Oil and Gas
Decentralized Energy
Volatile
Prices
–
Balanced
Response
The Price of Oil over the Last Five Years
110.00
100.00
90.00
80.00
70.00
59.67
50.00
What do you do when the costs in your industry have
doubled over the past couple of years, and then the
price you can charge for your product halves in just six
months? Welcome to the dilemma faced by developers
and operators in the upstream oil and gas sector.
40.00
2,000,000
1,000,000
0
30.00
2011
2012
2013
2014
2015
Source for all data: www.nasdaq.com/markets/crude-oil.aspx?timeframe=5y, May 2015
Text: Ward Pincus
oil production
56 Living Energy · No. 12 | July 2015
through the rest of the decade. Also,
China is no longer increasing oil consumption at the same pace as it was
over the past decades.
On the supply side, there is plenty of
oil coming into the market over the
medium term. As outlined by Hasan
Qabazard, OPEC’s Director of Research
between 2006 and 2013, non-OPEC
suppliers will continue to add to global supplies until the end of the decade. US shale oil currently produces
just under 5 million barrels per day
(bpd), up from less than a m
­ illion
bpd only a few years ago. But despite
the price decline, he expects total US
shale oil production to grow to 6 million bpd by 2018/19, when it will then
plateau. Other non-OPEC oil will also
contribute to medium-term supply,
says Qabazard, who is the Chief Executive Officer of the Kuwait Catalyst
Company and also a ­former Director
of the Petroleum ­Research and Studies Center at the Kuwait Institute for
Scientific Research. Longer term,
however, both Qabazard and Dubaibased Robin Mills, Head of Consulting at Manar Energy, see oil prices
rising as global demand continues to
grow while non-OPEC production
fails to maintain its recent heady pace.
OPEC estimated in late 2014 that global energy demand will increase by
60 percent by 2040 compared to 2010
levels, with world oil output projected
is expected to grow
to 6 million bpd by 2018/19
OPEC estimates that global
energy demand will increase
by 60 percent by 2040 compared
u
Photo: Getty Images
E
veryone is aware of the sharp
fall in oil prices that began
in mid-2014, and uncertainty
­continues to cast a shadow over the
prices in the medium term. What
seems likely, however, is that oil will
remain at more moderate prices
­until, at least, the next decade.
This is driven both by the demand
and the supply side. On the demand
side, emerging market growth isn’t
expected to hit the same pace as it had
over the past ten years, when ­many
of those years saw real GDP growth
between 6 and 9 percent a year. The
IMF forecasts emerging market growth
at 4.3 percent this year, 4.7 percent
next year and just over 5 percent
US shale
to 2010 levels
World oil output is projected to
grow from 81.8 million bpd to 99.6 million
bpd until 2040
Living Energy · No. 12 | July 2015 57
Decentralized Energy
“However the oil and gas market
­develops in the short term, it offers
uniquely attractive perspectives
over the long term.”
Lisa Davis, responsible for Oil & Gas and Member of the Managing Board at ­Siemens AG
Comprehensive Oil and Gas Portfolio
With its recent acquisition of the Rolls-Royce Energy gas
turbine and compressor business, and the announced
agreement to acquire Dresser-Rand, ­Siemens is building a
comprehensive portfolio across the entire oil and gas value
chain, from power generation, distribution and control
systems to ­f ield-proven compressors, water processing,
automation and control and electric-drive-related products,
systems and solutions.
These acquisitions are not only a matter of
technology, but also of valuable human capital. “The recent additions to our oil and gas
­portfolio almost double our pool of talent
and create a truly global strategic partner for
all of ­Siemens’ oil and gas customers,” says
Lisa Davis.
The acquisition expands the ­Siemens portfolio to include high-efficiency, compact
aeroderivative gas turbines. ­Especially attractive in offshore applications where costs
grow as equipment weight and space increases, the lighter, more compact aero­
derivative gas turbines offer significant advantages. Furthermore the aeroderivative
­turbines offer high availability and reliability,
delivering operational advantages with short
maintenance cycles.
