with James L. House, Regional VP & Managing Director, Apache North Sea Limited
Apache took over Forties from BP in 2003, and you have been Managing Director since 2006, What have been the main highlights and achievements since your arrival?
I took over from a gentleman by the name of John Crum, who was running this region at the time. John is an Executive VP at Apache and was here during the initial assumption of operations from BP of Forties during April 2003. Of course, the initial objective was to make an impact in terms of overall performance as quickly as possible, and this was well under way by the time I arrived. Apache was in the phase of undergoing a number of significant projects, so by the time I came many were moving towards commissioning. After I arrived, Apache North Sea continued to build on the momentum created during that first phase from April 2003 through late 2005.
Major accomplishments include commissioning the key projects that have reshaped how Forties operates. To understand or appreciate what that means, Forties is a very large multi-billion barrel field acquired from BP that had become a very mature asset and likely positioned more at the tail-end of their portfolio. BP had many other projects competing for capital that likely generated better returns, although they had previously looked at a number of ways to address the significant issues facing Forties.
With Forties approaching 30 years of age, the majority of the rotating-type machinery, from pumps to turbines used to generate power or compress gas, were approaching the end of their useful life, not to mention the tendency for mature assets of the North Sea to have controls, maintenance and other fabric integrity issues, i.e. try to keep them from rusting apart. As such, Forties had not been getting the same kind of attention as could be expected from a company operating that field as their sole asset. Apache’s different corporate culture, coupled with the fact that it is our sole asset in the North Sea, means there has been a tremendous amount of focus with a sense of urgency on improving how Forties operates.
Apache’s Forties acquisition was based on approximately 150 million barrels of remaining reserves to recover, and the field was producing around 40,000 barrels per day, and had been in decline for a number of years. Forties in its heyday had produced over 550,000 barrels per day, with well over 2.6 billion barrels recovered to date, and still is the single largest oil accumulation in found in the North Sea.
When Apache arrived, naturally the organization started addressing what it would take to exploit the available opportunities, putting together action plans and putting the people in place to make it happen. There were a number of key maintenance issues that needed to be addressed, as well as embarking on a program to deal with problems that kept the platforms from running consistently.
The biggest issue to contend with was stable power generation and reliable transmission systems. Forties consists of five platforms: four original installations from the mid-1970s called Alpha, Bravo, Charlie, and Delta; and the last, called Echo, installed in 1988. Each of the four primary platforms were essentially independent islands generating their own power, processing of produced fluids, and exported pipeline quality oil via Charlie to the main export system down the Forties pipeline system.
Initially, Forties was not fully benefiting from the natural gas associated with the produced crude oil that could be utilized for fuel gas. Several key platforms were fuel gas deficient and their power generation was supplemented with using diesel, which is costly and yield higher emissions. Apache came up with a plan to develop a gas ring pipeline system to transport gas throughout the field and consolidate power generation to two platforms with state-of-the-art turbines, increasing power generation capacity by a factor of 100%. On both the Alpha and Charlie platforms, two new Solar Titan power generation units were installed that could generate 13 megawatts each for a total of 26 megawatts per platform. The power is distributed throughout the field through a state of art power management system, and the reliability has provided a step change towards improving the field’s operations as well as enables further expansion opportunities.
The second major issue plaguing the operation was the export pumping system. The old pumps, either gas or diesel driven, were replaced with high speed electric pumps commissioned through the first half of 2006. However, Apache found that with new and improved faster-running systems, there were other frailties in the system began to surface, e.g. on Charlie’s import header, which was a legacy since replaced with a whole new system that can withstand greater rate and pressure fluctuations. Previously, there was a narrow window with a reduced-pressure import system, and now the new system has eliminated the number of trips virtually to zero. Now, the field is realizing the dividends from the investments to gain reliable power generation and export pumping systems, which ultimately has translated to enhanced production efficiencies.
During this same period, Apache was also initiating various drilling projects around the field, and was contending with platform drilling packages also in a state requiring significant attention. Ultimately, Apache has recertified all of the derricks as well as upgraded each of the drilling packages by adding additional mud pumps, top drives, iron roughnecks, and mud handling and cuttings reinjection systems. Previously, Apache had mobilized a jack-up drilling rig over the Echo platform, which at the time was producing approximately 1,000 barrels per day. It turned out to be a great project, and when the rig departed, Echo was producing over 22,000 barrels per day, which yielded a massive ramp-up in the overall field production profile.
