New challenges, particularly offshore, mean greater opportunities for service providers

Even though substantial new oil discoveries are not expected in the near future, the Abu Dhabi National Oil Company (ADNOC) is working to increase daily production at existing fields. As a result, the company and its partners are focusing on increasing production from existing fields, particularly offshore.

This is creating a wealth of opportunities for companies, international and local, which can offer a range of services to oilfield operators, including engineering, procurement and construction (EPC) services and advanced drilling technologies. As output targets rise, technical challenges increase, particularly in the long term, but companies well equipped to address these challenges can flourish. “What makes the UAE unique is the mix of projects from exploration to production,” Hussein Fouad El Ghazzawy, UAE vice-president and general manager of oilfield services firm Schlumberger, told OBG.

Upper Zakum Project

One of the most important projects to boost production is taking place at the offshore Upper Zakum field, the world’s fourth-largest oilfield and second-largest offshore oilfield. Upper Zakum is owned by the Zakum Development Company (ZADCO), a joint venture between ADNOC (60%), ExxonMobil (28%) and the Japan Oil Development Company (12%). Upper Zakum is located around 84 km north-west of Abu Dhabi Island and has proven reserves of around 50bn barrels of crude oil, according to the local English-language daily The National. The field is extensive and covers around 1200 sq km. Current production stands at 500,000 barrel per day (bpd), but the ongoing UZ750 project aims to increase this to 750,000 bpd, with this level sustainable for 25 years. The $10bn project is due to be completed by 2017.

The UZ750 project has two phases: the first is a Dh3bn ($816.6m) development being undertaken by National Petroleum Construction Company, an Abu Dhabi-based firm that is majority-owned by government industrial holding firm Senaat, and France’s Technip, bringing an additional 100,000 bpd of capacity. The second, bringing a further 150,000 bpd online, is being executed by Petrofac Emirates – an EPC outfit that is part of a UK-based, Jersey-registered company – and South Korea’s Daewoo Shipbuilding & Marine, with a contract worth $3.7bn.

The UZ750 project will involve the construction of four artificial islands on a scale unprecedented in the global oil industry. The islands will house a central processing complex and three satellite platforms, and are being constructed from sand and rock quarried in the UAE. The islands will use extended reach drilling technology, which allows wells to be drilled vertically before horizontal drilling to reach reservoirs several kilometres away. The development also uses maximum reservoir contact technology to reduce the number of wells and reach oil in tighter locations. The Abu Dhabi Marine Operating Company (ADMA-OPCO) is also developing artificial islands at its Satah Al Rasboot (SARB) 1 and 2 fields, with up to 44 wells each, in a bid to increase output at the fields to 100,000 bpd. Ali Al Jarwan, CEO of ADMAOPCO, told OBG, “While the artificial island concept has been executed in other places around the world, the scale and developments in Abu Dhabi are unprecedented. It requires an immense coordination among industry stakeholders optimising the most innovative technological advancements, as well as extremely efficient logistical applications.”

EPC Opportunities

Petrofac has been a beneficiary of ADNOC’s drive to increase oil and gas production. In addition to the Upper Zakum project, since April 2013 it has won three other major contracts. These include: a $515m offshore, engineering, procurement, installation and commissioning contract from ADMA-OPCO for the SARB 3 package project; a $187m onshore EPC contract from the Abu Dhabi Company for Onshore Petroleum Operations (ADCO) to develop phase one of the Bab Habshan field; and a $500m onshore EPC contract from ADCO to expand the Bab gas compression facilities. “The general outlook for EPC awards in the UAE is positive, but still far off from 2009 levels, when around $30bn worth of contracts was awarded,” Roberto Bertocco, executive vice-president and head of operations for Petrofac UAE and North Africa, told OBG. “The bulk of the EPC contracts in the medium term will come from ADCO’s onshore expansion, offshore developments and gas investments.”

