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Offshore Oil and Gas

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 7
Offshore Oil and Gas

Irati Legorburu*, Kate R. Johnson and Sandy A. Kerr

Heriot-Watt University, Scotland

*Corresponding Author

Executive Summary
Driven by low selling prices, high production costs and the development
of new onshore exploitation techniques, offshore oil and gas activities are
experiencing a significant decline. The European sector is mainly composed
of private companies that operate mostly at the global scale. However, the
production from its territorial waters accounts for 9% and 13% respectively of
the total oil and gas consumption in Europe, respectively. Thus, this decline
can undermine the energy interests of the EU and especially, the economic
activity of the North Sea countries (responsible for the production of virtually
all of the oil and more than 80% of the gas).
Despite this negative outlook, the development of new and more efficient
subsea exploitation systems can provide an important boost to the sector.
However, in a Blue Growth context, the main importance of this industry
relies on its important legacy of infrastructure, knowledge and experience
(skills, business models, concepts of permanent occupation of the marine
environment, etc.).
With this in mind, this chapter describes the main features of the offshore
oil and gas industry along with the opportunities and barriers that it presents
for the development of Blue Growth and MUS/MUP concepts.

7.1 Introduction
By value, technology and geopolitical status, the offshore oil and gas sector
(O&G) is by far and away the most important sector in the contemporary Blue
Economy. Offshore O&G came to prominence in the 1970s and currently

231
232 Offshore Oil and Gas

accounts for about 37% and 28% of the total O&G global production respec-
tively (WOR, 2014). Companies continue to extend their areas of operations,
with “Exploration and Production” (E&P) in ever more extreme and hostile
areas. E&P is set to take off in the Arctic Ocean as the ice retreats; fields are
already in production at the so called ‘Atlantic Frontier’ between Scotland
and Faroe. The 1970s extreme of North Sea working at depths of up to 300m
is replaced by a contemporary technology of working at depths in excess of
1500m. In contrast to the transient activities of fisheries and shipping, the
offshore O&G sector introduced the concept of semi-permanent occupation
of maritime space. It introduced the idea of fixed platforms at sea which could
be supplied with materials and services for the production of O&G and a safe
home for thousands of workers, hundreds of kilometres from land. The sector
has led the way in maritime health and safety and in the development of risk
assessed regulation to control operations and protect the environment.
However, the offshore O&G sector is also in decline. Recent, and possibly
sustained, falls in the oil price render offshore production uneconomic com-
pared to adequate low cost onshore resources and the rise of the ‘fracking’
process for onshore gas. Industry sources believe that the rapid advance of
offshore technology peaked in the 1990s and has slowed very considerably.
The whole (land and marine) oil sector has been driven by global dependence
on fossil fuels as the main resource to supply a burgeoning energy demand.
Many companies have employed successful business models and made their
fortunes. The economic and political drivers have been with them. Others
have been attracted to the sector by its successes but have not had the skills,
or the luck, to flourish.
In 2015, the O&G sector has achieved maturity as the world approaches
what is believed to be the ‘peak oil’ event. Pressure grows for emissions
restraint and alternative sources of clean energy. Notwithstanding this, and
in spite of efforts to move to new energy technologies such as renewable
electricity, the use of fossil fuels continues to dominate energy supply and
is forecast to continue to do so (well in excess of 50%) for the next fifty
years or so. An as yet undetermined transformational technological event,
perhaps in renewable and energy storage technologies, might possibly change
this equation but current forecasts anticipate continuing dominance of fossils
sourced primarily from terrestrial areas. The economic factors are, though,
not the complete picture. Geopolitical factors have played a hugely significant
role in O&G markets and will continue to do so. Oil has been used as a
weapon by major producers to exploit their resources to the full and to punish
those states they do not agree with. Wealthy states with smaller resources
 7.2 Market 233

have therefore acted to exploit their own, even at uneconomic rates, for the
purposes of energy security. Poor developing states have been anxious to
develop any easily recoverable reserves to generate economic growth and
foreign exchange. These will include the more accessible offshore resources.

7.1.1 The Offshore Oil and Gas Sector in the Development

of Blue Growth
Although the offshore O&G industry may be at or past its peak, its products
(not only fuels, but also e.g., synthetic materials) still will be necessary for
the development of marine economic activities. In any case, its true value
to Blue Growth is what it bequeaths at many levels. The successful offshore
operators have established technologies, infrastructure and operational skills
of enormous value to the Blue Growth sectors while, so far, demonstrating
little appetite for diversification themselves. The O&G majors are among the
largest multinationals in the world with significant capital to invest, many
have started small preliminary investment in renewables but most have pulled
back from serious participation. A few have gone further, like BP Solar or
Statoil in the development of floating wind (Xing et al., 2014). However, with
the depletion of traditionally exploited fields a new factor will enter into force
in the short term: decommissioning. In the North Sea alone, 7% of the existing
facilities are in the decommissioning process, and it is estimated that over the
next 30 years this process will affect to 500–690 additional infrastructures
(RAE, 2013).
With all this in mind, the great resource transferability from the O&G
industry to the new Blue Growth sectors is clear, being:
• Infrastructures,
• vessels,
• technologies,
• operation procedures,
• human skills,
• supply industries and
• financial resources.

