Edison Investment Research

Plenty of action for Hurricane on Lancaster EPS

Since our most recent note on Hurricane Energy, ‘Lancaster EPS on track and on budget’ activity has continued at pace for the company as it remains on track for first oil in H119. Last week the offshore installation phase of the Lancaster EPS commenced with the installation of the Enhanced Horizontal Xmas Trees on the two existing wells, 6 and 7z, completed by the Far Superior offshore construction vessel. In addition the Lancaster EPS buoy departed from Drydocks World in Dubai on the Jumbo Kinetic vessel and is scheduled to arrive in Lerwick in the Shetland Isles by the end of June, allowing installation of the turret mooring system for the Aoka Mizu FPSO to take place on schedule by the end of Q318. Meanwhile, we expect that re-entry and completion operations on the 6 and 7z wells will commence imminently, since the Paul B Loyd Jr rig is now on location. The activity will provide plenty of opportunities for those who like to track vessel movements.

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.

EnQuest acquisition: Ability to extract net economics (NAV) will be demonstrated over time

EnQuest’s agreement to take over operatorship of Magnus, SVT and associated infrastructure is a material operational undertaking, especially when considered in parallel with commissioning and ramp-up of production at Kraken. The transaction will involve EnQuest taking on several hundred onshore and offshore staff and contractors. With this in mind, EnQuest’s staged approach, which involves taking on just 25% of Magnus and an additional 3% of SVT at the outset, appears to be sensible. The combination of deferred consideration payments, a ‘call’ option on additional equity in the transaction assets and downside protection mechanisms suggest that EnQuest is backing its ability to maximise value from late-life assets without exposing shareholders to potential downsides. EnQuest has until 15 January 2019 to exercise its option over an additional 75% of Magnus and related transaction assets, giving it time to understand the operational complexities as well as study decommissioning options before taking on risk. 

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.