North Sea – reelin’ in the years

Author Ben Winkley

Happy birthday, North Sea oil. And a significant one, too! So raise a glass — half full or half empty, depending on your countenance — to an industry, benchmark-hub and all-round way of life that was born this month in 1975 when the Argyll field, in the Central Graben area, came on stream.

Happy birthday, North Sea oil. And a significant one, too! So raise a glass — half full or half empty, depending on your countenance — to an industry, benchmark-hub and all-round way of life that was born this month in 1975 when the Argyll field, in the Central Graben area, came on stream.

Like any 40th, this one is being marked with some uncertainty about the future, the insecurity that comes with fearing you are 20 years past your peak, and with a soupcon of regret about wasted opportunities.

But life begins at 40, right? Well, maybe. As the industry’s own regulator OGA states, the UK offshore has been finding it increasingly hard to compete for investment.

“Rising costs over many years, a fiscal regime that had not evolved with the fortunes of the basin, and the need for stronger regulatory direction, have complicated the challenges already faced by operators using ageing infrastructure and tackling more demanding fields,” the OGA says. And this was the situation before the oil price fell last year.

The OGA has identified two key risks — that the profitability of producing fields will be insufficient to attract continued investment; and that declining confidence in the future of the region will lead to a shortfall of investment.

On the first, there are clear signs that things are not great. Deal-making in the North Sea was sluggish in the first quarter, with the sharp decline in oil prices widening the gap between buyers' and sellers' valuations. But that was a particularly uncertain three months, and a recent improvement in oil prices may close the gap and pave the way for an increase in M&A activity in the second half of the year.

So, as large companies such as Total review their presence in the North Sea and smaller companies struggle to service debts and fund operations, there is scope for more investment to be made.

The presence of cash-rich investment vehicles such as the Carlyle-CVC-backed Neptune Oil and Gas, unveiled today with ex-Centrica chief Sam Laidlaw at the helm, suggests there is money to be made. Neptune isn’t the first — US investment company Blackstone and UK-based Blue Water Energy announced plans last year to invest up to $500mn in a North Sea upstream independent called Siccar Point Energy, which will focus on acquiring stakes in marginal or mature fields in the UK that are struggling to compete for investment within their owners' portfolios. Siccar Point Energy has yet to strike any deals but Alpha Petroleum, owned by Petroleum Equity, is pursuing development of the Cheviot oil field.

This sort of deal-making is not an elixir of life for a middle-aged basin — more a quick fix to cover the grey hairs. The real challenge, as the region enters its fifth decade, is to add new output and there is very little exploration ongoing, with only around half a dozen wells active at either exploration or appraisal. The rate of output decline slowed somewhat unexpectedly last year, but it remains on a downward slope. The government expects production to halve from current levels by 2030.

Forty years on from Forties, it’s becoming increasingly rare to find a giant field, and when one does come along it is a slow process to bring it on line, as best demonstrated by Norway’s Johan Sverdrup.

And although Shell and Repsol have, through deal-making, found themselves with larger North Sea footprints of late, increasingly it is the smaller independents that are building a base in the region, and making the mature basin a breeding ground for innovation in partnerships, fundraising and technology. The biggest of these independents is Enquest, which concentrates its efforts on development and production in maturing basins where larger oil companies see no value. Among Enquest’s developments is Alma-Galia, a redevelopment project that should soon revive production at Argyll, that very first North Sea field.

For more information, please contact OilBlog@argusmedia.com

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