7.2 Market
7.2.1 Products
The need for energy has been the principal driver for the development
of the O&G industry. While fuels needed by transport activities are the
234 Offshore Oil and Gas

main oil products, gas is widely used in electricity generation and heating
processes. However, O&G products and by-products have a wide applica-
bility in day-to-day lives as they are used, among others, as raw materials
for pharmaceuticals, chemicals, plastics, lubricants, waxes, tars, synthetic
clothes, rubbers, paint or photographic films (WOR, 2014).

7.2.2 Market Trends

These are not good times for the O&G market. Imbalances between supply
and demand, still tangible effects of the financial crisis, enforced environ-
mental policies, changing consumer preferences or the development of more
efficient transport systems have severely hit the industry, particularly in
developed countries. However, and despite its marked and sustained slow-
down, developing countries economies mean that global O&G consumption
continues to increase, giving as a result two general global trends (Mitchell
et al., 2012; BP, 2015):
• Non-OECD countries: Growth markets. Developing economies (mainly
China) are responsible for the net growth in global consumption. How-
ever, these economies are facing an important deceleration, which is
being reflected as a slowdown in the consumption growth rates of the
sector.
• OECD countries: Non-growth markets. Opposite to developing
economies, the O&G consumption rates in the OECD economies remain
stagnant or even declining. Noteworthy in this regard are the cases of
Japan and the EU, which have suffered, respectively, the largest O&G
consumption declines over the last decades.

7.2.3 Prices
Hydrocarbon products are not common trading goods and complex factors
influence their prices. Traditionally, their prices have been determined by
the fundamentals of supply and demand, being directly influenced by factors
like weather, changes in supply/demand patterns or the supply capacity of
the producing countries. However, geopolitical and speculative factors have
become of special relevance over the last decade. In geopolitical terms, the
control over the production, distribution and prices provides economic and
political power. Following the opening of the sector to financial markets,
O&G products have become assets of great interest, strongly subjected to
 7.2 Market 235

speculative interests. Although these factors are strongly interconnected, their

individual influence on prices varies depending on specific political and
economic situations or interests. As a result, prices in the sector are extremely
volatile and unpredictable (NRCan, 2010).

7.2.4 Future Supply and Demand Gaps

As finite resources, existing O&G reserves can’t meet the growing demand
for energy in perpetuity. Disagreements exist between those who affirm
enough reserves for the decades ahead, and the critical voices that warn about
the near depletion of stocks (Owen et al., 2010). Considering the industry
as a whole (onshore + offshore) both the discovery of new reserves (e.g.
deeper offshore fields) and the development of non-conventional exploitation
techniques (e.g., fracking, tar sands) will increase the availability of the
resource, extending its potential supply capacity over time. However, these
new reserves and non-conventional techniques are characterised by their
higher exploitation costs. Therefore, the inability of the sector to commer-
cially exploit its resources at prices assumable by the global economy may be
a more crucial determinant, rather than the amount of reserves themselves
(Owen et al., 2010). This might be of particular importance for offshore
activities in which the trend towards exploiting even more hostile and remote
areas implies a huge increase in operational costs. This may result in making
them even economically unfeasible. In addition, the 2015 report by the
UN Intergovernmental Panel on Climate Change (IPCC) clearly states that
significant climate change will occur from carbon emissions before known
reserves are exhausted. This has led many NGOs to campaign for a policy of
“keep the oil in the ground”.
In addition, the O&G industry faces increased competition that can influ-
ence its future supply-demand trends (Mitchell, et al., 2012). In terms of
intra-sectoral competition (i.e., Oil vs. Gas), the oil sector has largely relied
on the transportation market. Lower prices of gas and improved air quality
can be a driver for the development of gas-fuelled engines and encourage its
replacement of oil as a principal fuel. On the other hand, the growing pressure
from new fuels, new energy supply types and users requiring alternative non-
fossil energy types, may further decrease the demand for O&G products (new
biofuels and materials; electric vehicles; environmental protection policies;
diversification of energy sources, e.g., renewables).
236 Offshore Oil and Gas

7.3 Sector Industry Structure and Lifecycle

7.3.1 Lifecycle
Although for the following decades O&G will remain as the main supplier
for the global energy demand, the decline affecting the sector is particu-
larly relevant for offshore activities. Following the depletion of traditionally
exploited shallower fields, the production at deeper and more hostile areas
presents important economic barriers. Even more significantly, the new
non-conventional exploitation techniques (e.g., fracking) can redirect the
focus of the industry towards onshore activities to the detriment of offshore
production.

