Exploration in British waters has absolutely crashed and is now at its worst ever in the entire history of our still strategically vital offshore oil & gas industry.
Just 13 exploration wells were drilled in 2015.
Without exploration including, critically, the drilling of wells close by existing productive areas of Britain’s aquatory, the presumed further prize of up to around 20billion barrels oil equivalent will not be realised.
And yet there have been no UKCS exploration spuds for five months consecutive; something that has never happened before.
It seems bizarre given the size of the remaining prize to be harvested . . . perhaps around 20billion barrels oil equivalent.
“I absolutely agree, it is in a parlous state and it has been for a number of years,” says Werngren, who retires shortly to pursue other interests.
“This is why we (Oil & Gas UK) started working on the problem back in 2013 in order to try and raise the profile of the opportunity that still exists on the UKCS and to create opportunity for people to come and explore.
“But what people were saying to us was, depending on the size of the company, either they didn’t have money to explore, to drill wells and therefore had an issue around attracting capital to the basin, or they were having problems accessing seismic in the first place, but they were fairly confident that areas such as the Central North Sea and West of Shetland were still worth exploring, plus there was work going on in the Northern and Central North Sea.
“What we then did was survey all of the operators and asked: ‘If you’re going to stimulate the basin, what areas do you need to have a look at?’
“That work was called the 21st Century Exploration Road Map and it identified that the areas we should work on were the Palaeozoic and that we should do a new piece of mapping.
“Essentially we looked at from the Southern North Sea (SNS) to the Central North Sea (CNS), the Orcadian Basin and the Irish Sea.”
While this was a new piece of work ostensibly completed by British Geological Survey, it attracted industry and government funding of over £1million.
According to Werngren, the first tranche of that work . . . the southernmost sector . . . will be released this month to those who participated in that survey.
“We were trying to do two things: first of all get the industry to come together and there are 35-40 companies that have actually participated. Secondly, we also wanted to ensure that, if we did a piece of work, it wouldn’t be too long before it was released to the wider industry as well.
“Those who contributed receive the data very shortly; everybody else will get access to it on July 21, 2017.”
But why 16 months?
Werngren: “We wanted to give those who participated the advantage of utilising that knowledge for the next licensing round. It’s done on the basis that, as soon as that licence round is released, or July 1, 2017 . . . whichever is sooner . . . that data will go public.
“At the same time, we kicked off the CNS study of 100 dry holes. That was completed by Christian Mathieu (a team leader) at the Oil & Gas Authority (OGA). Again that was very much a joint piece of work with the industry where we did an analysis of all the wells and subsequently held a series of small conferences built around the subject. We’ve just held the third Pitfalls Progress & Potential Conference; it was a great success and we had 170 people attend.
“That report was critical; it was. It highlighted a number of areas where companies were not doing what we would consider full due-diligence before they drilled. That was an eye-opener and people in the industry have learned lessons from that.”
A further action taken was that OGUK, working very closely with the Department of Energy & Climate Change (DECC) as it then was, tabled a submission to the Government for money in the 2015 UK National Budget to help crack the flagging exploration issue.
The bid was successful, yielding £20million which was spent on acquiring 3D seismic data in the Rockall Trough; also the mid North Sea High. This fitted with the Palaeozoic work that OGUK had been doing, and with the CNS dry holes study.
“We feel we have majored in that area in terms of trying to understand what’s going on there,” said Werngren.
“At the same time, what was an initial 20,000km of seismic acquisition was almost doubled by a matching of legacy data. So, that helps us fill in gaps in those two areas.
“This data-set also ties into the 100 wells, some of which have been analysed. So it’s sort of coming together in terms of trying to put more information into the public domain.
“At the same time, we’ve been getting companies to release reports that they haven’t previously disclosed in terms of bio-stratigraphy or analysis of geo-chemical data on wells to help enhance the studies . . . particularly the Palaeozoic . . . even further.”
The OGA has now come out and said that, because of the success of the first seismic acquisition campaign last year, another £20million is being put towards seismic in the next tax year.
This sets a precedent for the UKCS, given that it has always been free-market . . . laissez-faire . . . unlike systematic Norway where the State has always been involved and led the way.
Werngren: “What this money is allowing us to do is open up frontier areas that haven’t been explored. However, in the mature areas, there is still a sense that industry needs to do more work and unlock those for itself.”
Indeed this is a rather bigger issue than some might care to acknowledge.
If one looks at Norway’s success with the recent multi-billion barrels Johan Sverdrup discovery, it was located in a mature part of the NCS and Statoil has said that, had traditional, established ways of handling seismic data and interpreting the geology been applied, they would never have drilled there. They (Statoil and Lundin) changed the way they did it. The net result was John Sverdrup.
If that’s possible on the NCS, only a few tens of kilometres distant from the UK part of the North Sea, then the question becomes: “Why not the UK?”
But it will require a rethink and perhaps co-ordinated action here to test the possibilities, and that is something with which Werngren clearly agrees.
“The rocks don’t know if they’re in Norway or the UK,” she replied. “What we’re finding here is that, when we came to look at whether or not one could shoot the seismic over areas that were already acquired, one starts to get into issues regarding state aid.
“If you acquire the data using public money over blocks that somebody already holds, one could be perceived as helping certain individuals.
“My understanding is, for that reason, the new money has to be spent on frontier areas. However, through the exploration board that has now been set up between the industry and the OGA, there is a piece of work ongoing to look at whether we can get industry to come together and fund 3D seismic; probably not this year as there’s no money for it, but could we do something in 2017?”
Is this one of those situations where the OGA has the mandate to say: “Come-on guys, or do we have to get your arms up your backs to make this happen?”. The OGA has considerable powers, but they haven’t been tested.
