With drilling . . . particularly exploration and appraisal . . . running at an all-time low on the UK Continental Shelf, life is tough for those connected with this activity.
The number of E&A wells drilled in any one year is something of a bellwether for the North Sea as it is a pointer to what the future might hold.
If one is looking for a credible trend from which to read the past, let alone the future, it probably doesn’t exist.
As Ian Burdis, of AGR, put it: “We’ve got a very strange situation where we have a relatively stable and high oil price but which isn’t stimulating exploration
activity at all.
“Yet there is massive investment, just look at the numbers being quoted. But a lot of that is going into fabric maintenance that was postponed.”
Not that he was forgetting the current wave of new field developments or the fact that lifting costs on the UKCS are very high . . . $55-75 per barrel in some cases.
“Your margin on $105-107 a barrel isn’t that big even if the headline numbers are large,” said Burdis.
“The government is trying to help a little with specific field allowances, but they’re not addressing the front end. They are studiously ignoring the exploration side.
“Even if there had been independence, I don’t see that the Scottish Government could do anything about it either because they were looking to raise revenues from oil and gas, rather than give it back in tax concessions, which would have to be fairly significant.
“Contrast the UK with Norway . . . and I know activity is going down there as well, but for different reasons.
“For exploration over there, you have 78% tax relief, whether you’ve got production or not. You can offset against production. If you’re a pure-play explorationist you can still get your money back.”
Activity is going down on the NCS because there is a two-pronged attack under way, with companies like Statoil wanting to return more money to their investors with the result that they are cutting capex.
They also want to get down the supply chain costs . . . rig dayrates for one.
“There’s definitely downward pressure on mobile rig rates. Statoil cancelling a contract (West Vanguard) is new behaviour for that company.”
Despite all the money sloshing around, Burdis warned that few of the UK’s many junior oil companies are seeing much of it, or at all.
“The finance community doesn’t find it attractive,” he says.
“Talking recently with the COO of a small independent, I asked him for his view,” said Burdis.
“He said that if you were an IT company and you wanted to raise capital, there would be no problem. But the difficulty with the oil and gas sector, and particularly AIM-listed companies, is that there are too many of them that are regarded as lifestyle companies.
“People are paying themselves lots of money and not generating any real activity or wealth.
“They’re just riding with the £50million or whatever they raised and not doing anything with it. The equity market . . . banks, etc, are viewing it as a small prospect of return.”
Burdis said Hurricanes recent fractured basement successes West of Shetland was one of few high points among oil juniors.
“That’s the first in a long time. We helped them with their campaign. But I think too many people have been drilling wells that really should not have been drilled. The prospects were probably not good enough to warrant their drilling.”
Yes, there were other successes by juniors, like EnCore pioneering the Catcher area before being taken out by Premier, but E&A well success rates are in decline.
Burdis agreed that the UK North Sea part of the AGR portfolio was enduring a lean period, and had been for some time.
“We had seven prospects going into this budget year. This time last year we were talking to various companies such as Hurricane, Parkmead, MPX that would likely do some work.
“So we put UK work into our budget; we had it as a strategic initiative to capture some work back here. But the Hurricane well (drilling) was the only one of the seven that has actually been drilled yet.
“None of the others have come about. Either they’ve been deferred because they can’t farm down, or they can’t raise the money, or they’d like to spend it on something else.
“Technically they’re still live but, like decommissioning, they will probably happen at some point in the future.
So, we haven’t been active on the wells front in the North Sea. We’ve done planning work, we’ve done procurement of long-lead equipment, but not actually executed (a well) since 2011, or technically, January 2, 2012.
“With Hurricane, we did a lot of the up-front work (for the Lancaster appraisal well).
“But then a rig slot became available with one of our competitors. They got a rig (Transocean Sedco 712) from someone else. But, as it turns out, they could probably have secured a rig for less money than they paid, had they waited.
“You can’t always wait and I understand the drivers; but that was the only one of the seven UK drilling prospects that we had identified.
“So our diet on the wells front is very much the international market,” said Burdis, adding that the recent acquisition of AGR by Silverfleet Capital mid-year heralded a good future.
“I see it as very positive. They’re very keen to grow the business . . . to support geographic expansion, to support add-on acquisitions, to add capability.
“Whether that happens here, Norway or somewhere else is still to be determined. We’re kicking around a number of ideas.”
There will be more from Ian Burdis in our Atlantic Frontier review in December’s Energy.
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