7.3.2 Industry Sectors and Segmentation

Depending on the processes involved, the O&G industry is divided into
upstream (exploration, drill wells, production), midstream (transportation and
storage) and downstream (refining and marketing) activities. Firstly, only
upstream and midstream activities relate to offshore activities. And sec-
ondly, downstream processes are always onshore activities and therefore do
not offer interesting alternatives for Blue Growth or potential combinations
with other marine economic activities. Thus, considering the scope of this
book, only upstream and midstream sectors activities will be considered
(Table 7.1).

Table 7.1 Sectors and segments of the O&G industry

Sub-Sectors Segments
Upstream Major Companies
Search and exploration of Fully integrated: cover all the facets of O&G industry
resources, well drilling (upstream-midstream-downstream). Exploit large
and extraction of raw proven reserves, which require at the same time greater
materials. investment (as are also their returns).
Midstream Small Companies
Transportation (pipelines, More versatile, normally focused on exploration and
LNG/oil tankers) and production activities. Go after opportunities discarded
storage of extracted raw by major companies, e.g.: (i) acquiring and exploiting
materials. depleted fields trying to squeeze some extra production
at lower cost; (ii) exploring in areas where the
probability for large discoveries is low; or (iii) operating
in areas with uncertain fiscal and regulatory regimes.
Invest just enough to reduce uncertainty.
 7.3 Sector Industry Structure and Lifecycle 237

7.3.3 Horizontal and Vertical Integration

Major oil companies usually have a fully integrated structure (vertically and
horizontally). Given their huge resources they cover the whole O&G supply
chain, from exploration and production of new reserves, to transportation,
and, to the final refining and sale to the consumer (upstream-midstream-
downstream). On the other hand, small companies do not have enough
resources (or interest) to cover the entire supply chain. Usually they develop
their activities in very specific segments of the industry (e.g., geophysical
surveys, activities exclusively focused on production or transporting) and sell
their products/services to third parties of the supply chain. Finally, mergers
and acquisitions are common in the industry, so the release or subcontract of
certain activities are a frequent practice of oil companies (horizontally within
the different segments and vertically along the supply chain).

7.3.4 Centres of Activity

Currently, more than 600 active offshore extraction platforms exist in the
EU-28, a value that significantly increases if those located in Norwegian
waters are considered. The European offshore production constitutes 9% and
13.8% of the total O&G consumption, respectively. Therefore, the offshore
production of hydrocarbons represents an important energy resource for
Europe (JRC, 2015). Figures 7.1 and 7.2 show the distribution of the major
O&G reserves and their associated infrastructure in the studied basins.
In the Atlantic basin, most of the exploration and production is devel-
oped in the North Sea. Practically all of the oil and more than 80% of the
gas produced in Europe are produced by countries bordering the area (i.e.,
Norway, UK, Denmark, the Netherlands and Germany). Undeniably Norway,
and the UK to a lesser extent, are the leading countries in terms of production.
This is clearly reflected by the greater number of reserves and development
of infrastructures within their territorial waters (Figure 7.1).
Compared to the North Sea, offshore production in the Baltic seems
minimal. Production activities mainly develop along the Polish coast and
represent only 0.1% of the total offshore production (Figure 7.1). However,
this basin plays a very important role in strengthening the energy security
of the EU. With a length of 1,224 km and a combined transport capacity of
55 bcm/yr (27.5 bcm per line), the Nord Stream twin pipeline crosses the
Baltic Sea serving as a connection between the vast Russian gas reserves and
the European markets (Nord Stream, 2014).
238 Offshore Oil and Gas

Figure 7.1 Distribution of main Oil and Gas fields and associated infrastructure in the
Atlantic, Baltic and Mediterranean basins (Authors’ compilation based in: ENTSOG, 2015;
Lujala et al., 2007). Offshore oil and gas production values are given in million tonnes (JRC,
2015).

In regard to the European territories of the Mediterranean, traditional

production areas have been located in Spanish, Greek, Maltese and Adriatic
waters (mainly Italian). In this latter case, of special attention is the increase
in the offshore production of Croatia. Although these activities can improve
the energy self-sufficiency of the country, many critical voices warn about the
danger to tourism from potential accidents as it is a tremendously important
sector for the economy of the country. In any case, the main production
areas in the Mediterranean are outside the territorial seas of the EU, being
especially important the North African coast and the recent discoveries in
the eastern Levant basin. These latter findings, partially located in Cypriot
waters, have enabled the cooperation between the EU and some eastern
Mediterranean countries (e.g., Israel, Lebanon). The agreements relate to
issues such as, optimisation of exploitations, development of infrastructures,
access to European markets, or pricing. Among the regarded options, the con-
struction of the Cyprus-Greece pipeline or the building of a LNG terminal in
Cyprus can be highlighted (EC, 2013). Romania and Bulgaria on the one hand
 7.3 Sector Industry Structure and Lifecycle 239

Figure 7.2 Distribution of main Oil and Gas fields and associated infrastructure in the Gulf
of Mexico and Caribbean basin (Authors’ compilation based in: ANH, 2016; BOEM, 2016;
Lujala, et al., 2007; Petróleos de Venezuela SA; Theodora.com).

