ConocoPhillips Faces Suit in China Over 2 Oil Spills

- ConocoPhillips Faces Suit in China Over 2 Oil Spills

Thursday, August 25, 2011
International Herald Tribune
by Edward Wong

The spills at the country's largest offshore oil field, developed by ConocoPhillips and China National Offshore Oil Corp., have released about 3,200 barrels of oil and drilling fluids into the sea.

The Chinese maritime authority is preparing to sue ConocoPhillips, the American oil company, over two oil spills that took place in June and engulfed large swaths of Bohai Bay in north China, according to a report by Xinhua, the state news agency.

The report, which appeared Wednesday, said the government agency, the State Oceanic Administration, was aiming to prepare a team of lawyers by the end of the month. It cited an agency spokesman as saying that 49 Chinese law firms had applied to provide legal assistance in the lawsuit, which would demand compensation.

The two spills at Penglai 19-3, the country's largest offshore oil field, covered at least 840 square kilometers in Bohai Bay and was the biggest oil disaster in China since a pipeline explosion in Dalian in July 2010 resulted in a leak into the Yellow Sea. About 3,200 barrels of oil and drilling fluids have spilled into Bohai Bay from the June accident. Penglai is being developed by ConocoPhillips and China National Offshore Oil Corp., commonly known as Cnooc.

John Roper, a spokesman for ConocoPhillips, which is based in Houston, said in an e-mail Thursday that the company had not received any notice of litigation.

"As far as compensation goes, we will listen to any requests and follow Chinese law, but we have not received any notification of claims," he said. "Cleanup efforts are going very well. We are more than 95 percent finished with the cleanup of mineral oil-based drilling mud and expect to reach our target of being 100 percent by the end of August."

Mr. Roper added that there was no more oil sheen on the surface of the water.

The Xinhua report said the oil spills had spread to beaches in the provinces of Hebei and Liaoning and were being blamed for a slowdown in local tourism and for economic damage to aquatic farming industries. The report also said "nine new oil spill sources" had been found in the bay as of last Saturday.

Mr. Roper said those nine seeps were not from new leaks but rather were residual oil and drilling mud from the June 17 spill that were now migrating to the surface. "Divers were only able to see them once the drilling mud was cleared away from the seafloor," he said. The seeps are small, are clustered together and are releasing a total volume of fluids of one to two liters per day "that is being immediately contained and cleaned up."

In Hong Kong on Wednesday, the chairman of Cnooc, Wang Yilin, addressed the compensation issue.

"If Cnooc is ruled to pay any form of compensation, we will certainly fulfill our commitment and do the right thing," Mr. Wang said at a news briefing after the company announced its first-half earnings, according to Bloomberg News. "Cnooc is a responsible company, and we honor our long-term commitment to the country, people and the environment."

Georg Storaker, president of ConocoPhillips China, said at a news conference in Beijing on Wednesday that the spill in Bohai Bay should not be compared with the disastrous spill in 2010 in the Gulf of Mexico for which BP was blamed.

(C) 2011 International Herald Tribune. via ProQuest Information and Learning Company; All Rights Reserved

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U.S. Faces Increased Energy Security Risk, Report Shows

- U.S. Faces Increased Energy Security Risk, Report Shows

Tuesday, August 09, 2011
Rigzone Staff
by Barbara Saunders

The U.S. faces heightened threats to its energy security, according to a new report by the U.S Chamber of Commerce that measures risk in four areas—geopolitical, economic, reliability and environmental.

For 2010, the energy security risk index score was 98.0—the fourth highest since 1970 and a 6.5 point increase from the 2009 score of 91.5.

"These are the worst risks we've seen in recent history," said Karen Harbert, president of the Chamber's Institute for 21st Century Energy. "They approach what we saw following the Iranian hostage crisis. . . . Unless we take dramatic action to change the trajectory, America is headed toward an unprecedented level of sustained risk."

The index, updated annually, tracks changes in energy security risk beginning in 1970 and projects future risk through 2035. The 2011 edition of the index incorporates the most current energy data from the U.S. Energy Information Administration (EIA) and other federal agencies.

Of the 37 metrics weighed, 20 showed increased risk in 2010, 11 showed improvement, and six were unchanged. Eight of the top 10 metric with the largest score changes related to energy prices, price volatility and expenditures, the Chamber said, adding that the index projects a sustained period of high risk all the way through 2035. "These risks would be even higher if not for improvements made in energy efficiency, and the potential for shale gas to improve the security of natural gas supplies and lower energy costs," the Chamber added.

"We must maximize all of our domestic energy resources, make clean energy technologies more affordable, and eliminate regulatory barriers that are stalling urgently needed energy projects," Harbert said. "Only by taking these actions will we reduce our energy risks and make the nation and economy more secure."

The 2011 edition includes some adjustments to the index's formula based on feedback from last year's inaugural report. Adjustments also were made to some previous year's scores based on updated data from government sources. Most significantly, the 2009 score was adjusted from 83.7 to 91.5, largely because revised data that showed resurgence in high energy prices occurring more rapidly than originally estimated.

Highlights of the report included:

• Geopolitical energy security risks rose to 97, 13.5 points above the 30-year average of 83.5. Most of the increase in risks seen in this sub-index since the early 2000s is linked to higher crude oil prices and volatility and greater import expenditures. The metrics measuring security of global fossil fuel reserves and production were essentially unchanged from 2009.
• Economic energy security risks increased by 9.3 points in 2010 to 94.0, offsetting a large portion of the 17.1 point drop experienced in 2009. "This level of risk is well above the 30-year average of 73.7 for this sub-index and has been exceeded only in 1980, 1981, and 2008," the Chamber noted.
• Reliability energy security risks increased 5.4 points to 111.0 in 2010, the highest recorded for this sub-index, with crude oil price volatility being responsible for much of the increase. The score for this sub-index has hit 100 points or more every year since 2005, and projections indicate that levels of risk above 95 will be maintained through 2035, even after assuming that crude oil energy price volatility will return to historical averages.

