October 6, 2012
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№ 7 (July - August 2012)

Natural Gas on the Black Sea Shelf: Will the EU Really Get It?

   Since the 1960s, developed countries have actively financed research into offshore oil extraction technologies. This has put exploration and drilling science about 10 years ahead of production science. However, the availability of onshore reserves delayed extensive interest in developing the offshore until the 1990s.

By Iliyan Petrov

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Reserves vs Technologies

   Whereas before 1990s, the difference between the depth of exploration and extraction drilling was 2,000 meters, in early 2010, it almost disappeared (about 2,950 and 3,100 meters, respectively). Fig. 1 demonstrates the changes of depths achieved in offshore extraction over time.
   The 2000s saw a real breakthrough: more than 60 percent of new oil fields were discovered in marine waters of the continental shelf (see Fig. 2). According to experts, in the next 10 to 20 years the shelf will supply 30 to 40 percent of the overall hydrocarbon extraction (see Fig. 3).

Only Good Lessons from Nabucco

   The recent events in the South Gas Corridor showed that the European Union has to actively participate in the development of their own reserves and to support their own companies.
   An ambitious Nabucco project failed at the very outset due to insufficient gas reserves. In March 2012, Nabucco-West, a small part of the initial project, was proposed: it comprised the construction of a medium-size (about 1,300 km) and a medium-capacity (10 to 20 µm/g) gas pipeline through the European Union. In June 2012, it was suggested as the only gas pipeline exporting gas from Shakh-Denis II to Central Europe, which received the approval.
Given relatively low costs (just about 5 to 6 billion Euros) the project seems quite cost-effective for Europe, because it invests into the local economy with a multiplier effect. Even despite the Eurozone crisis and recession (read more in “Oil Prices: Everyone Wants Stability” on page 48), EU counties and gas companies will have enough money for this project; in addition, some money would be left for the South Stream.
The time losses caused by the delayed decision on Nabucco make the EU accelerate its work on its priorities:

Completing the infrastructure of the regional gas transportation system in order to improve the security of supplies and of the market development;

Developing own reserves in the Black Sea and in the Mediterranean Sea with the funds saved on Nabucco (about 10 to 15 billion Euros);

Positioning Nabucco-West as an internal corridor accessible to all potential supply sources, such as:
а. home production;
b. Caspian gas;

c. Russian gas (transit via Ukraine or the South and/or the Blue Stream).
Given a continuous increase in oil and gas prices, the development of offshore fields is not an illusion or a dream. This is a good long-term opportunity for EU members in the Black Sea basin (Bulgaria and Romania) and for oil and gas companies from other counties. Everyone must realize that this will not be easy and that it will take some time before they can get cheap gas.

Offshore Fields, Technologies and SEFDRs

   Average estimates of certain counties reveal that only 4 to 5 percent of the Black Sea shelf has been investigated, which can be easily explained.
Until mid-2000s, Eastern Europe counties received USSR and Russian gas at low prices, which did not stimulate reserve exploration or extraction technology development. As a result, the Ukrainian shelf is investigated to 3 to 5 percent, the Bulgarian shelf to 4 percent, and the Romanian shelf to 6-8  percent.
However, the work at the shallow marine shelf started long ago, and intensified in the early 2000s. For example, 2 million cubic meters of gas per day is extracted in the Ukrainian sector (0.7 billion cubic meters per year); in the Bulgarian part 1 million cubic meters is extracted daily (0.36 billion cubic meters per year), and Romania produces 2 million cubic meters per day (0.7 billion cubic meters per year), which in total amounts to 1 percent, 15 percent and 6 percent of consumption, respectively.
   All the countries located at the shallow marine shelf (100 to 150 meters) possess functioning extraction platforms. In 2012 Ukraine purchased the Petr Godovanets self-elevating floating drilling rig (SEFDR), which can operate at the depth of up to 150 meters and drill up to 12 holes of up to 9,000 meters simultaneously (see Table 1).
   This platform, which has been contracted for the next 2 years, has become a real breakthrough for the country, as well as for the entire Black Sea region. The Russian Gazprom has already showed interest in operating it jointly.
Other countries currently use lower-capacity platforms leased from specialized companies. However, if the shallow marine shelf proves to be advantageous enough, the owners of Black Sea waters will also purchase one or two SEFDRs, which would be enough to solve the shallow shelf drilling tasks for the next 15 to 20 years.
   Due to the “shale revolution” in the U.S., development of spot markets and a decrease in gas prices, SEFDRs are already offered at reasonable prices: second-hand or idle facilities are priced at $40 million (drilling capacity of up to 3,000 meters) and new ones are offered for up to $300 million (drilling capacity of up to 100 kilometers). For example, Petr Godovanets SEFDR cost  Ukraine $400 million.

