Exploration and production

Why explore/produce hydrocarbons?

Energy resources such as oil and gas are the drivers of economic growth.

Croatia has a long history in production of oil and gas, which is ongoing for more than 60 years. Domestic production in Croatia is declining, due to that fact, it is necessary to stimulate new investments for exploration of hydrocarbons in order to increase domestic production of oil and gas. Investments in exploration activities have declined both offshore and onshore. Oil production fell by 34.6% in the period from 2007 to 2013, while gas production fell by 28.5%.
Currently, Croatia produces about 70% of its gas needs and 20% of oil needs. Energy resources such as oil and gas are the drivers of economic growth. Nowadays, accessible domestic energy resource mean energy independence and the sovereignty and security of each country.

What is exploration block?

It is an area in which is allowed to explore hydrocarbons under strict control and limitations.

Exploration block is an area in which is possible to carry out exploration activities for the purpose of hydrocarbon exploration under strictly controlled conditions. In the Adriatic Sea, 28 exploration blocks have been demarcated, with sizes from approximately 1,000 km² to 1,600 km². Exploration blocks as defined in April 2014 have been located 10 km away from the mainland and 6 km away from islands.

It is important to note that prior to the new block demarcation no exclusion zones existed. Meaning that with the previously existing blocks exploration was allowed in 100% of Croatian Adriatic waters, including waters next to coastal beaches as well as waters inbetween islands and the islands themself. For example, previously drilling activities occurred on the islands of Brač, Vis, Krk, Ugljan, Dugi otok, Silba and in the costal area of Istria. Today, thanks to the new regulatory framework and approach, drilling on the mentioned islands is no longer possible nor is drilling possible within ten kilometers of the mainland and six kilometers from the islands. In fact, Croatia is the only country bordering the Adriatic Sea that has exploration blocks and offshore production and does not allow any exploration nor production ten kilometers from the mainland.

What does Exploration of hydrocarbons mean, and how long does it last?

During the 5 year exploration period, actual offshore exploration activities are expected to last approximately 6 months.

The exploration period lasts 5 years. During those five years, 3D seismic and drilling of wells will be conducted in order to confirm existance of oil and/or gas in the exploration area. During the five years exploration period, actual offshore exploration activities are expected to last approximately 6 months. 3D seismic acquisition is expected to take approximately one to two months per block, and drilling activities are expected to last up to four months per block.

3D seismic is usually performed in the first year, followed by a desk job where the 3D seismic data is analyzed and interpreted. Whereas drilling can be expected in the fourth or fifth year of the exploration period. If drilling results in a commercial discovery of oil and/or gas it is technically possible to commence with production activities under certain strict conditions. For example it is necessary to perform an environmental impact assessment defining the conditions under which production is possible and if production is possible.

What is exploitation field?

It is an area in which the production of oil and/or gas is allowed.

Production field is an area which contains commercial discovery of oil and/or gas, the reserves have been confirmed and the production is allowed. Today, on the Croatian side of the Northern Adriatic, there are 3 exploitation fields which contain 19 active gas production platforms.

What does production of hydrocarbons mean?

Production of oil and/or gas.

Production of hydrocarbons means production of oil, condensate and/or gas, which lasts approximately 25 years, depending on the size of the field.

What is the difference between exploration and production well?

Exploration well is drilled in order to confirm a reservoir, meanwhile a production well is drilled for oil and/or gas production.

An exploration well, depending on the sea and well depth, is usually drilled in one to four months, and is drilled for the purpose of confirming and identifying hydrocarbons reservoirs.

A production well is drilled for the purpose of developing confirmed reserves with the aim of oil and/or gas production.

What is the difference between production well and platform?

One platform can be connected with dozens of wells.

Production wells which are drilled in order to develop confirmed reserves and are then connected to the production platform. Many producing (production) wells, depending on the size of the reservoir, can be connected to one platform. For the example, in the Croatian Northern Adriatic, there are 19 gas platforms which are connected to approximately 50 production wells.

What are the differences in respect to the upcoming hydrocarbon exploration and production activities and activities performed prior to the new regulatory framework of 2013?

Activities shall be performed under much more strict conditions/control and with much higher benefit for the Republic of Croatia.

Having adopted new regulatory framework in 2013, Republic of Croatia has introduced stricter criteria of safety and environmental protection, and also enabled greater economic benefits from production of oil and/or gas for Croatia in future.

Is it possible to explore for only gas, and not the oil?

