China Keen To Fix Britain's Broken Benchmark Oilfield

By MarEx 2013-03-12 09:22:00

* CNOOC expects higher output from UK North Sea assets

* At least six Buzzard shutdowns in 2012, one so far in 2013

* Supply losses affect global prices via Brent benchmark

(Reuters) - China's state oil company is prioritising a fix for Britain's biggest oilfield, the accident-prone Buzzard, which plays a part in setting global oil prices.

CNOOC has taken a controlling stake in the North Sea field central to the price of benchmark Brent crude and which, every time it shuts, can raise costs for some of China's oil imports.

China imports around a third of its oil - over 2 million barrels per day (bpd) including Nigerian and other African crudes - based on Brent prices. An increase in Brent prices by $1 per barrel costs the world's top energy consumer over $60 million a month or $720 million a year in additional oil import spendings.

"We fully expect to increase production from the UK North Sea assets," CNOOC said in a statement to Reuters. "Detailed operational matters have not been finalized, but we are working on specific plans for the North Sea assets."

The Chinese company owns a stake in Buzzard through its $15.1 billion purchase of Canadian oil firm Nexen Inc., operator of the field, which closed last month.

The purchase gave Chinese companies operatorship of around 300,000 bpd or a third of the dwindling UK North Sea oil output of roughly 1 million bpd.

CNNOC is the world's largest dedicated exploration and production company by market capitalization - with 40 percent of its proven reserves outside China.

Reuters reported at least six Buzzard outages that slowed or shut down output in 2012. A one-month planned shutdown in 2012 took twice as long as expected. So far in 2013, the field has had one unplanned stoppage.

Buzzard normally pumps 200,000 barrels per day, less than 0.25 percent of daily world supply.

That contrasts sharply with its role for the global oil markets as the largest contributor to the Forties crude blend, the most important of the North Sea crude grades underpinning the Brent benchmark.

As a result, Buzzard shutdowns often lead to an increase in Brent prices as well as premiums of Brent futures for immediate delivery .

As well as boosting costs for oil consumers, this frustrates traders in the North Sea market.

"It is literally unbelievable," said a crude trader with a bank, caught on the wrong side of a sudden jump in Brent after a production glitch in November. "It is easy to say from the sidelines, but still, this is worse than Nigeria."

Buzzard's problems have been irritatingly regular for traders but are unlike those of Nigeria, Africa's top exporter where theft from pipelines hampers production and oil spills occur almost daily.


By the North Sea's standards, where some fields have been producing for decades, Buzzard is relatively youthful, having started production in 2007. Other field partners are Suncor Energy Inc and Britain's BG Group.

Age may play a part in Buzzard's woes.

The Forties pipeline system, which gathers the oil from Buzzard and more than 50 other fields, dates back to 1975 and, say industry sources, often breaks down.

More reliable Buzzard output would lead to more stable exports of Forties crude blend. Its loss for one day can cause delays in Forties loadings since field output of 200,000 bpd is enough to fill a Forties cargo every three days.

Higher-than-expected levels of sulphur in Buzzard's oil have also caused problems, and meant that new equipment has had to be installed. Sulphur in higher concentrations is corrosive and damages pipelines.

According to a 2009 article by John Sheehan in JPT, the publication of the Society of Petroleum Engineers, Nexen was forced to add a fourth production platform to reduce the sulphur level so the oil could still be transported in the Forties pipeline.

Delays associated with the new facility contributed to unplanned outages at the field in 2011.

Another reason, said a source with a Buzzard field partner, may also have been a strong safety culture and risk aversion at Nexen. Work may have taken longer and the field shut as a precaution more frequently.

On top of this, engineers say the field was designed in an era when a focus on cost-cutting may have removed margins of flexibility seen in older assets.

In the 1990s, oil prices were much lower: spiking to $40 after Iraq's 1990 invasion of Kuwait and sinking to $10 in 1999, but mostly trading around $20. The prospect of today's $110 oil, back then, was pretty much unthinkable.

Nexen did not go into detail when asked to comment on the reasons for Buzzard's outages although a company spokeswoman, Patti Lewis, described the field as "one of the most complex operations working in the UK North Sea."

She said Nexen had worked over the last two years to improve reliability at its operations company wide and in the third quarter, Buzzard's production efficiency was 86 percent, slightly better than planned.

Asked if a safety focus lay behind outages, Nexen said output was not the sole factor it used to judge success.

"Production efficiency is only one measure that we follow and Nexen is very proud of our reputation as a responsible energy developer," Lewis said in the email.

Nexen, which is still led by its CEO, Kevin Reinhart, as a wholly-owned subsidiary of the Chinese company, also said work already done by Nexen had increased reliability.

"Nexen has recently completed a major turnaround at Buzzard," CNOOC said. "In conjunction with the existing team, we have the relevant expertise to continue to safely and successfully manage the field."

By Alex Lawler and Claire Milhench

(C) Reuters 2013.