Exploration and drilling activity on the UK Continental Shelf was generally dismal in 2009, but there was one bright spot – West of Shetland, where eight wells were drilled.
While Chevron underpinned the effort by plodding on methodically with its extensive appraisal of the large Rosebank-Lochnagar asset, others such as DONG, Hurricane, OMV and Chrysaor collectively added measurably to the UK’s Atlantic Frontier reserves base, while Shell drew a blank with its South Uist probe.
But, while it was basically a good year for most, perhaps the company that came through best was Faroe Petroleum, which has doggedly held on to its West of Shetland dream for years and finally saw it realised with the DONG-operated Glenlivet and OMV-led Tornado discoveries.
This is why our annual UK Atlantic Frontier round-up is given over all but entirely to Faroe, which is Aberdeen-based, rooted in the Faroes, Footsie-listed and majority-owned by fellow Granite City company Dana Petroleum.
However, it is important to point out that 2009’s results clearly demonstrate that very slow-burn West of Shetland does offer real potential. Moreover, it may yet yield a prize that, once and for all, silences the critics and doubters. Faroe’s CEO, Graham Stewart, is in no doubt that the province is worth the effort, even though the company relinquished licence P1106, which has the initially promising but ultimately disappointing Seonaid prospect.
However, the Glenlivet (Faroe has 10%) and Tornado (7.5%) successes more than make up for the Seonaid disappointment. Stewart sees them as significantly derisking the Anne Marie, Cardhu and Lagavulin prospects. Not only that, but Glenlivet is seen as being hugely valuable to the Total-operated Laggan-Tormore development, for which third-party business is seen as crucial to the success of the first UK West of Shetland gas development.
“Glenlivet was drilled on a seismic anomaly that we had a very good feeling about and which turned out to be justified,” Stewart told Energy.
“We have what we consider to be a commercial find … very high quality gas. I guess the question is when and by what route will it be developed, given Laggan-Tormore.
“I think they’re working on the basis of about 1trillion cu ft of recoverable reserves. But you don’t have to go back many years for the view to be 3TCF before something was commercial (Aurora Project study).
“But look at it now. There’s Schiehallion gas, Foinaven gas, Rosebank-Lochnagar, Cambo, Tormore, Victory, Laxford (on our licence). Just Glenlivet and Tormore add a few hundred billion cu ft … shall we say 500bcf or so.
“So I think it’s now pushing 3TCF. The question then becomes whether the pipe that’s going to be installed for Laggan-Tormore … will it be sized to take account of that? If DONG has anything to do with how things develop, then it will be.
“DONG has 80% of Glenlivet and 20% of Laggan-Tormore. So they’re strongly incentivised to bring their gas on sooner rather than later, and Glenlivet is proportionately more important than Laggan-Tormore.”
Glenlivet hydrocarbon quality is very high – almost all methane and no liquids. This compares with Laggan-Tormore, where there is a liquids element, which means slugging and related problems will have to be accounted for when developed.
Stewart’s view is that having Glenlivet as a tie-in can help Laggan-Tormore become a more successful project.
“It’s our hope that they (Total) see it that way.”
Though clearly a discovery, when announcements were made about Tornado, there was an edge of caution. Stewart acknowledged this.
“Glenlivet’s more cut and dried. We’ve appraised it, it’s ready to go. We have a water sample and a lot of chemistry.
“That’s why we drilled the down-dip well. Therefore we know exactly what we’ve got. The fresh data is easily mapped, modelled and slotted into a development plan.
“Glenlivet’s a very homogeneous, high-quality reservoir. It’s going to take one or two wells to develop something that’s the size of Breagh (in which Faroe held an interest until recently) and which may take 12 wells and two platforms.
“By comparison, this is as cheap as chips, even though it’s West of Shetland. Glenlivet doesn’t need to be more than 100-150billion cu ft to be commercial.
“With Tornado, the position is different. We expected it to be a no-brainer oilfield. It turned out to be oil and gas. We don’t know how much oil we have … that will require a lot more analysis.
“We’ve drilled a well that not only encountered both gas and oil, but also established oil-water contact. We found a better, thicker reservoir than anticipated, which should mean more hydrocarbons. But finding the relative split will be the challenge.
“We’re pretty confident either way that Tornado could be commercial. But is it a gas field with an oil rim or an oilfield with a gas cap?”
Faroe has a 7.5% working interest in the find which, according to Stewart, bears some resemblance to the Suilven discovery of the 1990s and which has, so far, failed to make the commerciality grade.
Tornado, well 204/13-1, is located about 10km north-west of Suilven; also some 30km north-west of the Schiehallion, Foinaven and Loyal producing fields.
Such close proximity means that the reserves threshold at which this latest find is potentially commercial should be fairly modest, especially if it is paired up with Suilven.
Suilven reserves are thought to be about 180billion cu ft of gas and 25million barrels of oil.
“I don’t know enough about Suilven, nor does anyone know enough about Tornado at this stage to give a definitive answer,” said Stewart.
On Tornado’s side already is the fact that gas quality is said to be excellent; the reservoir, too. Stewart says oil quality is also very good.