(intra-EU) and Turkey and Ukraine (extra-EU) on the other, have been the
main hydrocarbon producers in the Black Sea. Historically, countries border-
ing the Black Sea have shown little interest in the exploitation of their massive
energy resources. Importation (mainly from Russia) has been proven as an
easy and cheap option for them. However, changes in the energy markets, the
discovery of new reserves in the Bulgarian, Romanian and Turkish coasts or
political tensions with Russia, are strengthening the development of offshore
production in the region.
Finally, with countries like Mexico, the US, Colombia Venezuela or
Trinidad and Tobago, the Gulf of Mexico and the Caribbean Sea have major
actors in the global energy sector (Figure 7.2). However, most of these
resources are outside the territorial waters of the EU or its associated overseas
countries territories. Thus, the oil and gas activities carried out in the region
may be of less interest for the development of EU’s Blue Growth strategies.
240 Offshore Oil and Gas

7.3.5 Types of Ownership

In the same way that the demand for O&G presents two differentiated patterns
(OECD and non-OECD economies), the ownership of O&G reserves also
shows two main actors: private companies and National Oil Companies
(NOCs). In any case, given the importance of the energy sector for the
world economies, unregulated private companies do not exist. Even in the
most developed economies, where O&G is supplied by private companies,
the sector is strongly influenced by government policies (e.g., subsidies on
exploitations and transport, taxes to consumption, price manipulation...).
Private companies have a primary objective to make profits for their share-
holders. Typically, they exploit and produce their resources more quickly than
NOCs, 10–12% depletion rates, compared to 3–5% for NOCs, (Mitchell et al.,
2012). While their resources and infrastructure have a global coverage, their
headquarters are normally located in developed economies and direct their
production to competitive markets (OECD).
Although NOCs share about 86% of proven reserves, their production
rate is comparable to that of private companies (55% of the total). Apart
from their national economies, their main customers are located in emerging
economies (non-OECD). NOCs normally belong to countries with a high
economical reliance on their O&G exports. Hence, their production and
reserve exploitation policies are highly conservative in comparison to those
of private companies. The protectionism degree of governments towards
their NOCs, closely relates to the diversification of their economies. As a
result, there exist two types of NOCs (EIA, 2016). The NOCs organised
as corporations have strategic and operational autonomy. Although mostly
controlled by governments’ interests, part of their shares are publicly traded
and subject to private funding (e.g., Petrobras, Statoil, Gazprom). Thus, they
are subjected to the rules of the Stock Exchange, and are characterised by
their commercial objectives and income generation. The NOCs that oper-
ate as an extension of government are aimed to support national policies,
both strategically and financially (e.g., Pemex, Saudi Aramco, Petróleos de
Venezuela). Their objectives do not directly relate to the markets, as they
seek to boost the national and foreign objectives of their countries (e.g.,
offering lower prices to domestic consumers or generating long term incomes
for their economies). In any case, operation agreements between both types
of companies (privates and NOCs) are a common practice in the sector that
allows a joint venture arrangement where private companies operate NOC
owned reserves.
 7.4 Working Environment 241

7.3.6 Rules and Regulations

Since it is a source of important government revenue (e.g., by means of
taxation, awarding of exploitation licenses, increased GVA, etc.), the O&G
industry is crucial for the economies of producing countries. Regulations
are applied to the economic activity itself and the industry is also subject
to strong requirements on environmental safety. All this complexity is, at the
same time, the main cause for investor’s reluctance. They opt to invest in
countries with favourable regulatory frameworks. Therefore, regulation can
become a double-edged sword, as both strict and lax regulations may impair
the economic interests of producing countries. As a result, the regulation in
the sector is strongly influenced by constant challenges and opportunities in
order to maintain a balance between national interests and concessions to
the private sector (e.g., changing fiscal regimes, socio-political and environ-
mental sensitivities, etc.). Annex 7.1 shows the main regulations affecting the
sector in terms of economic activity, environmental protection and liability
and compensation.

7.4 Working Environment1

7.4.1 Economic Climate
As already observed, economic and geopolitical factors have a major influ-
ence on the performance of this sector. The slow recovery of major economies
(e.g., Europe, Japan, China) and current political conflicts in the Middle East
and Russia-Ukraine (together with the sanctions imposed by the EU and US),
fuel the mistrust of markets in the industry. As a result, the industry has to face
an uncertain economic climate (Hays, 2015), in which producer countries
adopt different response strategies.
NOCs are an important support for their economies. As an example,
PEMEX revenues have accounted approximately for 35% of the Mexican
federal government’s budget, and PDVSA is the main company sustaining
the Venezuelan economy. Therefore, the decline in demand and prices can
cause a fatal impact in the socio-economic development of these countries.
Thus, the attraction of foreign investments is part of the solution to get cash
in both cases (e.g., potential denationalisation of certain fields, exploitation

1
In general, the information provided in this section refers to the Oil and Gas sector as whole
(inland + offshore activities). However, the main European Oil and Gas producers develop
their activities at sea. Thus, at least for European countries these figures can be considered
fairly representative of specifically offshore activities.
242 Offshore Oil and Gas

agreements, sale of international assets...). In the case of European pri-

vate companies, the ageing of their reserves is an additional factor to be
considered. Waiting for favourable regulatory and economic changes, these
companies have opted to avoid or minimise new investments.