58 Living Energy · No. 12 | July 2015
Looking to expand the port­
folio in the oil and gas field
equipment.
Rising Costs in the Field
Photos: Getty Images, ­Siemens, Chris McEniry
Light and compact: aeroderivative gas turbine.
The agreement to acquire
Dresser-Rand will enable
­Siemens to expand its oil and
gas field equipment portfolio, including high-pressure
field injection and oil recovery, gas ­liquefaction, gas
transmission and refinery
process equipment. DresserRand also adds additional
distributed power generation
technologies to the S
­ iemens
Oil & Gas solutions, including
reciprocating engines that
provide power to field equipment such as compressors,
and micro liquefied natural
gas solutions that are ideal
for smaller-volume associated gas found in fields such as
unconventional shale oil.
to grow from 81.8 million bpd to
99.6 million bpd over the same period.
The OPEC study also predicts that the
share of oil in the global energy mix
will fall from nearly 32 percent to
24.3 percent, while the share of all
fossil fuels, including oil, coal and gas,
in the global energy mix will decline
from 81.6 percent to 78.4 percent.
Mills said he is more bullish than the
market consensus regarding ­renewable
energy’s ability to take a larger share
of the energy mix, but says that fossil
fuels will “probably still be the major
source” of energy by 2040. This is
driven by renewable energy’s technology mismatches, most notably in
transport, Mills says. Furthermore,
disruptive technologies such as carbon capture and storage could change
the calculus by making fossil fuels
as “clean” as renewables, he says.
But there is another part of the p
­ icture
that was putting a squeeze on producers long before prices collapsed: the
skyrocketing costs associated with
drilling and producing oil and natural
gas around the world.
Energy consultancy IHS studied the
return on capital among upstream
players and found that it had fallen
by more than half between 2000 and
2013, from a 23 percent net income
return on net cumulative capital costs
in 2000 to an 11 percent return in
2013. That was even as average oil
prices tripled from just above US$22
per barrel of oil equivalent to US$63.
As Mills notes, the reasons for the price
rise were manifold, including companies losing discipline in the face of
high prices, overstretched equipment
and qualified mid-career experts in
the face of so many projects, more
difficult and complex ­projects, and
these complex projects turning out to
be even more difficult than expected.
Operators React to
Price Collapse
The sharp fall in prices is forcing
­operators and service companies
to address these cost issues more
consequently than was required with
oil at US$100. The first step being
­taken by most operators, both national oil companies and international
oil ­c ompanies, are sharp and widespread cutbacks in capital spending.
This means canceling and delaying
nonstrategic investments, retendering others and renegotiating fees
with suppliers, both because of the
need to share the pain of lower
­prices, and also to capture the gains
of falling material prices, which have
begun to come down in recent months.
BP is halving its exploration activity
and slashing capital expenditure by
20 percent; Shell plans to reduce
costs by US$15 billion over the next
three years, and Statoil is cutting its
capital spending for 2015 by 10 percent.
In turn, some of the world’s biggest
oil field services firms, including
­Baker Hughes, Schlumberger and
Halliburton, are laying off thousands
of employees.
Regional Responses
The steep drop in oil price is impacting all regions, though each in its
own way. In the North Sea, there is a
big mismatch between current prices
and operating costs. That worries
Dr. Patrick O’Brien, Chief Executive
of the Industry Technology Facilitator
(ITF), whose organization is based in
Aberdeen. “We are much later in the
life of the [North Sea] basin, compared to other regions, so the threat
is that [with low oil prices] we start
to shut down and decommission
­before we should. […] This should
drive people to think how to do
things differently.”
In North America, there is urgency
to bring down costs in the face of
lower prices. Qabazard says that the
ability of North American unconventional producers to leverage technology and improve system and operational efficiencies to lower costs is
­ eing seen in the declining
already b
break-even curve for those fields.
