Edison Investment Research

UKCS 31st round awards reflect ongoing shift in mix of North Sea companies

37 licences have been offered to 30 companies in the 31st Offshore Licensing round, which focused on frontier areas of the North Sea. The round has followed recent trends seen in the basin, as European supermajors concentrate on specific areas and US companies leave the region to focus on US shale opportunities. Shell, BP, Total and Equinor are all represented and of these, Equinor has picked up the most awards with five, including four as operator.

Verbier appraisal points to lower than expected resources

UK independent Jersey Oil and Gas (JOG) has announced that the Verbier appraisal well, 20/05b-14, has not encountered the targeted Upper Jurassic sands as expected, resulting in a likely downward revision of resources to the low end of pre-drill estimates. The objective of the Equinor operated appraisal well was to refine the estimated resource volume range of 25 – 130mmboe, with a mid case of 69mmboe. Verbier sits 8km to the north west of the Buchan field (now decommissioned), and was discovered on pre-broadband 3D seismic.

Tullow’s Araku result completes our 2017 wells to watch list

At the start of this year, we highlighted seven exploration wells due to be drilled in 2017, all involving independent companies and targeting resources over 100mmboe. The results from the last of these wells, Tullow’s Araku, were announced last week, with the offshore Suriname well proving the presence of gas condensate but with no significant reservoir quality rocks.

Verbier delivers after sidetrack

Statoil’s sidetracked Verbier well has discovered oil after the main wellbore found water filled sand. The company was targeting oil in an updip location on the structure together with joint venture partner Jersey Oil & Gas (JOG). Statoil believes that the 20/05b-13z well has proven a minimum recoverable resource of 25mmbbls, and that the upside could be as much as 130mmbbls. The JV has not at this stage provided details of the discovery such as sand quality and thickness, or of the location of the sidetrack. Appraisal wells will now be planned to assess the commerciality of Verbier, and to mature further prospectivity in the P2170 licence including the Cortina prospect and Meribel lead.

Wells to watch in 2017

Since the oil price crash of 2014, exploration has been particularly badly hit as companies looked to trim expenditure. Wood Mackenzie estimates that 2017 exploration will account for 8% of upstream expenditure, down from historic norms of 14%. In this more difficult environment, any surviving exploration has tended to be led by majors, for example ExxonMobil’s giant Liza discovery offshore Guyana in 2015. In our most recent Exploration Watch, we highlight wells due to spud in 2017 that involve independent companies, with resources estimates greater than 100mmboe. Our exception is the much anticipated multi-billion barrel potential Korpfjell prospect in the Barents Sea offshore Norway, which is operated by Statoil and partnered by major companies.

Shell/Chrysaor deal… raising the private equity stakes

PE continues to build its influence in the UK North Sea

While details on the Chrysaor/Shell deal are pretty thin on the ground, it clearly represents another material transaction for private-equity investors in the North Sea. Previous press reports were that Chrysaor was in competition with Ineos and fellow PE-backed Siccar Point to acquire the portfolio of assets that were put up for sale in late September 2016 as part of Shell’s $30bn divestment programme following the BG acquisition. As recently as October 2016, the for sale package was reported in the press to be valued at around $2.2bn so the $3.0bn that Chrysaor is paying (that could increase to $3.8bn) reflects a bullish view of the sector, albeit the asset package may have changed during negotiations and oil is $7-8bbl than at that time. In terms of materiality, the Chrysaor deal easily trumps Siccar Point’s acquisition of OMV UK announced in November 2016 for up to $1bn, further increasing the exposure of PE to the UK North Sea.

Decommissioning - changing the mindset

£1.1 billion was spent on decommissioning in the UK in 2015, accounting for 5% of total UKCS expenditure that is expected to increase to 12% in 2017. Oil & Gas UK has estimated that decommissioning on the UKCS up to 2025 represents a £17.6 billion opportunity.

With the UKCS accounting for 50% of the global decommissioning spend over the next 5 years, the North Sea is at the forefront of developing the techniques to optimise the process and could position itself as a major player in the global decommissioning industry. At a recent conference on the subject hosted by Edison, together with Addleshaw Goddard, the key themes of cost uncertainty and industry collaboration emerged.

UK Election Budget: Impact on the UK oil & gas industry

So we had an interesting budget at last for the North Sea as Osborne finally puts back taxes to where they were pre-2011 when he massively shook up the market with increases to the supplementary charge. Reducing the supplementary charge and PRT to 20% and 35% respectively may just arrest the dramatic underlying flight we have seen from the industry in recent years.