New Life for the North Sea

In the United States, the Permian Basin is called “the gift that keeps on giving,” in recognition of both its longevity and productivity. The same term could soon be used for the North Sea.

While decline curves remain steep and platform decommissionings are numerous, the region is seeing a renaissance of activity and investment.

According to a report by Wood Mackenzie in August, the first half of 2017 saw seven field start-ups with over 500 million barrels of oil equivalent (MMboe) of reserves.

While acknowledging record number of decommissioning plans, ten submitted in the UK alone, Wood Mac saw the glass as more than half full. It noted low well numbers through the first half of 2017, “but exciting wells [are] expected” in the second half.

Similarly there was a “slow start” for final investment decisions with only three projects approved, but there is a full dozen anticipated through the second half of the year, including several in the UK zone and one for the Netherlands.

In particular the consultancy noted, “Norwegian brownfield and sub-sea projects sanctioned totalling US$3.1 billion capex.”

In the UK sector, the first half of the year saw one discovery with 250 MMboe. The Norwegians had a higher hit rate but lower yield: six discoveries out of nine wells, with 205 MMboe. The Dutch had the best percentage: two discoveries on three wells, but only five MMboe.

“Hurricane’s Halifax find continues momentum at the fractured basement play West Shetland,” noted Wood Mac. “Other high-impact wells – Sween, Ravenspurn, and N Deep – are still tight. High success rate in the Norwegian zone included a commercial discovery at Cape Vulture, but Barents wells – Kayak, Blåmann, and Filicudi have missed pre-drill estimates. For the Dutch, ONE’s Ruby is a tight discovery. This could be a play opener, targeting two trillion cubic feet of gas in place in the wider area.”

While the finds demonstrate the continued viability of the North Sea, the larger trend is an encouraging echo of the capital succession seen in the United States. Aside from the obvious differences of onshore resource development versus offshore reservoir drilling, the pattern of capital backing is similar. The global majors are giving way in many cases to independent producers, often backed by private equity.

Wood Mac issued a separate white paper on the trend to private equity in the North Sea.

“Private equity has had a chequered history in the North Sea. Funding has been small scale and exploration led, and some backers have left without a trace. But lately, there has been a change in sentiment. Big international backers have set up North Sea war-chests approaching US$15 billion.”

One of the significant changes in outlook has been the realisation that, just as in the US unconventional, the private-equity model is: build-sell-repeat.

“Rather than going down the typical exploration route,” the white paper noted, “private-equity money is going to work in late-life assets and developments. Deals being struck at low valuations have seen companies get into under-invested assets with room for upside. As much as 15 billion barrels of undeveloped North Sea resources and lower costs have attracted companies to the development model. Typical investment horizons of three to five years are being stretched and initial public offerings are looking attractive given the gap in the market for European mid-caps.”

On balance, Wood Mac wrote, “we believe the change in the corporate landscape is a good thing. Investment will increase, production life will be extended and value should be created. And while private equity might not hang around forever, successful monetisation could see the creation of listed mid-caps, an increasing presence of Asian, Russian and Middle Eastern players or even a return of the majors.”

Just as has happened in the US unconventional, starting with ExxonMobil’s acquisition of XTO Energy, the former Crosstimbers, in 2010