While these key issues were being addressed, other technical issues were being identified and corresponding plans developed. Several other notable projects include two new high pressure gas compression packages were added to Alpha and Delta to enhance artificially lift capabilities. Apache has also installed two new produced water handling and reinjection systems on Alpha and Charlie. Apache is also doing other projects like replacing all the glycol dehydration units, performing accommodation upgrades, and replacing multi-generation control systems with a modern more capable version.
Apache has also acquired a 3D seismic survey over Forties and converted it to a 4D evaluation, and the exploration department has continued to use that data while performing simultaneous inversion evaluations. This provides the ability to image changes in fluid saturations and identify bypassed oil saturations throughout the reservoir.
Forties is considered a 5 billion barrel original oil place field, covering 28,000 acres, or 45 square miles. Through the end of 2007, Apache had produced close to 100 million barrels, which would have left 50 million under original acquisition estimate. Apache ended last year with just over 200 million barrels on the books, meaning another 150 million – or the equivalent of what the field was bought for – had been added since its acquisition. That did not come without significant investment, with over $800 million directed toward renovating the facilities through 2007, with another $200 million in projects in 2008, and another $200 million anticipated in 2009. Apache has spent close to $700 million in rig related endeavors, with the result of production surpassing 70,000 barrels numerous times. In recent times, it’s the largest brownfield renovation project in the UKCS.
Overall, Forties has been a good project for Apache and has since paid for itself. Timing has helped in the commodity markets, but from a reserve replacement point of view, the old adage of “the best place to find new oil is in an old oil field” has held true at Forties.
Apache anticipates Forties to have a productive life approaching 20 or more years. Upon acquisition, it was slated for full decommissioning by 2012, and now the economic life is projected beyond 2027.
Forties was once well above the UKCS average in terms of lifting cost per barrel produced, but is now one of the lower operating cost fields. It’s remarkable considering the amount of fluids handled, and that typically oil projects carry higher operating costs. It’s bucking the trend, which at a late stage in the life of this asset is nothing short of remarkable. While the industry in the UKCS is looking at average costs exceeding $13 per barrel, the fact that Forties is averaging less than $9 is a testimony that the significant investment is paying dividends.
With centralized power generation and the utilization of fuel gas, Apache’s diesel consumption has dropped by more than half. In 2006, the diesel bill was more than £20 million. If we had continued to run at those consumption rates, with increasing diesel prices during 2008 the cost would have reached £35 million this year.
By burning gas versus diesel it also lowers emissions. Apache must stay under guidelines and certain mandates, and by switching to fuel gas the emissions have dropped significantly, and I might add that Apache is far below the statutory requirements outlined by the UK government. This is one of the significant benefits of the new system, on top of the fact that we have twice as much power to do other projects.
Although drilling activity tapered off in 2006 and 2007 due to construction and commissioning requirements, 2008 has been a great year with over 17,000 barrels per day of new oil rate added through September. In terms of operating efficiency, the field is performing the best it has since 2003 in terms of measuring production delivered versus that available. Taking out planned tars, Apache is operating in the 90% range of efficiency and continues to head upward in the right direction.
After paying the UK production revenue tax, but before corporation tax, Apache was slated to generate lease level income approaching $1 billion. With a $500 million capital program budgeted for 2008, production being slightly ahead of plan and operating costs being slightly below plan, and commodity pricing above what we estimated, Apache will finish the year with somewhere around $1.3 billion in income, and a net positive addition of over $800 million for the corporate balance.
The divestiture of Forties by a major oil company is an excellent case study of a mature asset that was sold at the right time in its lifecycle, and early enough before it was too far along that the required renovations became economically challenged. Looking at other assets around the North Sea, it won’t be just an issue of merely drilling and finding more reserves; significant investments in the platform and facility themselves will be paramount to make those projects viable to capture any remaining upside.
With this significant sum of investment in the area, how does Apache rate the climate for such expenditures in the region?
Apache met with Treasury last week to talk about improving the investment climate in the North Sea. Government is interested in industry investing at the highest level possible, in ways to encourage companies to be engaged in smaller reserves and more challenging projects low on the economic metrics. But at the end of the conversation, the question was around whether Apache would buy another North Sea asset.