No, gas and oil are hydrocarbons and they can not be separated during exploration. Exploration for oil drives discovery of natural gas. Until an exploration well confirms an oil or gas discovery , it is impossible to be certain on the discovery.

Methods and technologies of oil and gas exploration and production are the same. There are two options: either explore for hydrocarbons, which is both oil and gas, or not explore.

What is the difference between gas platform and oil platform?

There is no difference.

There is no technological difference, the technology of platforms which are used to produce oil or gas are the same and is based on a so-called "zero pollution" closed system.

What are and what is the amount of benefits for the Republic of Croatia from exploration of hydrocarbons?

The benefits include investments which Croatia, ultimately the Croatian taxpayer, does not have to pay for.

Depending on the exploration block, the investment amount is estimated to be between 50 to 150 million euros per exploration block. It is important to note that the investor will be committed for the investment amount once the Production Sharing Agreements are signed.

Even if no commercial discovery is found this will not result in an expenditure for the Croatia, just the opposite, it will represent benefit from foreign direct investments in exploration activities.

Other countries' experience shows that 60% of investments stay in the country, or go to the local community budget - through a variety of services paid for and through taxes. Croatian ports and port services, logistics companies, shipbuilders, construction services, drilling and oilfield service contractors, waste disposal services and others are most likely to benefit.

What are economic benefits from the future discoveries of oil or gas?

Expected future tax revenues can eliminate the state budget deficit in two years.

Benefits are enormous and if we take into account only direct benefits for the state budget. On the annual level tax revenues can reach several billion kunas. Which would mean that future tax revenues from the oil and/or gas production would eliminate the state budget deficit in two years.

If we take into consideration indirect effects, they are also significant - consumption growth, GDP growth, increase of living standard, strengthening of other economic indicators are inevitable. Special emphasis should be put on the employment of local people and on the growth of direct and indirect connected industries.

Will the Investors have to oblige themselvers under Contract to employ local industries, crafts, and labor force?

Yes, they will – it is preferred to use Croatian products and services, as well as employment of Croatian workers.

In accordance with EU directives, Contracts shall impose the use of Croatian products and services as well as the labour force. Croatia will have an insight in everything that investors do - we have the right to control every purchase exceeding one hundred thousand euros, as well to approve their annual budgets, procurement plans and employment. With such strict control, it is ensured that the main beneficiaries of the projects are local people, local producers and service providers - of course, if our supply includes competitive products and services.

Why has Croatia chosen a model according to which the profit from the eventually found oil is between 55% and 65% for the state budget, while Montenegro plans to get between 65% and 70% from eventually found oil?

This is realistic percentage which will ensure profit to the state, and security to the investor at the same time.

In April 2014, we presented our model together with the Montenegrin and other models which we studied. Based on the simulations of potential geological structures and realistic assessment of potential reserves, it was decided what will be the percentage which will represent revenues of the state budget. We performed a comparison with different models used in the world, starting from Greek model which ensures 42% for the state budget, Italian one brings 52.5%, ending with Syrian and Libyan models which exceed 90% when it comes to oil. It has been estimated that above given percentage for Croatia is realistic, that it will ensure the maximum profit to our country, and will not scare away investors at the same time.

What is the number of Italian platforms?

Italy has got over 100 platforms.

Currently, on the Italian side of the Adriatic there are 107 actively working gas platforms which are connected to nearly 600 production wells, and 7 oil platforms which are connected to 39 oil wells within 62 production fields (data have been downloaded from the official website of the Italian Ministry of Economy), which annually produce approximately 5 billion m3 of gas and 1,8 million barrels of oil and condensate.

Italy has only few oil platforms, doesn't it?

Italy plans to increase domestic oil production for 148%.

Under its energy strategy from 2013, Italy has set up the goal to increase its oil production by 148% and gas by 46% by 2020. The plan involves the mobilization of investments in amount of 15 billion euros, and predict savings of 5 billion annually for costs of imported oil and gas and opening of 25.000 new jobs. The increase in production has been triggered by the newly adopted regulations and laws in 2014.

If there is a oil spill in Italy, will it cause damage to Croatia?

It is a more likely and a more realistic danger that oil gets spilled by a tanker than from a platform.

All countries which have access to the Adriatic Sea exploration acreage are involved in the exploration or production of hydrocarbons process and it is unquestionable that if a potential accident happens in Italy, Montenegro or Albania, this will have an impact in Croatia. The fact is that all countries having access to the Adriatic Sea share the same risk, and only some of them get benefits from it through the production of hydrocarbons.

Željka Rukavina