2009 was a very important year for Sterling Resources thanks to a deal that allowed the Scottish petroleum minnow to remain a stakeholder in Breagh, which ranks as the largest natural-gas discovery made in the UK Southern North Sea for at least 10 years.
Breagh was originally drilled and tested as a gas discovery by Mobil in 1997 via the 43/13-2 well. However, an earlier well, 42/13-1, drilled by BP in 1968 to the east of 42/13-2, encountered 13m (43ft) of wet Scremerston Sandstone.
Sterling later saw value in the Quadrant 42 acreage and securing it via a Promote licence in the 22nd UK Offshore Licensing Round. The company then went through a farm-down process prior to drilling its first Breagh well late-2007.
Success led the company and its then licence partners to appraise the find during 2008 into early-2009, by when it became clear that it was a very significant find.
The appraisal programme finished in February 2009 and, at that stage, the Breagh partnership was made up of five/six very small companies: Sterling with a 45% stake; EnCore with 15%; RegEnergys, 15%; Stratic, 10%; Faroe, 10%, and Petro Ventures, 5%.
Sterling’s CEO, Stewart Gibson, told Energy that, while the consortium had a sizeable find on its hands, no one had the money needed to fund development.
“Everyone recognised that going forward would be exceptionally difficult – if, indeed, at all possible – given the size of the discovery and likely development costs,” he said.
“We also realised that some of the partners were being approached by other companies interested in buying a piece of Breagh, so the group decided that the best way to get value was to have a controlled process whereby a big portion would be sold to a large entity as opposed to several small entities.”
Various offers were tabled, but the one that won through was by RWE Dea of Germany.
“By the middle of the year – early-July – we knew RWE was going to purchase 70% of Breagh. We decided we would not exit Breagh, all other parties having decided to exit completely.
“We had 45% and now have 30%. That gives us a seat at the table in a credible partnership, which is a big change from the previous partnership.”
However, while the talk is about Breagh, there is also the surrounding acreage. One of the attractions to RWE was not only the size of the proven resources in Breagh itself, but the exploration upside.
“We were awarded 42/10 and 42/15 (25th Round) blocks just as we started entering the sale process, and what we offered as part of the package was not only Breagh itself, but a similar interest in the surrounding acreage.
“Yes, it was a significant amount of acreage, but there again, it was acreage that we had built up at very low cost. We acquired all the blocks on a Promote basis, apart 42/10 and 15, which were different because they had three wells producing gas.
“At the end of the day, RWE did pay a reasonable sum for the exploration acreage. We were glad of that because it meant not only were we getting value for the blocks, but it demonstrated that RWE has a desire to explore.”
One aspect that marks out the Breagh sale is that it took place during the aftermath of the credit crunch, with money in very short supply. So only a well heeled suitor was going to come forward in such a situation, especially since Gibson was determined that Sterling kept a stake for itself because of the asset’s upside potential.
He believes that Breagh could “easily be 1trillion cu ft-plus of gas” and that it has the potential to become the anchor of a significant new Southern North Sea gas-gathering hub and pipeline.
“Breagh is going to be the big brother here. It’s going to shoulder a lot of the costs, including a 100km pipeline to shore and onshore facilities and modifications that go with.
“Once you get a main pipeline in, most of the other stuff will line up. It will attract its own business.”
So what is the current status of the project?
According to Gibson, RWE has reacted positively to the prior development planning work carried out on Breagh, bearing in mind that this had been going on for more than a year at Sterling.
“The Breagh pre-FEED (front-end engineering and design) is under way and we’re just about to go out to tender for platforms, pipelines and some of the stuff that we’ve already looked at onshore. Bear in mind, we had this project pretty much ready to go December 2008 in terms of what we had been studying.
“The plan for field development project sanction is April 2010. We’re initially looking at one (not normally manned) platform with up to nine wells and pipeline to an onshore terminal.
“Once that’s in production, one or two years later, there will be a second platform. After that, there would be modular additions, perhaps another jacket, and/or subsea wells.
“The Breagh development plan is designed to be flexible and take account of wider opportunities, such as our Crosgan discovery.”
Gibson favours Teesside as the landfall for Breagh gas. He expects process plant to have a capacity of about 400million cu ft per day.
