005 production levels of about 50,000 bbl/day. Production from the Alba field has halved since 2005, from 54,000 bbl/day down to 28,000 bbl/day in 2010.

Production from the BP-operated Harding field has also halved since 2005, from 32,000 bbl/day down to 17,000 bbl/day in 2010. Output is also declining from the Statoil-operated Grane and Heidrun fields.

Heavy crude oil has traditionally been shunned by developers, who favour light sweet and distillate-rich crude. Heavy oil is sold at a discount to lighter crudes. The development and production of heavy crude is also more expensive and potentially damaging to the environment.

By: Kawai Wong
+44 20 8652 3214

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