In one bright spot, the Chamber noted that the "potential of shale gas to improve the security of natural gas supplies and lower energy costs and expenditures is beginning to emerge. Recent estimates double the volume of recoverable shale gas resources assumed in past estimates, leading to greater domestic and global supplies and lower gas imports. Increasing shale gas supplies and further improvements in natural gas extraction technologies will further delink the prices of crude oil and natural gas."

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Analysis: Iraq Faces Challenges in Growing Oil Production

- Analysis: Iraq Faces Challenges in Growing Oil Production

Friday, July 29, 2011
Rigzone Staff
by Karen Boman

Iraq's large oil-production potential could allow it to compete for leadership with Saudi Arabia in the coming decades, but a new energy study by Rice University's Baker Institute for Public Policy finds that in the near term, both Baghdad and Riyadh may have difficulty meeting rising demand for oil.

The study, "Iraqi Oil Potential and Implications for Global Oil Markets and OPEC Politics," argues that ambitious targets set by the government of Iraq may not be reachable in the short-to-intermediate term while international oil companies operating in southern Iraq continue to experience infrastructure development problems.

Iraq has the potential to increase production from 2.5 million b/d in 2010 to over 5 million b/d in the next five to 10 years. The country has expressed the ambition to reach 10 to 12 million b/d of production by 2017, but this lofty target will be difficult, given mounting political, bureaucratic and infrastructure related barriers.

"Political decentralization inside Iraq, social tensions and electricity shortages remain barriers to large-scale repair and construction of infrastructure that is needed before export levels can rise," said author Amy Myers Jaffe, the Wallace S. Wilson Fellow for Energy Studies at the Baker Institute. "Failure to progress quickly on water injection, pipeline, electricity and natural gas facilities will limit the ability of independent oil companies to translate upstream oil-field expansion successes into continued export increases."

The return of international oil companies to Iraq has raised the prospect that Baghdad's oil production will indeed be increasing in the coming years. Iraq is expected to see a 200,000 b/d increase in output in 2011, with output expansions already achieved at the Rumaila, Zubair, West Qurna-1 and Majnoon fields. As of spring 2011, Iraq's southern oil fields were producing a total of 1.986 million b/d and total production was pegged at around 2.7 million b/d. Iraq's June 2011 output was 2.56 million b/d, of which 2.27 million b/d were exported.

However, foreign oil company officials say that, while output gains are easily achievable based on field performance and geology, infrastructure bottlenecks might make future increases harder to accomplish. "The end result may be that ambitious targets set by the government of Iraq may not be reached in the short to intermediate term, delaying the time when OPEC will have to address rising Iraqi output," the study found.

While these operational and logistical factors will play a large role in whether Iraq reaches its energy potential, political factors will be equally important, the study concludes. The resolution or management of several political issues – including ongoing challenges to political stability, difficult power-sharing arrangements at the national level between political parties and growing pressures for provincial empowerment – is essential to the smooth development of Iraq's energy potential.

Iraq's logistical and political challenges come at the same time that the costs for Saudi Arabia to continue to expand and maintain sufficient spare capacity to influence global markets have increased dramatically, according to the study. Saudi Arabia has less spare capacity immediately available now than in the 1980s and 1990s, and it will be quite expensive for Saudi Arabia to bring on additional production capacity.

Saudi Arabia has spent $14 billion since 2005 to increase its oil production since 2005 to grow its oil production capacity from 10 million b/d to 12 million b/d. Future investment in a new tranche of Saudi production capacity is likely to be even more expensive because the kingdom will have to shift to areas that have more complex geology and require greater technological intervention.

But Saudi Arabia is also facing competing priorities with higher spending requirements on social services and defense in light of new regional and internal challenges, which calls into question whether sufficient spending on spare oil production capability will be maintained. King Abdullah ordered sweeping spending increases of $67 million in March 2011 for housing, job creation and the military, on top of a $36 billion hand-out to citizens in February, in an effort to respond to increased instability across the Middle East. "The pressures for higher defense and social spending will make it that much harder for the government to justify a massive campaign to expand its oil sector."

Possible increases in Iraqi oil production will likely be very important to the future stability of the global oil markets, and Iraq’s aspirations to become a major oil exporter create shared interested with the U.S. and other major oil consuming countries. The U.S. and other major powers should meet to discuss way to support Iraq's realization of the potential of its oil and gas deposits.

"As the U.S. government did successfully in the Caspian region and the Japanese government did successfully in Qatar and other LNG [liquefied natural gas] producing nations, the United States, EU, Japan and China should work together to ensure that IOC’s [international operating companies] operating in Iraq and the Iraqi government are able to attain attractive financing and loan packages to underwrite major export infrastructure development projects," the study noted. "Multinational assistance would also be appropriate as a means to support major investments as well as bilateral or trilaterial trade finance and development assistance."

Iraq's ability to reach its energy potential should be of broad regional and international concern. The nation could be poised for a dramatic transformation, one in which it finally escapes the political and technical constraints that have kept it producing less than four percent of the world's oil, despite having the third largest conventional oil reserves in the world.

"Should Iraq meet its ambitions to bring nearly 10 million more barrels of oil on line by 2017, it would constitute the largest ever capacity increase in the history of the oil industry," said Meghan O'Sullivan, the Jeane Kirkpatrick Professor of the Practice of International Affairs at Harvard University's Kennedy School. The health of Iraq's energy sector – currently the source of more than 90 percent of revenues accrued by the state – is a major determinant in setting Iraq's overall trajectory.

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