The oil and gas sector faces many upstream hurdles. In the search for new resources to drive future growth and profitability, international oil companies are casting their nets wide. Even if new reserves are discovered, they are often in inaccessible areas like deep water or the Arctic Circle. In more hospitable regions, attention is turning to unconventional gas and oil sands.

Working in remote areas with unique ecosystems, such as Alaska, raises concerns about the environmental impact of operations, as does the relative energy intensity of converting bitumen into oil. Solving the problem of delivering financially and environmentally sustainable growth falls on design and construction teams.

Shell strategy 2020

In March, Shell set out its strategy to take the company to 2020 and these issues featured heavily. At its Annual Strategy Briefing at Hilton Tower Bridge, London, CEO Peter Voser and CFO Simon Henry put forward a vision based heavily on exploration and innovative approaches to recovering resources.

“Growth to 2012 will drive a substantial step up in cash flow,” Voser says. “All this is underpinned by a new wave of project start-ups in Qatar, North America and Asia Pacific. Beyond that we have an upstream portfolio that can grow to at least 2020. We have come a long way, but there is much more to do at Shell, and I’m very energised by that.”

“By 2012, Shell expects its production to reach 3.5 million barrels of oil equivalent per day, up 11% from 2009 levels.”

By 2012, Shell expects its production to reach 3.5 million barrels of oil equivalent per day, up 11% from 2009 levels. Longer term, 35 projects are planned to add a further 8 billion barrels of oil equivalent to reserves. Beyond that more speculative exploration is targeting another 11 billion barrels. Voser admitted that growth would be concentrated on more stable countries.

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“It is generally more OECD than the rest,” he says. “We want a certain proportion – generally in the 60-70% region – because we have more political and fiscal stability there, which drives investment and dividend payments. The other 30-40% we vary according to risk categories. Technology is a risk we can manage irrespective of the country.”

The extent to which the company is driving technological progress in terms of design and construction is clear. Voser and Henry are confident that Shell’s approach to innovation has long-term value and that the progress of technological development will keep pace with their ambitions.

“Looking in the more near term, we’re talking about the application of technologies we already have and refining them, but also some new developments,” Voser explains. “But I would not say that we are relying on technology breakthroughs in order to deliver the growth we are outlining today. I would not say we’re depending on it for the next few years, but we will for the next few decades, just as we have in the last 30-40
years – we’ve always been seen as the leading technology company.

“Innovation is a key theme. One of the reasons why we put a project and technology business together back in July last year was to have a clear focus on R&D and innovation at the group level. I expect over the next three to four decades that technology and innovation will be the key differentiator compared with IOCs and NOCs, so it makes us an interesting partner.”

Cool project: Sakhalin II

Although the industry is going through a transition, the experience of recent years has prepared Shell well to move ahead. One example of Shell’s willingness to apply technological solutions in extreme circumstances is the Sakhalin II project, a joint venture with Mitsui, Mitsubishi and Russian gas monopoly Gazprom.

In the freezing conditions off the eastern coast of Siberia, the consortium pioneered a number of techniques for working in near-Arctic conditions. First oil was produced on Sakhalin in 1999 and production came fully onstream last year, combining a number of major projects that would be significant in their own right. The scale of the construction required the deployment of custom-built barges to move the 22,000t topsides of the
Lunskoye-A platform.

In addition to the size, there were more complex challenges to be met. The gas produced on the island will be exported as LNG and this required the development of super-cooling trains capable of operating in sub-Arctic conditions. Using Shell’s double mixed refrigerant process and leveraging the low ambient temperature, the gas can be cooled to liquefaction point with lower energy inputs. Waste heat is also captured and fed back
into the treatment process.

The seabed around Sakhalin is frequently struck by large chunks of ice. To protect the facility, engineers on the team conducted detailed scans to better understand its movement. The decision was then taken to install pipes up to five metres below the surface to keep them safe.

“One example of Shell’s willingness to apply technological solutions in extreme circumstances is the Sakhalin II project.”

In addition to the extreme cold, the facility sits on the Pacific Rim, which is prone to earthquakes. To counter this, the platforms are built on friction pendulum seismic isolation bearings, the first time the technology has been deployed on an offshore facility. In normal conditions, the system reduces the strain on the structure caused by wind and ice.

“We are happy with the progress in Sakhalin and start-up was second-to-none,” says Voser. “We are very pleased with how it’s operated in the last six to nine months since it came onstream.”

The lessons learnt in Russia could have particular relevance to any future moves into Alaska, where conditions are similar.

