A leading engineering consultant says the 2013 rate of investment in North Sea assets is unsustainable and that more carefully-targeted maintenance is now essential for the region to stay profitable.

Philip Lawson, of ABB Consulting in Aberdeen, says North Sea operators are only likely to achieve an acceptable return on investment if they maintain and invest in the right areas from now on.

Offshore industry body Oil & Gas UK recently revealed* that maintenance on ageing infrastructure had dented outputs for 2013, with levels at a record low. Average output for the year has been forecast at between 1.2m and 1.4m barrels of oil and gas per day (BOEPD), down from 1.54m in 2012.

The drop has been attributed to downtime caused by the extent of asset improvements and repairs that have taken place this year, with investment estimated at £13.5bn so far.

Lawson, who is due to address delegates at September’s Offshore Europe exhibition in Aberdeen, said: “There is no question the region can still be profitable for many years to come, but maintenance programmes must now be targeted very carefully in order to achieve those targets.

“There has been record investment in assets this year but it cannot continue at that rate if an acceptable ROI is to be achieved.

“Assets may be ageing but many of them are capable of safely reaching the end of their design life, particularly over the next two decades as activity in the North Sea slows down.

“It is possible, therefore, to target the right areas effectively – applying maintenance only to the right equipment and systems at the right time, and prioritising investment in areas that are most likely to fail.”

He said it could sometimes be difficult for those working offshore to identify priority areas, which meant onshore support and consultancy was playing an increasingly vital role in the industry.

“Sometimes it can be hard without an outside perspective to identify the most critical assets correctly. Resources and skills are currently at an absolute premium so strategies have to be implemented perfectly in order to achieve profitability for the next 20 years,” he added.

* Oil and Gas UK’s 2013 Economic Report

NYC-based PIRA Energy Groupbelieves that Asia Pacific refinery margins begin recovering and global crude markets are supported. On the week, the U.S. had a small stock build, while Japanese stocks drew. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Asia Pacific Refinery Margins Begin Recovering, Global Crude Markets Supported

Refinery margins in Asia are starting to recover from poor levels amid increasing refinery turnarounds and good demand growth. Global crude markets are supported by continuing supply outages, and with strong crude stock draws resuming in November and increasing sharply into December. Product demand growth increases seasonally through year-end which should support improved cracks, particularly gasoil, and refinery margins.

U.S. Small Stock Build

Crude stocks surprised to the upside with a sharp drop in runs for the week ending September 20, making the week earlier 16.1 MMB/D print an outlier, while product stocks fell for the second consecutive week. Crude stocks remain above average, but this is largely due to new infrastructure to service growing U.S. production, while the inventories of the four major products are below the historic average. The stock excess to last year widened, particularly gasoline. Last year's stocks were especially low and the current gasoline inventory level is equal to the average of 2009-2011.

Japanese Crude Runs Continue Declining, But Crude Stocks Draw

Crude runs continued declining as turnarounds ramp up. The crude import rate was sufficiently low to produce a large crude stock draw. Gasoline demand was higher with a low yield that drew stocks. Gasoil demand stayed low reflecting holiday impacts and despite lower exports, yield dropped sufficiently to keep stocks flat. Refining margins began to improve, but remain statistically poor.

Higher U.S. Octane Values Here to Stay

U.S. octane value has trended higher in 2012 and 2013. One of the main reasons is that the U.S. has effectively reached its maximum ethanol utilization, and gasoline blenders cannot adjust octane with additional volumes of ethanol. In addition, increasing runs of paraffinic U.S. shale crudes are putting downward pressure on catalytic reforming yields and generating substantial quantities of low octane light naphtha.

Refiners Continue to Maximize Diesel/Gasoil Yield

In the Atlantic Basin, refiners have responded to the higher price of diesel/gasoil vs. gasoline by steadily increasing diesel/ gasoil yields as a percentage of crude. Even in Western Europe, where it was thought refiners were close to maximum diesel/ gasoil yields in 2007-8, yields have continued to creep up. In the United States, diesel/ heating oil yields have increased from roughly 26-27% to over 30% or more. Hydrocracking additions have played an important role.

VLCC Rates Improving

VLCC rates improved somewhat when chartering activity picked up substantially in September as production from Saudi Arabia continued at record levels. While this has produced only a modest increase in rates, it has at least kept rates from falling further in an over-supplied market. On the vessel supply side, the international order book seems to have bottomed with the focus increasingly on product tonnage. The biggest new developments are in the U.S., where high rates, thin spot markets, and uncertain availability have prompted a significant increase in orders for Jones Act tonnage.

Chemical Demand Supporting Propane

Preparations for winter are beginning, with a far better crop drying season than last year anticipated. Higher demand and exports will keep U.S. propane inventory relatively low. Propane remains a preferred feedstock over naphtha in international markets.

Ethanol Manufacturing Margins the Highest Since November 2011

Ethanol prices rose in most of the U.S. the week ending September 20, reversing some of the prior week’s losses. Cash Margins for ethanol manufacture were the highest since November 2011. RIN prices fell to the lowest values since February.

Ethanol Output and Inventories Decline

U.S. ethanol supply was tight the week ending September 20 as production fell to 832 MB/D from 838 MB/D in the previous week and inventories declined by 565 thousand barrels to 15.6 million barrels. PADD I stocks are at the lowest level in over 3 years.

The information above is part of PIRA Energy Group's weekly Energy Market Recap, which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.

Click here for additional information on PIRA’s global energy commodity market research services. 

Apache Corporation (NYSE, Nasdaq: APA) has announced it has completed the previously announced sale of its Gulf of Mexico Shelf operations and properties to Fieldwood Energy LLC, a portfolio company of Riverstone Holdings, for $3.75 billion in cash (subject to customary post-closing adjustments) and assumption of liabilities for future abandonment costs of the properties with a discounted value of $1.5 billion.

Apache retained 50 percent of its ownership interest in all exploration blocks and in horizons below production in developed blocks, where high-potential deep hydrocarbon plays are being tested.

Portfolio rebalancing progress

"Completing this transaction is a significant step toward our goal of rebalancing Apache's portfolio to focus on assets that can generate strong returns and drive more predictable production growth, including our deep inventory of onshore liquids assets in North America," said G. Steven Farris, chairman and chief executive officer.

On a pro forma basis accounting for the Fieldwood transaction and the previously announced  partnership with Sinopec International Exploration and Production Corp. in Egypt,  Apache's second-quarter 2013 production from North American onshore assets and from Egypt would have comprised approximately 55 percent and 15 percent, respectively.  In 2010, onshore North America contributed 31 percent of Apache's overall production, Egypt represented 25 percent and the Gulf of Mexico Shelf represented 17 percent.

Apache also announced that it has completed the previously announced sale of oil and gas producing properties in the Nevis, North Grant Lands and South Grant Lands areas of western Alberta, Canada, to Ember Resources Inc., a private Canadian company, for $214 million. Proceeds from the Ember transaction are subject to customary post-closing adjustments.

Including the Fieldwood and Ember transactions, the partnership with Sinopec and two additional agreements to sell oil and gas producing properties in western Canada, Apache has completed or announced more than $7 billion in asset sales year-to-date.

"In addition to enhancing our production and return profile, these transactions enable Apache to retain our an optimal capital structure for growth by reducing debt, enhance shareholder value through a 30-million-share repurchase authorization, and fund future capital expenditures including high-impact international projects," Farris said.