7.4.2 Employment, Skills and Migration

Figure 7.3 shows the direct employment created by the sector in some of the
considered countries2 . It provides a picture of the most important countries in
the sector and its relative importance to their national economies: countries
with higher production capacity, are those generating a greater number of
direct jobs in the sector. The importance of the industry in terms of employ-
ment relies on its ability to create indirect employment. In the North Sea
alone, it is estimated that each direct employment in the sector induces up to
7.5 other indirect jobs (ECORYS, 2013).

Figure 7.3 Direct employment derived from Oil and Gas exploration activities.
Source: EUROSTAT, 2016; Quest Offshore, 2011.

2
The data in this section must be considered as indicative as:
• it has not been possible to find data for all the countries involved in offshore activities.
• depending on the sources, direct employment data can vary significantly.
 7.4 Working Environment 243

In the coming years, skill shortages will be one of the main prob-
lems to be faced by the sector. The rejuvenation of the workforce (added
to a poor transfer of knowledge), the retirement of experienced workers,
the poor update on technological advances, or strict immigration laws that
prevent the access to global talent are among the main causes for this
shortage. Much of the expertise required in the sector relates to fields such
as science, technology, engineering or mathematics (STEM). The industry
is a highly male dominated industry and to balance the lack of skills,
O&G recruiters are increasingly focused on the incorporation of women into
the sector (Hays, 2015). Companies are increasingly recognising the high
quality of women in STEM and they have an increasing presence in the
workforce.
Regarding the migration and mobility of workers, European companies
rely principally on their local workforce (Hays, 2013). Europe is charac-
terised by its smaller reserves and by an industry dominated by private
companies. These companies commonly operate at the global level, develop-
ing much of their production out of European territorial waters and favouring
the displacement of workers outside their countries of origin. In addition, the
high skills of its workforce can act as additional drivers for the mobility of
European workers.

7.4.3 Economic Indicators

7.4.3.1 Contribution to GDP
Figure 7.4 shows the contribution to GDP of the rents derived from the
extraction of hydrocarbons in the producing countries around the studied
basins. Despite exceptions (e. g., Trinidad and Tobago, Ukraine, Netherlands,
Israel), incomes derived from the exploitation of oil exceed those obtained
through gas exploitation. Probably this is due to the fact that oil has been
traditionally a more intensively exploited and marketed resource than gas,
and consequently, more heavily taxed. However, it is likely that this pattern
will change in the future: the depletion of oil reserves, along with changes
in the preferences of the markets (lower prices of gas, replacement of oil
as a primary fuel in transport) can help the expansion of the gas sector and
increase the amount of rents collected by producing countries.
Driven by their higher amount of reserves and the lower diversification
of their economies (a probable consequence of the former), Caribbean and
North African countries are those with a higher reliance on the Oil and Gas
sector.
244 Offshore Oil and Gas

Figure 7.4 Contribution of O&G rents to individual and regional economies.

Source: World Bank, 2015.

7.4.3.2 Wages
Exceeding a global average of $81,000 annually, salary is one of the main
attractions for workers in this sector. The countries bordering the North Sea,
the US, Colombia and France are at the top of the list, exceeding that average
for either their local or imported workforce (Hays, 2013).
In contrast to Norway where salaries of local workers may be up to 60%
higher, the remainder of the North Sea countries, US and France present
a balance in the wages for both types of workers. These cases should be
considered exceptions and indicative of their highly skilled local workforce.
In the rest of the countries the salaries of foreign workers are significantly
higher, which may be due to two main reasons:
• The allocation to foreign subsidiaries or exploitations of workers from
private US and European companies.
• Attempts to attract talent by countries with much production capacity
but with a lack of skilled labour.
The bonuses received by the workers are another important aspect to be con-
sidered in relation to wages. Companies commonly offer incentives in order
to ensure and maintain their skilled workers. Almost 80% of the staff in North
Africa and South and North America receives some kind of bonus, while in
Europe this value drops to 60%. Bonuses, health plans, home allowances or
retirement plans are among the most common incentives (Hays, 2013).
 7.4 Working Environment 245