“Hurricane was saying that someone had finally found light oil West of Shetland, but they’re not the only ones who have achieved that.”
According to Stewart, it should not be necessary to check out Tornado any further through the drillbit.
“It is fair to say that we have now appraised Tornado … it won’t require further appraisal drilling; it’s now a matter of analysis. We have container loads of data and cores. We even ran a mini drill-stem test. This all needs mapping in so we can figure out the way forward.”
While Stewart is excited by the results of the 2009 drilling, he told Energy that other Frontier acreage held by Faroe held even greater promise.
He referred to Conival – which BP drilled in the 1990s and which was ultimately non-commercial – and, more particularly, the nearby Marjun discovery, located in the Faroese sector at the end of 2001/start of 2002 and which overlaps the UK-Faroe aquatory boundary.
“We’ve now got Conival plus the UK part of Marjun, which was a Hess discovery. The well apparently encountered a 170m of hydrocarbons (light oil) and Hess identified better reservoir conditions on the UK side.”
On the Faroese side, the company holds Orodruin solus (licence 002) and is in the process of mapping prospects that Stewart thinks may be Tornado lookalikes.
“The difference is that we have 7.5% of Tornado but 100% of these other ones. And, clearly, with finds like Glenlivet, you would be daft not to be thinking whether there are any more prospects like that.
“The difference is that we already have and operate the acreage around. There are targets; the question is what we’re going to do with them.
“Our cost on Tornado is low; our equity is relatively low, too, but the discovery unquestionably has value (to us). The bit next door could multiply that substantially if there are analogues.
“The Faroes sector Anne Marie prospect, which we’re drilling in 2010, has been held by us for 10 years. Exploration takes a long time, which is why you need a conveyor belt of opportunities so you can keep drilling.
“I think people’s faith in us has been rewarded in these two successes, but it is what comes up next that matters. Glenlivet and Tornado … we’re very happy with them, but they’re at the small end of Atlantic Margin prospects that we’re drilling. By contrast, Anne-Marie (12.5%) is a very large prospect and we believe it is an analogue to discoveries already made.
“But it is completely different to William, which was drilled at the back end of 2007/start of 2008. William had a massive amount of basalt.
“Anne-Marie has very little basalt and it is argued that this is the best prospect in the Faroes. If there are hydrocarbons, it will be very big and the risking is now moderate.”
After Anne-Marie should be Cardhu (formerly North Uist and now operated by BP).
Stewart insists that it is not like Shell’s South Uist failure.
“Cardhu is in a different geological horizon and there’s a lot of excitement within the partnership as it’s a very large prospect. We expect to drill mid-year.”
Does this mean the UK Atlantic Frontier is at last coming of age?
The Stewart view is maybe. But it has required a rethink on how to approach the geology – in essence, get back to basics and look for lumps and bumps in the geology instead of more subtle geological signals of the kind used to find BP-operated Foinaven and Schiehallion.
“Cambo and Rosebank were drilled on bumps and they worked for Chevron. So today, it’s about identifying the bumps on the trend, and we’re fortunate to be in it all the way.
“It’s interesting to note that Cardhu will be BP’s first new UK West of Shetland exploration well for a long time. So that gives us quite a lot of confidence. They don’t like drilling dusters and will avoid high-risk wells like the plague. Famous last words, of course.
“When Foinaven and Schiehallion were found, BP didn’t really know what they’d got when they found them, and weren’t confident about how to model and understand them before drilling. There was a lot of luck involved.
“My argument is that there has been a move back towards more traditional geology.”
Helping Faroe in its push to find resources is the fact that it now has a decent war chest thanks to the company’s participation in the Southern North Sea Breagh gas field discovery, appraisal and eventual majority sale to RWE (see Boardroom – Pages 6-7).
The Breagh involvement enabled cash to he harvested – £26million. This has led the market to adopt a more mature attitude to Faroe Petroleum stock, which has risen significantly in value over the past year.
The question of whether to sell or stay in an asset can pose a dilemma. However, for Stewart, getting out of Breagh pre-development was the right timing.
“There are different ways of skinning a cat. You don’t have to sit through to production to get value. We want to have more production because it’s tax-efficient for us to do that.
“We’re investing quite significant appraisal losses carried forward that aren’t going to be used up unless we have production revenues. There’s no use dragging those losses around with no value.
“We’ve got something like £30million of value in our tax losses alone, so we have a reason to have more production as we can get that value straightaway. But to get production does not necessarily mean development. There are other, quicker ways … like trade our way into it.
“A lot of people imagine that taking a project from fully appraised to development sanction to production means that you’re adding a lot of value. In many instances, value is, in fact, removed because of unexpected downsides. This happens often enough.
“And, in getting there, you spend a heck of a lot of money on the development process.
“Take Breagh. We invested £8million in exploration and we sold out for £26million. If we had stuck with it, we would have had to invest another $100million (£60million).
“There is a spectrum of points at which you can step off. It depends on how much capital you want to put at risk, for how long and in what manner.”