Before the oil price collapse, these
operators had a break-even point of
between US$40 and US$120/barrel,
he says, but now, they are reportedly operating at ­between US$20 and
­US$70/barrel.
In the Middle East, the national oil
companies are less exposed to
the price drop because they have
­lower-cost operations, and also
­generally have a longer time horizon.
This means most upstream projects
are strategic in nature and not
­subject to suspension or cancellation,
Living Energy · No. 12 | July 2015 59
u
Field Innovation and Technology Advances
One of the most effective ways to reduce costs
in an oil and gas field – whether onshore
or offshore – is to use electric-drive pumps,
compressors and process equipment that is
connected to a power grid and a control system,
instead of diesel-powered mechanical-drive
equipment.
Electricity powering the grid can come from a
high-efficiency gas turbine, from a combined
“We’re focusing
our innovative
strength on
­setting new
standards for
­efficiency and
reliability.”
Digitization
With digitization and automation, operators can collect real-time data
on equipment and operations, and also remotely manage the equipment
more efficiently. Big data and other analytics help operators cut costs
and improve efficiencies by optimizing performance and enabling
­predictive and preventive maintenance. With sensors and control equipment located across the field system, operators require fewer field
­engineers, something that delivers big cost advantages particularly in
offshore and remote fields.
Digitization allows for real-time monitoring of wellheads so operators
can manage equipment better. For example, through real-time monitoring of the mix of fluid, sand, rock and hydrocarbons coming through a
wellhead, pumps can be adjusted accordingly to reduce wear and tear,
and prevent damage.
Another exciting implementation of digitization is to take the extensive
experience S
­ iemens has in image processing in fields such as health care
and bring them to the visualization of oil and gas reservoirs. It is a key
challenge in the exploration and development phase to take the extensive information from ultrasound, seismic, core samples and flow data to
build a picture of what the subsurface reservoir looks like. Using ­Siemens
software, exploration companies can get a better view of the reservoir in
real time or near real time, allowing them to make decisions faster,
thereby reducing costs associated with expensive leased rig and other
field equipment.
Lisa Davis
heat and power plant, or even from a combined
renewable and fossil-fueled plant. Operators
benefit most significantly from electrification
through improved reliability and availability,
and thus better field efficiency. Furthermore,
Subsea Power Grid
electrification can reduce operating costs
through greater fuel efficiency and the lower
maintenance and operating costs associated
And while the initial capital outlay is larger with
electrification, overall capital costs can be lower
because production generally can begin sooner
and is less likely to face start-up delays.
Electromagnetic heating can be used
to unlock much more of a thick oil
reservoir’s potential.
Electromagnetic Heating
Further out the innovation curve is the
­Siemens development of electromagnetic heating for use in unconventional
heavy oil fields such as those found in
Canada and Kuwait. While current technology gets this thick oil moving by
­using steam, electromagnetic technology offers a way to unlock much more
of a reservoir’s potential, while having a
dramatically smaller physical and environmental footprint that requires no
water and avoids the inefficient twostep process of creating heat that then
is applied to water to create steam.
Photos: ­Siemens
with electrical motors and drives.
Cutting costs through digitization
and automation.
The subsea grid is operational to depths of 3,000 meters below
sea level.
­ iemens is also leading innovation in the field of
S
subsea power grids for large-scale processing on
the sea floor. Currently in the detailed design and
test phase, this solution will provide offshore operators with a complete medium-voltage system that
includes subsea transformers, subsea switchgear
and subsea variable speed drives that are operational to depths of 3,000 meters below sea level.
This brings processing closer to the reservoir and
mitigates sea-surface platform risks, including
those associated with weather.
Also incorporating a comprehensive power control
and communication system, the solution is
­designed to deliver long service intervals with
­exceptional availability, and includes an integrated
condition monitoring system to identify and
­address unplanned downtime issues before they
impact operations.