Shell has invested $50m on baseline science activities there and has published a plan for exploration in the year ahead. This includes the drilling of up to five test wells in the Camden Bay and Chukchi areas.

Gas to liquids

The next major project the company expects to come online is the Qatar Pearl gas to liquids (GTL) facility, and that too is making extensive use of cutting-edge technology. Building on a pilot programme for GTL carried out in Malaysia, Pearl and its sister LNG development Qatargas should account for over 10% of Shell’s total global production.

All major construction in Qatar is scheduled for completion by the end of the year with production ramping up from 2011. In early March two boilers were fired up, the first step in a process involving a team of 800 operators and technicians.

The Malaysian Bintulu facility only outputs 14,700bpd, but allowed Shell to gain valuable insights into the process of turning gas into liquid fuels using what it calls Shell middle distillate synthesis. Improvements to the procedure have reduced capital expenditure in Qatar, where Pearl will output a total of 320,000bpd.

To speed up the process of bringing the facility onstream, Shell developed its simultaneous operations method, which allows for the drilling of the well and the construction of the platform to happen concurrently, saving up to 30 days.

Different strokes

Looking further ahead, Prelude in Australia recently entered the front end engineering and design stage, in conjunction with French company Technip and Korean Samsung Heavy Industries.

If it goes ahead, the project will lead to the construction of the first floating LNG facility, a 480m long and 75m wide platform moored in water 250m deep. This could represent a means of accessing reserves of gas that are too small to justify the cost of a pipeline, potentially opening up opportunities elsewhere. LNG has a lower carbon footprint because it does not require a pipeline and having a floating platform will reduce this
even further.

In North America the target is tight gas. Voser believes there is potential for up to 400,000bpd by 2020 and production leapt up by over 60% in 2009 alone. Here again there are major technical challenges but Henry argues that the company’s growing experience has shown what’s possible.

Elsewhere, unconventional resources remain to be proven. There are considerable shale gas reserves in Europe but accessing them will be more difficult than in the US and Canada. “A lot will depend on the geology and the technology we have to work there,” says Voser.

Shell is touting the virtue of gas as a cleaner burning fuel than oil and coal and a way to reduce CO2 emissions in the long term, but the same cannot be said of oil sands, the mining of which has attracted considerable criticism from environmental groups. The trick as far as Voser is concerned is recovering and processing bitumen in a sustainable way.

“Pearl and its sister LNG development Qatargas should account for over 10% of Shell’s total global production.”

“In the long-term energy mix, oil sands will play their role,” he says. “If you compare when this industry started with today, just as on the operational side, on the sustainability side we have made significant improvements. We assume these barrels will be developed and, looking at our achievements over the last few years, done in a sustainable, sound way.

“We have major expansion coming onstream this year. We’re operating what we have onstream now for $32 per barrel cash cost. That’s a competitive and compelling reason to expand. Shell sees it as having a long-term future, but we will always drive towards sustainable development standards.”

One way of achieving this is using carbon sequestration, which is being researched as part of a project called Quest. Shell hopes this will help it capture 1 million tonnes of CO2 a year. These developments should hone technology for use in the long term.

To support this activity, the company is engaged in extensive exploration globally. In 2009 new discoveries added 2.4 billion barrels of oil equivalent to its reserves, the majority being gas, and the expected average for the next five years is 1.5 billion additional barrels per year.

“We expect to drill some 23 key wells in 2010, including sub-salt Brazil, deepwater Gulf of Mexico and in the North American Arctic,” says Henry. “By 2011, we aim to put at least ten new projects into front end engineering and design. This is all part of the programme to sustain growth after 2012.”

Technology and creativity

Shell’s strategy is ambitious: its short-term goals, if achieved, will see it closing in on rival BP. As it diversifies its portfolio, it is clear that investment in technology and creative design will be important. In recent years work like that on Sakhalin has shown an ability to build on experiences and develop partnerships to bring together expertise.

Relying on a range of new facilities to deliver growth will potentially increase Shell’s operational complexity but recent reorganisations at senior management level will go some way towards countering this. The main challenge is implementing technology and engineering solutions.

Expanding while paying more than lip service to sustainability will also be difficult. On a micro level, the company has shown itself willing to make significant concessions to local eco-systems but reducing CO2 emissions will be harder to achieve.

Despite the challenges, Shell’s prospects for the coming years look good, with expansion in the number of facilities taking place in a structured way. Underpinning all the company’s upstream activities is a commitment to the use of technology and an intelligent approach to design.