Black Sea Needs Investors

   The development of the deep marine shelf remains quite problematic. Additional problems are created by Black Sea bottom characteristics: it may get up to 2,000 meters deep, it has a lot of steep slopes, and it contains hydrogen sulphides.
   For now, none of the countries in this region has technical or financial resources to independently extract hydrocarbons with deep marine shelf platforms, which cost from $500 million to $600 million. For this reason, all countries have to invite foreign investors, which have the money and the necessary technologies.
   When gas prices for the EU grew to $450-550 per 1,000 cubic meters in the early 2000s, Black Sea counties became a lot more active, and now we can see a tough competition in the Black Sea as they try to accelerate the development and to find investors.

Romania Has Plenty of Gas…

   In 2011, Romania held its first tenders, and in March 2012, the Exxon consortium (with the participation of OMV) made several successful hydrocarbon field discoveries, the reserves of which are estimated at 40 to 80 billion cubic meters. Given the current consumption level of 13 billion cubic meters, this field alone is able to supply the country with gas during three to six years or replace the import (2.5 billion cubic meters) for 20 to 40 years. According to preliminary estimates, up to 60 million tons of oil equivalent will be extracted there.

…and So Does Bulgaria

   In March 2012, Bulgaria also invited tenders, and in July Total-OMV-Repsol won the Khan Asparukh field with a total area of about 15,000 sq. meters (15 kilometers away from the Neptun plot). Three exploration holes are to be drilled in the next three years. The potential of this field is 20 to 40 billion cubic meters of gas. In future, it will satisfy the current consumers’ needs (2.5 to 3 billion cubic meters) for 6 to 12 year and replace import (2.2 to 2.4 billion cubic meters/1.9 to 2 million tons of oil equivalent) for 10 to 18 years.
   Total reserves in the Bulgarian waters may equal 100 to 200 billion cubic meters, which satisfies the current consumption for 40 to 70 years, given the expected production costs of $250 to $300 per 1,000 cubic meters. At the first glance, the forecast looks quite optimistic; however, from the technical point of view, it is hard to achieve in just three to five years. There will not be any economic advantages in these explorations if low-cost gas is provided from the Caspian region and the Middle Asia via the South Gas Corridor.
   So for now, the increasing local gas share in consumption may improve the energy balance structure and significantly lower oil import (to 4 to 5 million tons a year); however, complete independence does not look realistic.

Disputed Strait

   Other Black Sea countries are also getting active on the shelf. Russia, for example, included the Black Sea basin in the list of priorities, and set a zero MET rate for the region since 2012; Ukraine plans to hold two tenders for deep water fields this year. In July, Russia and Ukraine signed an agreement on dividing the Black Sea and Azov Sea territories, which, according to the mass media, resolved the territorial dispute, but not the economic one.  In accordance with this agreement, the Tuzla Island and the navigation part of the channel in the Kerch Strait belongs to Ukraine. According to Valery Khomyakov, General Director of the National Strategy Counsel, the existing division can be economically beneficial for both countries: Ukraine gets access to energy sources, and Russian companies can enjoy financial benefit.

Turkey: Seeking Independence

   Turkey is also getting interested in the development of its vast and under-investigated shelves in the Black Sea and in the Mediterranean Sea, hoping that these reserves will help it achieve greater energy independence.
   Fig. 5 illustrates the production of hydrocarbons in Black Sea countries. This data demonstrates good prospects for Romania and Bulgaria, as well as a forecasted growth in Ukraine and Turkey. However, none of the countries should entirely stop import, since all of them play an important role in international transit streams. Generally speaking, this would not be even possible now.

Disputes over the Shelf

   The reserves of the Black Sea shelf are another apple of discord, the division of which causes numerous disputes. Each country present in the region wants to get as much water area as possible.
   Fierce disputes between Romania and Ukraine lasted several years; in February 2009, The Hague International Court of Justice resolved that the Zmeiny Island cannot be considered part of Ukraine. As a result, 79.34 percent of the Black Sea territories in dispute went under Bucharest jurisdiction, and in early 2012, large gas reserves were discovered in this area (see Fig.  6).
Bulgaria and Romania have engaged in similar disputes, of a smaller scale, since 1994 (see Fig. 7): Romania claimed that the development of the Bulgarian oil and gas industry prevented Romania’s oil and gas production, both onshore and offshore. Currently, the aforementioned Khan Asparukh is under dispute, where the drilling of the first hole (Domino 1) revealed large reserves.
   The next round of negotiations on disputed territories between Romania and Bulgaria is expected to take place by the end of this year. If this dispute is not resolved by mutual consent, Bucharest will appeal to the International Court of Justice in The Hague. Romania is keen on obtaining 300 sq kilometers of the Black Sea territories, which is not that much, compared with the Ukrainian dispute. Romania’s claims point to its possible plans in terms of marine gas pipelines: if the Romanian request is satisfied, the country will receive 50 meters of area bordering the Turkish continental plateau, which would deprive Bulgaria of direct access to Ukraine. This would allow Romania to lay pipelines along the Black Sea bottom between its own and the Turkish waters.
   These events on the Black Sea arena promise a very interesting and intriguing continuation and may significantly change the energy profile of the countries in this region.
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