North Sea - comeback basin?
Thanks to the innovation of independent producers, predictions of the UK North Sea's death may be premature
From time to time over the past two years - with oil prices in freefall and the majors taking a hatchet to capital spending - it looked like things might finally be over for the UK's North Sea. But independents stepped in to pick up the slack, leaving the big players to refocus on the largest remaining plays.
That pattern will continue in 2017. Independents - emboldened by rising production and falling costs - will continue to pick up assets sloughed off by the majors. Production costs have fallen from around $35 a barrel in recent years to around $15/b, with services companies and their workers - predictably enough - taking the most pain, as operators mine their contracts for cost savings. Even the North Sea's debt pile, in little danger of shrinking unless oil prices make meaningful gains, seems a manageable burden, given near-zero interest rates.
Some majors are hanging on in there too, albeit in an increasingly selective way. BP says it will stay in the North Sea for decades. With its partners, it is investing £10bn ($12.4bn) in Clair Ridge and Quad 204 - projects with the scale to fit its ambitions. Both fields are in the Greater Shetlands area, which is generating plenty of interest. As it reshapes after buying BG Group, for example, Shell may sell the Buzzard field. And, with Ineos seen as a legitimate bidder, the field looks like it may no longer be a big-company play. While Conoco is getting out of the offshore game, ExxonMobil, Chevron and Cnooc's Nexen still seem to be in for the long haul.
But the independents will remain the driving force in 2017 and after. With support from the newly formed Oil and Gas Authority, a UK government body, and patient lenders, they are doing more than just putting assets in the shop window.
Premier Oil has had its fair share of problems, beyond external pressures from low oil prices. Its Solan field entered production four months late. But it seems to have learned lessons and should bring Catcher on stream in 2017, as planned. Like others, Premier will need to renegotiate its debt arrangements, but it has got to grips with forces within its control - beating production forecasts and acquiring Eon's North Sea assets at the bottom of the market.
Hurricane Energy’s West of Shetlands programme shows how an innovative mindset can unearth further value from a mature basin
Ithaca Energy, also ravaged by the low oil price, and harmed by delays at its North Sea Greater Stella development, has not just been sitting on its hands.
Savvy hedges have kept it in the game for two years and now Greater Stella - expected to get going in late 2016 and ramp up in 2017 - should assure its long-term survival, creating a production hub with the potential to develop numerous small discoveries profitably.
Other companies, including Faroe Petroleum - a canny mover between the North Sea's Norwegian and UK sectors - EnQuest and The Parkmead Group, also see the UK North Sea as open for business. They will make big investments in the next few years, honing in on assets that suit their scale and expertise.
Hurricane Energy's West of Shetlands programme illustrates how an innovative mindset can unearth further value from a mature basin. Hurricane's success in fractured-basement reservoirs could be a game changer, not just for the company, but for the country. And the discovery at Lancaster may just be the start; the firm has acreage nearby at Lincoln, Warwick and Whirlwind, and there is unlicensed acreage to consider if it is successful.
All told, the buzz of activity in the North Sea - defying some of the sector's gloom - will be good for output, at least for the short term. The peaks of a decade ago are gone, of course. But production rose by almost 10% in 2015, to 1.64m barrels of oil equivalent a day. For 2016, industry body the Oil and Gas Authority (OGA), expects a modest 2.3% rise, to 1.68m boe/d, before swelling again slightly to more than 1.7m boe/d in 2017. Thereafter, the project pipeline begins to dry up a bit - without a big improvement in the oil price, OGA says production could fall by 50% over the next decade.
But this is no time to write off the North Sea. The spirited, intelligent and optimistic management of many of the basin's operating companies can keep the UK's province in a healthy state in 2017 - and for many years beyond.
The making of hubs, and the sharing of infrastructure and costs, will make hitherto marginal fields profitable - maybe more than imagined. If prices do recover, a leaner and more efficient North Sea will still offer value to investors and energy to consumers.
This article is part of Outlook 2017, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here