Testing the waters: The development of offshore islands brings many opportunities for marine services firms

Developments in Abu Dhabi’s waters illustrate the extent of innovation in the emirate’s oil and gas sector. The two main offshore operators, the Abu Dhabi Marine Operating Company (ADMA-OPCO) and the Zakum Development Company (ZADCO), are constructing artificial islands on an unprecedented scale for future drilling programmes. Utilising islands to drill offshore is a demonstration of Abu Dhabi’s commitment to maximising potential.

Boosting Production

ADMA-OPCO is developing two islands in the offshore Satah Al Rasboot field (SARB 1 and SARB 2), which will be completed by 2017. The islands will have up to 44 wells each and will help the operator reach its goal of producing of 100,000 barrels per day (bpd) from the SARB field in seven engineering, procurement and construction (EPC) packages. This production will be pumped to processing facilities at Zirku Island, a base for production from the SARB field and the Upper Zakum field. While the field will be operated by ADMA-OPCO, a concession holder owned by Abu Dhabi National Oil Company (ADNOC, 60%), BP (14.7%), Total (13.3%) and Japan Oil Development Company (JODCO, 12%), the development of the artificial islands and the SARB field is an ADNOC sole risk project. Located 120 km north-west of Abu Dhabi City, the islands are being constructed by ADNOC’s Civil Projects Division. In April 2013, ADMA-OPCO awarded an offshore EPC contract worth $515.4m to the UK-based Petrofac International and an onshore contract worth $1.89bn to Hyundai Engineering and Construction Company of South Korea.

ZADCO, the operator of the Upper Zakum oil field owned by ADNOC (60%), Exxon Mobil (28%) and JODCO (12%), is also developing four artificial islands. Each island comprised of rock and sand will be approximately 1 sq km in size, with the first delivered to ZADCO in 2012. These islands are crucial to the operator’s plans to boost production in the field, the world’s fourth largest, to 750,000 bpd from the current rate of 500,000 bpd in a $10bn capital investment project known as UZ750. In 2012, the French firm Technip with its local partner, the National Petroleum Construction Company, was awarded the first EPC package for the islands’ development.

Coming in at $817m, the contract is the first step to helping ZADCO meet its goal of achieving a 70% recovery rate from the Upper Zakum field. In July 2012, a further contract worth $50m was awarded to Speedy Hire to work with ADNOC’s support services firm, ESNAAD. The five-year contract, which has an optional two-year extension, is for a full range of support services including logistics, asset management and equipment rental services.

While the artificial island concept has been executed in other places around the world including Alaska, the Beaufort Sea and the North Caspian region, the scale of the developments in Abu Dhabi is unprecedented. Hitherto, development in ZADCO’s Upper Zakum reservoir has been carried out using 100 wellhead steel platforms and a complex network of subsea pipelines. Originally, ZADCO had planned to achieve its expansion targets through the deployment of an additional 25 wellhead platform towers and hundreds of kilometres of flow lines. This would have had substantial cost implications and potentially led to equipment constraints given the requirements to more than double the drilling rig fleet.

Long-Term Benefits

In conjunction with ExxonMobil, ADNOC through ZADCO decided that the use of four artificial islands would be both more cost-effective and improve long-term performance. At a very basic level, this will lead to cost savings in rig costs – construction of land rigs ranges from $ 20m40m, while offshore rigs cost from $170m-900m with concomitant rates for leasing. Abu Dhabi is well-placed to introduce the artificial islands concept.

Located 84 km offshore, the islands will be built in shallow waters with depths of 5-15 metres, making the dredging and construction much more feasible.

However, it is the long-term benefits that have drawn ZADCO to pursue the idea. The islands will be used as a base that can facilitate the introduction of cutting-edge technology such as extended reach and horizontal drilling in the Upper Zakum field. Drawing on ExxonMobil’s expertise in this regard, with substantial experience in the Sakhalin field in Russia, ZADCO will be able to access tight plays and reduce the requirements for new wells. Using ExxonMobil’s extended reach drilling and maximum reservoir contact technologies ZADCO will expand its drilling capabilities, targeting wells of 30,000-35,000 feet, from their current maximum of 10,000 feet. While these new wells are expected to be expensive, they should be more productive and reduce the need for further capital investment.

The projects will also bring numerous other benefits to the local hydrocarbons industry. As Abu Dhabi focuses on increasing production capacity in its offshore fields, the demand for oil field and marine services in the emirate is likely to increase. ADMA-OPCO was the third-largest client for EPC services in the Middle East in the 12 months to November 2013, according to MEED Projects. With $3.5bn worth of EPC contracts awarded in the UAE in that period, and work continuing to progress on field developments in Abu Dhabi’s waters, the potential for marine services firms to expand their workbooks in the coming 12 months remains strong.

ADMA-OPCO has made a strong commitment to investment in its reservoirs. Ali Rashid Al Jarwan, the CEO of ADMA-OPCO, told OBG, “Investments to upgrade existing fields as well as to develop new fields offshore will be vital in raising overall capacity in line with the government’s production objectives.” The construction of several new artificial islands is one of the most important sources of contracts for services firms. The Petrofac contract, for example, which is expected to be complete by 2017, will offer new sub-contract opportunities for marine services firms. ZADCO’s artificial islands have also brought a bounty of contracts.

Opportunities Available

 As such, many firms are eying tenders from these two operators. Samer A Qiblawi, the managing director of Marine Capabilities (MARCAP), told OBG, “With the majority of the largest EPC awards within the region coming from Abu Dhabi, this is the place to be for oil service support companies. This is especially true for offshore support services given the amount of investment being made by ADMA-OPCO and ZADCO’s development of its artificial islands.”

With such a raft of projects, there is currently a shortage of vessels in the market and more pressure on input costs for services firms. Prices for marine services have risen by approximately 20% since 2009 due to increases in input costs. Furthermore, many companies will be looking to invest in their fleets in the coming years. Qiblawi said, “Regulations regarding the 20-year limitation on the life of a vessel have forced many providers to invest in new craft.”

Another firm benefitting from the expansion plans of ADMA-OPCO and ZADCO is Mutawa Marine Works, a local firm that already has diving contracts associated with the artificial islands. Khalid Abdulla Al Mutawa, the chairman of the company, told OBG, “Reserves onshore have been exploited and there has been a considerable shift towards the exploration and extraction of oil reserves from offshore sites. Therefore, the demand for offshore support vessels is on the rise.” The company has expanded across the spectrum of services it offers, increasing its fleet from nine vessels in 2009 to 18 vessels by the fourth quarter of 2013.

Local Players

With the abundance of contracts in the local market and strict regulations surrounding local ownership and prequalification, a number of strong local players have emerged in the marine services sector. For example, Quality Marine Services, a subsidiary of Abu Dhabi’s Zakher Marine International, won a number of contracts worth $350m for platform supply vessels and accommodation jack-ups for Chinese clients. Indeed, many other local firms are having success in international markets as well. Another such player, Gulf Marine, which provides offshore barges for oil companies, announced in June 2013 that it is seeking a foreign listing that could value the company at $500m. Since a consortium led by Gulf Capital bought the company in 2007, its profits have grown by 750%. The potential for growth both at home and abroad remains strong, suggesting that many firms will be able to expand their workbooks and revenue. “We anticipate greater utilisation of maritime support vessels, equipment and personnel to meet the growing demand resulting from increased maritime trade,” said Khalifa Al Gobaisi, general manager of marine service firm Abu Dhabi Petroleum Ports Operating Company, also known as Irshad. “This, along with more exposure to key growth markets in Africa and Asia, should result in higher rates for service providers going forward.”