While opportunities for service companies are growing, the sector is very competitive, with entrants from Asia in particular driving contract prices down in recent years. Some have suggested that the government introduce more stringent pre-qualification requirements in order to guarantee standards. However, the government is understandably keen to ensure that contractors deliver good value. Dagher Darwish Al Marar, CEO of ADNOC’s support services firm ESNAAD, told OBG, “The complexity of offshore activity is having a major impact on the need for enhanced maritime logistic support services.”

Among the biggest EPC contracts in recent years, ADMA-OPCO signed three deals worth a total $3bn in November 2014 with Senaat subsidiary the National Petroleum Construction Company (NPCC), South Korea’s Hyundai Heavy Industries and France’s Technip for the Nasr full field development project. The development of the offshore Nasr field, 130 km north-west of Abu Dhabi City, is part of ADMA-OPCO’s plan to add 270,000 bpd of production capacity from Nasr, Umm Lulu and SARB. The contracts were awarded as two EPC packages and one project management contract, which was awarded to Technip. The work includes constructing wellhead towers and several platforms, laying infield pipelines totalling 110 km and providing power infrastructure, as well as a gas pipeline and 70-km oil export line.

ADMA-OPCO has also awarded a $494m contract to the NPCC for EPC work for additional gas supply to the Umm Shaif Super Complex. This follows it winning another EPC contract from ADMA-OPCO in January 2014 for an $885m project to replace 90 km of oil pipelines and modify associated wellheads at the Lower Zakum field. NPCC is also participating in the development of the Umm Al Lulu field. Phase 2 of the project is being developed by a consortium of NPCC and Technip, with the latter taking 35% of the $1.69bn contract and responsibility for the engineering, while the NPCC is executing the construction and installation of fieldside processing facilities.

Offshore Challenges

Development of the Gulf’s huge offshore oil resources, including those of Abu Dhabi, has in recent years been driven by higher oil prices. But extracting submarine oil is often considerably more expensive. “The depth and complicated nature of drilling offshore can mean operations cost as much as three to five times more than an onshore rig,” said El Ghazzawy. “The limited amount of space, more complex well trajectories, slower and more expensive mobilisation, and more stringent legislation and environmental restrictions have presented challenges to the industry.”

Service Demand

Challenging though the climate may be, ADNOC’s drive to increase production presents a wide range of opportunities for service companies. “Investment across the range of Abu Dhabi’s hydrocarbons assets is aimed at increasing production and recovery rates. This, in turn, has positively impacted demand for rigs as well as drilling related services,” Abdalla Saeed Al Suwaidi, CEO of the ADNOC-owned National Drilling Company (NDC), told OBG. “The offshore expansion by ZADCO and ADMA-OPCO, that onshore by ADCO and the many projects related to sour gas have created not only demand for drilling services and rigs, but demand for technologically advanced drilling solutions. Many of these projects require tailor-made solutions, especially the artificial island projects, which are unique.”

Such demand has led NDC to increase its own portfolio from 28 rigs in 2009 to 60 in 2014, which the company expects to rise to 100 in the next few years. It is also undertaking the modernisation of its existing fleet, including through the Rig Integrity Assurance Programme, which extends the lifespan of existing offshore rigs by up to 15 years. Established in 1972 and now one of the largest drilling contractors in the Middle East, the NDC provides drilling, workover and well maintenance services. The company operates a fleet of offshore, island and land-drilling rigs, a multipurpose service vessel and five water well rigs surveying the groundwater of Abu Dhabi. The firm is also focusing on developing skills among the local Emirati population, and in June 2014 the NDC opened a Drilling Training Centre in the Bu Hasa area of Al Gharbia. With six halls, four laboratories and other facilities capable of accommodating more than 300 trainees, the centre will provide new employees with specialised technical training.

Furthermore, the company has been investing in updating and expanding its infrastructural capacity, as investment aimed at increasing production and recovery rates across the range of the emirate’s hydrocarbon assets has led to a surge in demand for rigs and drilling-related services.