­Siemens’ recent investments in expanding its portfolio and bringing its expertise to the challenges
of the oil and gas sector reflects the company’s
commitment to the sector. “We’re now also focusing our ­innovative strength on the oil and gas sector and setting new standards for efficiency and
­reliability,” says Lisa Davis. u
Oil and Gas
­ sing enhanced oil recovery techu
niques – such as CO2 injection – and
extending the service life of field
infrastructure.
Given these priority areas, operators
and service companies can begin
­cooperating right away to realize
­systems and solutions enhancements. “However the oil and gas
­market ­develops in the short term,
it offers uniquely attractive perspectives over the long term,” says Lisa
Davis, ­responsible for Oil & Gas at
­Siemens and Member of the Managing Board at S
­ iemens AG.
Solutions to Cut Costs
“Better IT, field
­automation and
virtual work could
help staffers be
more ­productive.”
Robin Mills, Head of Consulting,
Manar Energy
Robin Mills, Head of Consulting at
Manar Energy.
62 Living Energy · No. 12 | July 2015
There are many steps the industry
and individual operators can take to
bring down costs and increase production. In addition to adopting new
technologies, experts agree that the
industry also can bring down costs by
managing fields more efficiently,
pursuing cross-operator standardization, and improving field operations
efficiency.
Mills adds that streamlining the
­supply chain, implementing better
­contracting models that create a
more collaborative relationship
­between operators and service companies also would help. To help address the shortage of qualified field
engineers, he says better IT, field
automation and virtual work could
help ­existing staffers be more
productive.
Outside of North America, there is a
sense that innovation moves more
slowly than it could. “You hear a lot
about technology that’s out there
but that’s not being taken up,” says
O’Brien, whose organization, ITF, is
comprised of international oil and
gas operating and service companies
that collaborate on research and
­development initiatives to address
shared technology challenges.
Examples of ITF’s work include
­fundamental research on the basic
­algorithms for imaging subsurface
reservoirs, understanding how
cracks grow during hydraulic fracturing (fracking), and algorithms
to more accurately model and predict weather that impacts offshore
Australian oil fields.
Hasan Qabazard, Chief Executive
Officer of the Kuwait Catalyst
Company, and OPEC’s Director of
Research between 2006 and 2013.
O’Brien recognizes the huge imperative for safety in this industry, given
the human, environmental and commercial harm from a disaster. But he
says this has created a different risk
of “overspecifying, overdesigning,
overcustomizing.” This not only makes
operators and service companies
more conservative in adopting new
technologies, but it also makes it
harder to share lessons learned and
to reduce costs through some levels
of standardization.
Other areas of technology development that the experts mention
­include field electrification, the implementation of CO2 injection to
­support enhanced oil recovery, and
technologies to unlock the potential
of heavy oil and tar sands.
O’Brien says that while the sharp
drop in prices might be painful today,
in the future “we may find ourselves
saying it was a good thing because it
made us focus on really trying to do
things differently. Maybe it will help
us achieve more innovation than
we’ve had in recent times.” p
Ward Pincus (Dubai) is a Middle East expert
who writes on science, technology, health, and
business issues for publications in North
­America, Europe, and the Middle East. He is a
former correspondent for the Associated Press
(AP) in the United Arab Emirates.
Photos: Private, Getty Images
though operators are pushing
­service companies on price.
As Qabazard says, countries such
as Saudi Arabia, the United Arab
Emirates and Kuwait will continue to
­invest in production expansion to
achieve their strategic goals of having
the necessary production capacity
­onstream to deliver the residual supply to global markets that will be
needed once non-OPEC supply plateaus in the early 2020s.
Gulf operators are concerned about
improving the efficiency of fields,
“We may find ourselves saying that
the sharp drop in prices was a
good thing because it made us
­focus on really trying to do things
differently. Maybe it will help us
achieve more innovation than
we’ve had in recent times.”
Patrick O’Brien, Chief Executive of the Industry Technology Facilitator (ITF)