According to Werngren, the issue is that some of these licences were awarded a long time ago and all the obligations have been fulfilled. As a result of that, a lot of the seismic is now very old.
“If you take Apache as an example where it bought Beryl, the data for that field was ancient,” she said.
“Apache has since acquired the latest 3D seismic, processed it multiple times, interpreted it and, as a result, they’ve had great success.
“If you could apply that same concept to vast tranches of the North Sea where the data is old, then there is the potential for new discoveries. It’s about trying to get that message out and to demonstrate that the industry is capable of working collaboratively in order to unlock new resource. That’s work in progress.”
There is of course the industry adage that, if you want to find new oil & gas, go look where you’ve already found it. That’s what Apache has done. Who knows what could be unlocked in terms of prizes by companies taking a collaborative approach to the future.
Werngren: “The Central North Sea is an area that we’re particularly interested in. There have been over 300 discoveries in this area; we think there are something like 3billion barrels of oil, some of it in small finds.
“If one could revisit this area and get people to work in a collaborative fashion, this is where potentially the next set of developments might come from. That’s a very real issue for the basin today.”
There has been massive investment in the North Sea . . . in the order of £8billion per annum for the past several years; but the latest OGUK forecast is that this will drop to just £1billion this year as the current spate of projects slows to a trickle.
Sooner or later, there will be another spurt of development activity, assuming that oil prices pick up and costs are brought properly under control. But where is the next tranche of developments going to come from? Candidates are hard to spot.
“The discoveries are there,” said Werngren. “The question is, in this current environment, how does one make them economic? How do people work together to unlock small hydrocarbon pools?
“There are various boards ranging from exploration, through asset stewardship/regional development and infrastructure working this one.
“The industry and the Government have come together and identified the areas that we want to unlock. But we’ve got to do something about developing regional plans, increasing exploration, developing existing discoveries – and that’s particularly in the CNS – and then reducing costs and increasing efficiency.”
But, even if it was possible to secure that level of co-operation, now and for some time ahead, even if there was a significant improvement in the oil price . . . say up to $50 in the next 12-24 months, all the operators regardless of size have damaged balances sheets.
Many of the smaller companies don’t even know whether they’re going to survive; Iona and First Oil are recent casualties, for example. In a nutshell, almost no one has any money.
Werngren admitted that this is a significant issue.
“But what we’re hoping is that the work we’re doing today will allow companies to move forwards and to find something that is big enough to warrant the interest on a global basis.
“We’ve got to demonstrate that we have prospects that are worth drilling; that we can drill them at a competitive rate and that we can produce them at a globally competitive rate.
“The various things that we’re doing are part of a bigger jigsaw in order to demonstrate that is the case. But I have to admit that it’s a very tough environment.”
One of the ironies of the current situation is that, when the North Sea was first opened up, major discoveries were quickly made based on scant knowledge and inferior technologies when compared with today. Despite all the experience and today’s sophistication, the province is struggling!
Again, Werngren agrees.
“I think it’s a combination of the various factors plus the industry here is now 50 years old. But I genuinely think there is tremendous opportunity here. The question becomes, how do you attract funds here and how do we ensure that this basin is fiscally competitive.”
However, it is known worldwide that the UK North Sea is no longer fiscally competitive.
We wrote a simple, blunt editorial in January’s Energy about the tax position and what’s needed, since when the industry and others have stated that the fiscal regime has to be fixed.
Government has to step up to that plate and create an environment to enable survival of the province and genuinely drive investment, including exploration.
Werngren is optimistic.
“I think the Government is starting to invest . . . look at the seismic. But it does have to ensure in the March Budget that there is a line thrown to the oil & gas industry in order to ensure that it can demonstrate that this basin is worth investing in.
“The industry is looking for some kind of tax holiday on exploration; but quite what that might look like, I’m not close enough to be in the conversation. However, there has to be stimulus for exploration.”
At present, the outlook for 2016 is for a single-digit number of exploration wells drilled, but OGA’s Gunther Newcombe said the industry needs to be drilling at least 26 exploration wells a year to stand a chance of delivering a reasonable hopper of further discoveries.
Werngren thinks it should be more.
“From our (OGUK) perspective, we need to be drilling 30-plus wells a year in order to ensure that we are a sustainable basin going forward, and we’re a long way off that.
“It’s a tall order from where we are today; but it won’t take much to change that if we’ve got new seismic that anybody can interpret; if we’ve got movement into the Palaeozoic; and if we have the basis to allow people to go and explore and see if there’s anything out there.
“There might be nothing. But there might be the next John Sverdrup. We don’t know. A combination of that, of the industry working with government to ensure appropriate licensing rounds, with the right tax regime and some investment, then one could turn this basin around.
“I think that if you really wanted to unlock the North Sea, shooting 3D across the mature basins would, as Apache has demonstrated with Beryl and Forties, unlock something very, very significant.
“It’s about getting people’s attention to buy-in and do that and getting them to consider investing now, particularly since seismic boats are available at bargain rates and so-forth.
“However, what we can’t afford to do is let go of that front-end of the industry in terms of seismic and exploration capability. If that happens then the competency to do such work would also disappear. The deeper the cuts go in the companies, the greater the risk is of that happening.
“I don’t think we’ve cut too deeply yet. By putting new seismic into the public domain, this will hopefully encourage companies to keep their geoscientists and do more work on the back of it.
“It’s also good for students, bearing in mind that one of the challenges, especially at MSc level, is that they haven’t had any good, new data to work with. At least they will now have that and use this to stimulate that next generation of explorationists!”
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