In September 2014 the NDC inaugurated five new rigs for maintaining oil wells as part of its long-term plan to upgrade its fleet. Two months later in November, the NDC awarded Lamprell a $356m contract for the construction and delivery of two additional high-specification, jack-up drilling rigs.

The new rigs are completely outfitted, self-elevating mobile offshore drilling units designed to reach a depth of 30,000 feet. Lamprell is expected to deliver the two rigs between the fourth quarter of 2016 and the second quarter of 2017.

In December 2014 the contractor delivered on a previous order signed in April 2012 from the NDC for a jack-up drilling rig, known as the Shuweihat, which is the fifth in a series of eight LeTourneau Super 116 Enhanced Class rigs. Al Suwaidi told the local press at the time, “It is a source of pride that all five rigs were built here in the UAE, and to the highest quality and international standards.”

New Requirements

The technological requirements of rigs are becoming much more advanced. Extraction is becoming more technically complicated, as easily accessible reservoirs deplete and extraction shifts to complex deposits. The development of highly volatile and sulphurous sour gas resources presents another technical challenge for drilling and other equipment players.

Indeed, it took some years for technology to develop to make the safe and environmentally sound extraction of sour gas in Abu Dhabi viable. However, the cost of technology has fallen quite rapidly in recent years. The Al Hosn Gas project, developed by ADNOC in partnership with US-based Occidental, will come in at less than $10bn, well below an initial estimate of $17bn.

While attention is turning to unconventional segments such as CO 2 enhanced oil recovery (EOR) and sour gas, there is substantial demand for drilling and infrastructure from the conventional industry, particularly for oil rigs, said El Ghazzawy. But here, too, technological demands are rising as Abu Dhabi ramps up production. “In addition to the development of unconventional resources and EOR, we are seeing a move into drilling longer, deeper, faster,” he told OBG. “Abu Dhabi has not been spared from the modern-day need to develop more advanced drilling technologies. Companies have been forced to go offshore, to drill advanced or even horizontal wells, and often times multilateral wells.”

The increasingly stringent regulation of environmental protection – a priority for the industry in Abu Dhabi – is another factor driving the demand for more sophisticated drilling and rigging equipment. While sector players plan ahead as much as they can, the dynamic nature of the sector means that at times they have to rely on partners to supply equipment when clients have urgent requirements, Al Suwaidi added. Al Marar told OBG, “Vessel owners and operators are looking to upgrade their fleets with newer vessels fitted with advanced technology to meet the rise in domestic demand.”

Drilling Evolution

Drilling technology and techniques have been evolving for some time, driven by rising demand for oil, which has encouraged the sector to innovate and invest. By the middle of the 1980s, the industry had introduced horizontal wells. These are designed to connect natural networks of fractures in reservoirs, and to prevent water coning and gas cusping, which disrupt oil flow, in small oil columns. Following this development was the multilateral well, which connects to the main borehole via a junction through which fluids are produced.

The well reduced production costs and improved recovery rates, while speeding up recovery. With output demands rising and reservoirs becoming more technically difficult to exploit, a wave of innovative drilling work is in the offing.

As with EOR this presents opportunities for firms that have the technology and a track record in extended-reach drilling, as well as the willingness to engage in knowledge and technology transfer. It also presents significant challenges. Al Suwaidi told OBG, “As a consequence of the increased demand for rigs and drilling-related services, the industry must also look to modernise its existing fleet. Through thoughtful modernisation, the lifespan of offshore rigs can be extended for upwards of 15 years.”

The industry at all levels, and its workforce, must adapt to new rigs, planning methods and casing programmes (the means by which the well is sustained structurally), as well as different drilling fluid systems. Pad drilling is also gaining momentum and involves drilling several well bores from a single location on the surface. Pad drilling allows multiple wells to be drilled at the same time and reduces the environmental impact of operations and cuts rig move time.