7.4.3.3 Export potentials

Table 7.2 shows major O&G exporting and importing countries. At the EU
(+ Norway) level, the only countries with a certain gas export potential are
Norway and the Netherlands. In fact, despite the production activity devel-
oped by some Member States, the EU as a whole, is a net energy importer.
Outside its territorial waters, the Caribbean and Mediterranean basins are
those with a higher export potential. In the Caribbean, the development of
new offshore exploitations can strengthen the role of the existing exporting
countries of Mexico, Venezuela and Trinidad and Tobago. In this latter case,
the construction of the Eastern Caribbean Gas Pipeline which will ensure the
supply of gas from Trinidad and Tobago to the Eastern Caribbean Islands,
will reinforce its role as gas supplier in the region. The recent discovery
of huge gas reserves in the Eastern Mediterranean, not only increases the
production capacity of the basin (mainly developed in North Africa) but also
the export potential of the Eastern Mediterranean countries. In this sense, the
agreements signed by the EU and these countries (e.g., Israel), involve a series
of advantages for the EU in terms of imports-exports, which might be helpful
to ensure its energy security.

7.4.4 Infrastructure and Support Services

Given its complexity and the risks involved, the oil and gas industry requires
a large amount of supporting services. Although some large companies
integrate these services within their structures, contracting third-parties for
support services is a common practice in the sector. Following the NACE
classification of economic activities, these services include a variety of

Table 7.2 Top ten of exporter and importer countries

Crude Oil Natural Gas
Net Exporters (Mt) Net Importers (Mt) Net Exporters (bcm) Net Importers (bcm)
Saudi Arabia (271) US (442) Russia (203) Japan (123)
Russia (239) China (269) Qatar (121) Germany (76)
Nigeria (124) India (185) Norway (103) Italy (62)
Iraq (119) Japan (179) Canada (54) Korea (53)
UAE (118) Korea (128) Algeria (45) China (49)
Kuwait (103) Germany (93) Turkmenistan (45) Turkey (45)
Venezuela (93) Italy (74) Netherlands (40) France (43)
Canada (90) Spain (60) Indonesia (35) UK (39)
Angola (84) Netherlands (57) Australia (26) US (37)
Mexico (66) France (57) Nigeria (22) Spain (30)
Source: IEA, 2014.
246 Offshore Oil and Gas

additional industries, which among others, relate to shipping, transport, port

services, R&I, construction and engineering, wholesale or health and safety
(EUROSTAT, 2008).

7.5 Innovation
7.5.1 Innovative Aspects and New Technology
The depletion of the more accessible offshore reserves (<400m depth) has
pushed the search for hydrocarbons towards deepwater (∼1500m) and ultra-
deepwater (>1500m) areas. The use of the most advanced geophysical
exploration techniques has enabled the detection of vast deposits at depths of
up to 12 km. According to recent estimates, these deepwater/ultra-deepwater
deposits account for more than 50% of the newly discovered larger offshore
fields (i.e. fields with an estimated minimum recoverable reserve of 170
billion barrels). However, the high costs of production at such deep loca-
tions, puts in risk the economic viability of these deepwater/ultradeep water
reserves (WOR, 2014).
In this sense, the development of subsea completion systems offers a
series of advantages and alternatives to the traditional use of large plat-
forms. Integrating several components for the processing of oil and gas
(compressors, pumps, and separators), these systems are directly deployed
onto the seabed, and underwater robots connect the different components to
form large production ensembles (Devold, 2013). Among the advantages pro-
vided by these subsea systems, the following are innovation areas currently
being explored:
• Simplification and efficiency improvement of the extraction, cleaning
and processing processes: improves the performance of pumps and
compressors and avoids the need for pumping to drilling platforms.
• Reduction of the amount of offshore production infrastructures.
• Increase of the exploitation radius: it is now possible to deploy within a
wider radius several wells which pump to a common production station.
• Reduction of operating costs.
Although several fields operated by these subsea systems already exist (e.g.,
Gulf of Mexico, South America, Norway), its full commercial development
still requires a number of technological innovations. In traditional platforms
the maintenance of production infrastructures (pumps, compressors, etc.)
may be relatively simple. However, these tasks turn highly complex when
working subsea and at such great depths. To solve these issues, much of
 7.5 Innovation 247

the innovation work in the offshore industry is focused on the development

of robust, highly reliable and commercially operative submarine production
systems (WOR, 2014).