Apache came into the North Sea and has demonstrated to the company, its peer group, and the financial community what could be done, with all the checks in the right places. The answer is that Apache would certainly like to. Opportunities for acquiring assets in the past few years have been very slow or stagnant. In the first few years Apache was here, the focus was on doing the right thing at Forties and dedicating all necessary energy and resources on getting Forties right. The key members of Treasury commented that what Apache has done at Forties is what they’d like all companies to do with mature assets, and is a prime example of what should be done in the North Sea. Indeed, Forties is running as well as a 30+ year old asset can. Apache is very deliberate in making acquisition decisions, and traditionally does not participate in auctions, preferring 1-on-1 direct negotiation deals that are win-win solutions for both parties. Apache looks for the right opportunity to come along and is very deliberate, but once the decision is made, the full-tilt sense of urgency Apache brings to projects comes to bear. Forties is just one great example of the smart and deliberate moves demonstrated around the world. That’s why Apache has a balanced portfolio of growth and cashflow regions, concentrated in seven areas as opposed to buying anything that moves.
Evidently, capital expenditures have been contributors to the success in turning Forties around, but how would you characterize Apache’s culture and its contribution in this endeavour?
Apache is different than a major company, but looking at the internal makeup, a large proportion of employees have worked for majors. There’s certainly an entrepreneurial spirit within Apache; it’s a flat organization where decision-making capabilities and accountabilities are pushed very deep down in the organization. Apache prides itself on its sense of urgency, but also incentivizes the regions and corporate groups to make progress, and has plans tied to production as well as investment objectives. Everyone is focused on meeting targets that are reviewed monthly, and it’s a focused organization that has accountabilities at traditionally lower levels than typically seen at most other organizations.
What has been your personal touch in influencing the feel of a relatively young organization? How have your personal experiences, in areas as diverse as Poland and Egypt, shaped your stile?
Talking about Apache in the North Sea, the first step after inheriting the organization involved in Forties was to change the culture and move away from a major oil company stile of approach, toward a more independent version in terms of addressing issues and making decisions.
Once people are given more responsibility and the ability of more or influence decisions, the organization as a whole tends to flourish in that kind of environment. Around this office, there a numerous examples of individuals who previously felt they were just a number in a system, but are now major players in what happens and are thoroughly enjoying what they are doing. I’ve seen this transformation over and over in a variety of Apache acquisitions over the years. Suddenly, people who didn’t think their voice mattered realized that they can make a difference, so they’re relaying their information and ideas and being in a position to make decisions. It’s amazing how things happen quicker that way.
Apache also prides itself on a safety culture. Safety is paramount anywhere in the world, but especially in the North Sea with certain historical events. One senior member of one of the larger North Sea service companies told me a story of when Apache first showed up, he was concerned that, coming from the US, the company may not have the same safety standards, awareness, or approach that a typical North Sea operator would have. After a few years, the community came to appreciate Apache’s no-nonsense approach to do what matters, understand risk, and that there’s no job too important not to be done safely; and Apache’s numbers and industry statistics bear out the fact that safety records are on the right side of the average curves.
In terms of my other international experience, each location has been unique, and certainly significantly different than working in Aberdeen. Building on the size and scale of projects in Egypt, I bring the experience that if you think you’re thinking big enough, you probably need to think bigger. Overall, the scale and scope of activities in other countries manifests itself in what’s being done in Aberdeen.
There are projects going on in other parts of the world that the North Sea operations are benefiting from, and it’s important for all parts of the organization to be aware of what’s out there and what resources are available around the Apache world.
In addition to the investment commitment, what community involvement has Apache undertaken in Aberdeen?
Apache is involved with numerous charitable initiatives, with an annual budget to support a number of projects in the local community, one being youth sports centre Transition Extreme. Apache has an annual budget dispensed by an in house charitable committee, which reviews applications and directs the budget towards supporting causes as diverse as community affairs, local schools, disabled entities, transportation systems, diabetes, learning disabilities, and other initiatives of that nature.
What is the vision for Apache in the next five to 10 year time horizon?
In the near term, it’s steady production, with Forties having undergone the majority of renovations required to keep it running.
Long term, Apache is a committed entity for the North Sea, the right type of company in both scale and size of financial resources for the chapter the North Sea is entering into. It’s well appreciated that it’s a mature basin, and the UK government needs companies like Apache and others in its peer group who are willing to take on some of these lower-end assets from majors. Apache is here, positioned, and when the right opportunity comes along is prepared to look at a variety of different means and ways of proceeding, whether that means taking on an initial position and another company retaining a piece, or not – but the primary objective is as an operator and in this way Apache impacts the pace of play, which is very important.
What is your final message to OGFJ readers about Apache’s activities in the North Sea?
Here in the UK, Apache has an asset to carry the company forward for years to come, and looks forward to another opportunity to replay what we’ve done at Forties. The key thing is that we have an organization in place that’s well-suited with the knowledge and experience to add value to mature fields. The a seasoned team in place fully embodies the Apache approach to how we conduct our affairs, and if there’s another company looking for a good partner, please give us a call.