“Breagh doesn’t require that but, given the plant has that capability, we can look from the plant … back to ensure the pipeline has spare capacity and, as we add facilities and production offshore, then we also have the capacity to fill the pipeline.
“The group (RWE and Sterling) has been thinking not just Breagh alone from day one, but Breagh-plus so the facilities can cater for third-party gas.”
As for the type of well needed to exploit the Breagh reservoir, the accent will be on high angle to horizontal. Sterling currently has two vertical wells that can be re-entered and re-completed. The same applies to the horizontal well drilled from the West Breagh accumulation heading towards East Breagh.
“We know the well rate capabilities for both vertical and high-angle wells. The development will be a mix of both, and we’re still looking at early-2012 for first gas.”
Gibson suggested that the decision to sell the bulk of Breagh and the time taken to see that through had played in Sterling’s favour.
“When we were looking at the idea of developing the field 18 months ago, you couldn’t get rigs. Not only that, there was limited availability in terms of mill slots for steel and limited availability of pipelay vessels, too,” he said.
“The market has since opened up a lot and will enable us to put the development onstream at a lot less cost than we were looking at a year ago. Total project cost will be in the region of £600million ($1billion), but we reckon phase one … getting us to first gas … will be about half of that.
“Taking a phased process is important to us as it exposes us to much less capital commitment until we get to first gas. Expectation is that, from that point on, we’ll be pretty much self-sufficient.”
Financing will be a split through project finance with a bank, plus money harvested from the Breagh state sale.
“Our discussions with RBS are going well. We expect to conclude some time early in the new year. Though RBS is the main bank, other banks have requested to be part of the syndicate,” added Gibson.
However, Breagh is not the only development on Sterling’s agenda as the company is also investing in a Black Sea project operated by another Scottish company, Melrose.
The Doina project offshore Romania is also scheduled to come onstream in 2012, which means Gibson can look forward to two projects kicking off a lot of cash flow from then.
Despite the pressures of two developments, Gibson and his team continue to explore.
“We’re often asked how we can continue to grow with so few people. Our answer to that is, with RWE handling Breagh and Melrose running Doina, that leaves us seven or eight guys here to keep finding more Breaghs. That’s our goal … our strategy.
“We think we potentially have three Breaghs on the books. One is Cladham, though that still has a fair bit of risk attached to it, but also has a very exciting upside potential.
“We’ve just signed the rig, JW MacLean, for Cladham (Northern North Sea 210/29a). This will be managed by ADTI. Anticipated spud is May, at the earliest, though this hinges on other people’s schedules.
“We’re going with one well. Currently, we have just the discovery well. The initial plan was to go back and sidetrack that. But following discussions with partners, we think we’ll go with a new well.
“Cladham is a stratigraphic trap. We’ve tweaked the top of it but have not yet found oil-water contact. It is over-pressured, which can signify a fairly long hydrocarbon column … but this can be for other reasons, too.
“The next well is intended to prove commerciality. We expect to finalise the drilling location some time this month.”
Cladham is reputedly one of the largest remaining stratigraphic traps left in the North Sea and perhaps a multi-hundred-million-barrels Buzzard field analogue.
The other significant exploration project on Sterling’s current agenda is in the Black Sea, close to the ongoing development.
“It will either be what’s called the Iona prospect, which sits south and east of Doina. That has the potential to be a Breagh in terms of size. Or there’s a target up in the northern block called Pelican. We have budgeted one exploration well, so it will be one or the other. The plan is to drill in the summer.”
There are three further North Sea wells under consideration for 2010 – two in the Breagh area, one of which sits between Breagh and Crosgan. The third target, Grian, is located near North Sea gas veteran Hewitt. It has the potential for about 150billion cu ft of reserves in place and is in the drilling plan for Q3.
Financially, Sterling begins 2010 in a dramatically different position from a year ago.
Gibson: “At the start of 2009, we were running on fumes and took a bridging loan to get the Breagh sale through. It was very tight. But we’re kind of used to that. We ended the year with around $80million in the bank.
“In a small company, you have to very carefully manage where your spend is going. That’s one of the challenges that small players face in the North Sea, namely the cost of doing business. We’re pleased to get to where we are. It shows what small players can do. Now we need to see things through to fruition.”
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