7.5.2 Decommissioning and Cross-Sectoral Opportunities

Decommissioning is the dismantling process of O&G infrastructures once
the exploitations reach the end of their lifecycle. Given the rapid decline
of the reserves in the North Sea, most of the information on decommis-
sioning relates to that area. It is estimated that all of the existing facilities
will require decommissioning over the next 30 years (RAE, 2013). These
operations will not only require strong economic investment (estimations
in the North Sea exceed £30billion over the next 30 years) but also great
human and technical capital. In any case, it can be expected that with the
future depletion of existing exploitations, decommissioning will also acquire
an increasing importance all over the world. However, it presents some
interesting characteristics and possibilities for Blue Growth:
a) From a strict point of view, decommissioning is not considered a sector
within the O&G industry. However, as a result of the decline of the
sector, it may emerge forcefully as a new offshore and highly tech-
nical activity that may absorb and replace the loss of highly skilled
employment from E&P activities.
b) Development of MUS/MUP activities: existing offshore O&G platforms
can turn into valuable assets, as they can provide the infrastructure
needed for the combination of maritime activities. However, based
on previous experiences from the Gulf of Mexico (BOEM, 2007) the
success of these combinations may vary greatly.
b.1) Active platforms: apart from being the owners of the platforms,
oil companies assume elevated risks and costs in their production
activities. For this reason, it cannot be forgotten that in any com-
bination including the use of any active facility, the interests of the
O&G industry will always predominate against additional indus-
tries. Thus, oil companies may be reluctant to combine and share
their infrastructures with sectors that add risks to their operations
without obtaining any direct benefit (e.g., aquaculture, immature
renewable technologies). As an exception, the combination with
wind energy can arise more interest, since the combination of these
fully developed technologies can provide short term benefits to all
parties.
248 Offshore Oil and Gas

b.2) Obsolete platforms: this seems to be the most suitable option for
the combination of activities, since it reduces either the power posi-
tions between industries or the risks associated with the oil industry
(e.g., spills, contamination of farmed species, etc.). It can also be
an incentive for oil companies, which can consider it as an option
to delay and reduce the expenses of the future decommissioning of
their infrastructures (rental agreements, leases, etc.). However, this
option also poses a series of challenges, related mainly to the regu-
latory framework. Despite some exceptions that enable derogation
(e.g., sub-structures weighing more than 10,000 tonnes), most of
regulations on decommissioning dictate the complete removal of
all the infrastructures once they become obsolete (e.g., UNCLOS
Article 60 (3); OSPAR Decision 98/3). Therefore, the possible
re-use or reconversion of obsolete platforms must be regarded
as a case-by-case study of the available options and applicable
regulations.

7.6 Investment
Government incentives, public donors (e.g., EU) and private investors are the
main funding source for oil companies (ECORYS, 2013).
The O&G industry is very lucrative not only for companies, but also
for Governments, who receive substantial revenue through the taxation
derived from the whole sector chain (from producing companies to final
consumers). To ensure these revenues and attract and retain the investment in
the sector, Governments often provide support to oil companies (Table 7.3).
Funding through their own reserves, private equity funds, bank loans
or bonds are the main forms of private investment. While government
investments seek to secure revenues for the development of their national
economies, private investments try to maximise benefits. Thus, some private
investors may opt for higher risk investments (in more hostile areas or new
explorations), which provide the opportunity for greater benefits.

7.7 Uncertainties and Concluding Remarks

Although the dominance of the O&G industry as the principal energy supplier
is expected to continue in the future, its offshore activities are in decline.
The depletion of the more accessible reserves has driven the search and
 7.7 Uncertainties and Concluding Remarks 249

Table 7.3 Common types of Government Interventions in Energy Markets

Intervention Type Description
Natural resource Policies governing the terms of access to domestic onshore and
access offshore resources (e.g., leasing)
Cross-subsidy Policies that reduce costs to particular types of customers or regions
by increasing charges to other customers or regions
Direct spending Direct budgetary outlays for an energy-related purpose
Government Government ownership of all or a significant part of an energy
ownership enterprise or a supporting service organization
Import/export Restrictions on the free market flow of energy products and services
restriction between countries
Information Provision of market-related information that would otherwise have
to be purchased by private market participants
Lending Below-market provision of loans or loan guarantees for
energy-related activities
Price control Direct regulation of wholesale or retail energy prices
Purchase Required purchase of particular energy commodities, such as
requirements domestic coal, regardless of whether other choices are more
economically attractive
Research and Partial or full government funding for energy-related research and
development development
Regulation Government regulatory efforts that substantially alter the rights and
responsibilities of various parties in energy markets or that exempt
certain parties from those changes
Risk Government-provided insurance or indemnification at below-market
prices
Taxes Special tax levies or exemptions for energy-related activities
Source: World Bank, 2010a.

exploitation of hydrocarbon resources towards more remote and therefore,

more expensive areas. This, together with the development of new onshore
techniques and the general fall of prices, can turn offshore activities econom-
ically unfeasible. While the big European companies operate at the global
scale, the production in European territorial waters accounts for 9% and
13.8% of the total oil and gas consumption of the EU, respectively. Within
territorial waters, most of the activity is developed in the North Sea, being
Norway and UK by far the principal producers. The Caribbean is one of the
main producers worldwide and the Mediterranean holds recently discovered
enormous deposits. However most of these deposits are located outside the
EU’s territorial waters. Therefore, the decline of the North Sea reserves may
limit even more the supply capacity of the EU and increase the need for
importation of hydrocarbons.
250 Offshore Oil and Gas

In any case, the decline of the O&G sector also presents a series of
opportunities and challenges for the development of BG industries, which
principally rely on two fundamental aspects of the industry: skills and
infrastructure.
• Skills. The extensive working experience in the marine environment,
has resulted in a competitive industry which holds a highly skilled
workforce. In this sense, the high human skill transferability and the
experience dealing with adverse situations (both environmental and
financial), are of great interest and a good example for the development
of new offshore economic activities.
• Assets. The oil industry has developed and integrated technologies,
operational models and equipment adapted to harsh marine environ-
ments. These include: vessels (e.g., platform supply vessels, tankers),
underwater scanning and surveying methods (e.g., ROVs and AUVs),
complex engineering techniques (e.g., floating anchoring systems, deep
sea drilling, subsea systems) or personnel trained to work at sea. All
these assets are of value for the future development of new offshore
industries, especially for those that require large and challenging tech-
nical works (e.g., deployment of renewable energy devices, deep sea
mining, offshore aquaculture, etc.).
• Infrastructure. The sector has many offshore installations, which could
be an important support for BG sectors, and more specifically, for the
development of MUS/MPP concepts. However, most of the current
marine legislation dictates the dismantling of all the existing infrastruc-
tures once they reach the end of their lifecycle. Despite certain excep-
tions that permit for derogation, decommissioning is an extremely com-
plex process. These difficulties not only rely on the huge financial and
technical requirements, but also in the possible environmental and socio-
economic impacts (e.g., pollution, conflicts with fisheries/aquaculture,
restrictions on the use of space, ecological impacts). At national levels,
the development degree of policies and guidelines on decommission-
ing, varies depending on the maturity of the O&G industry and the
previous experiences of countries. In this way, countries like Norway
and UK have regulatory provisions on decommissioning in their legal
frameworks. These requirements range from constitutional provisions to
specific requirements (World Bank, 2010b). The creation of a common
and clear regulatory framework not only will allow operators to know
compliance requirements, but it can also set the conditions that will
allow the conversion of existing infrastructures. Thus, for the moment,
 Annex 251

the reuse for new purposes of an existing O&G infrastructure, will be

subjected to a case by case study, in which either the type of infras-
tructure or the regulatory framework to which it is subject must be
considered.

Annex 7.1 – Regulation in the Oil & Gas industry

Economic EU • Directive 94/22/EC on the conditions for
activities granting and using authorisations for the
(reserves, prospection, exploration and production
licenses, of hydrocarbons
exploration and • Decision 1999/280/EC regarding a
production. . . ) Community procedure for information
and consultation on crude oil supply
costs and the consumer prices of
petroleum products
• Decision 2003/796/EC on establishing
the European Regulators Group for
Electricity and Gas
• Regulation (EC) 715/2009 on conditions
for access to the natural gas
transmission networks
• Directive 2009/73/EC concerning
common rules for the internal market in
natural gas and repealing Directive
2003/55/EC
• Directive 2009/119/EC imposing an
obligation on Member States to maintain
minimum stocks of crude oil and/or
petroleum products
• Regulation (EU) 994/2010 concerning
measures to safeguard security of gas
supply
• Regulation (EU, Euratom) 617/2011
concerning the notification to the
Commission of investment projects in
energy infrastructure within the
European Union and repealing
Regulation (EC) No. 736/96
US • Outer Continental Shelf Lands Act
(OCSLA)
• Oil and Gas Royalty Management Act
• Petroleum Marketing Practices Act
Mexico • Ley de Hidrocarburos
Venezuela • Ley Orgánica de Hidrocarburos
• Ley Orgánica de Hidrocarburos
Gaseosos
(Continued)
252 Offshore Oil and Gas

Annex 7.1 Contniued

Colombia • Ley 1274 de 2009 por la cual se establece el
procedimiento de avalúo para las
servidumbres petroleras
Trinidad and Tobago • The Petroleum Act
• The Petroleum Regulations
• The Petroleum Taxes Act
Environmental Regional OSPAR • Annex III on elimination of offshore
protection conven- (North pollution sources
tions East • Recommendation 2010/18 on the
Atlantic) prevention of significant acute oil pollution
from offshore drilling activities

HELCOM • Annex VI on prevention of pollution from

(Baltic) offshore activities
Barcelona • Protocol for the protection of the
(Mediter- Mediterranean sea against pollution
ranean) resulting from exploration and exploitation
of the continental shelf and the seabed and
its subsoil
Cartagena • Oil spills protocol
(Caribbean)
EU • Directive 2008/56/EC. Marine Strategy
Framework Directive
• Directive 2013/30/EU on safety of offshore
oil and gas operations.
Liability and International • International law principles
compensation Barcelona
for damages • Protocol for the protection of the
convention Mediterranean sea against pollution
(Mediterranean) resulting from exploration and exploitation
of the continental shelf and the seabed and
its subsoil
• Guidelines for the determination of liability
and compensation for damage resulting
from pollution of the marine environment in
the Mediterranean sea area (not binding)

EU • Directive 2004/35/EC on environmental

liability with regard to the prevention and
remedying of environmental damage
• Directive 2013/30/EU on safety of offshore
oil and gas operations.
 References 253

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