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European exploration surprises on the upside

Exploration interest remains high in the region even as political storms gather over the industry’s ‘license to operate’

It was a year of contrasts in northwest Europe. Long-term demand for oil and gas received increased scrutiny, with investors pointing at higher risk premiums and calls for abolishing petroleum activity. Yet exploration trends pointed towards an industry with a stronger outlook on the future, and where northwest Europe resources play an increasingly vital role.

There was increased exploration across the board in the region, with 23 FIDs reached and ‘flag-pole’ transactions for future activity reaching high price tags. The momentum has met the expectations Rystad Energy had at the start of the year, and is expected to continue into 2020.

It was projected that 97 wells would be completed this year, with 64 drilled in Norway and 33 in the UK. The current tally is 86 overall, with 57 in Norway and 29 in the UK, slightly below initial expectations.

There were major exploration surprises and disappointments, as is seen every year. The Central North Sea Glengorm discovery by Cnooc and Total in January was arguably the biggest surprise, achieving recoverable resource of an estimated at around 250bn boe. Continued high-impact failures in the Barents Sea throughout the year were among the most significant disappointments.

At least another 62 wells are expected to be completed in 2020, with 40 in Norway and 22 in the UK. But this was expected to grow at the end of 2019 as more drilling plans were revealed. Notable new high-impact wells include Shenzou and Rodhette in the Barents Sea, as well as Isabella in the UK Central North Sea.

FID bounty

Hot off the heels of a big 2018, where 23 FIDs were reached across Norway and UK, the expectation for 2019 was a continued high pace, with 14 expected in total—three in Norway and 11 in the UK.

The biggest FID was, as expected, the Phase 2 development of Johan Sverdrup in Norway. In that investment, $5bn was committed to increase the giant field’s reserves to almost 1bn boe, and to increase production capacity from 440,000 b/d to 660,000 b/d. This will be achieved by installing a new processing platform, and drilling 28 new wells across the field.

26 FIDs in Norway in 2020

The biggest FID in the UK was operator Neptune Energy’s Seagull development, targeting reserves of 50mn boe with start-up in 2021.

But significant FIDs were also postponed, with Equinor confirming a new 2022 target for the giant Rosebank project West of Shetland it acquired in late 2018 from Chevron. Aker BP and Equinor also failed to settle a dispute over the platform solution for the prolific Noaka area in the Norwegian North Sea, which is estimated to hold up to 800mn bl.

In 2020, another 26 FIDs are expected across Norway and the UK with two significant examples including Equinor’s Breidablikk in the Grane area and Siccar Point Energy’s Cambo in the West of Shetlands.

Shale retreat

A westward wind in the transaction market continued in 2019, with the American firms continuing to divest and redeploy capital and resources in their native shale patch. This trend picked up pace in 2019, with Chevron and ConocoPhillips selling their UK operations to Ithaca and Chrysaor respectively for a combined sum of $4.7bn.

ExxonMobil made the biggest transaction of the year when it divested its remaining Norwegian upstream activity to Var Energi for a staggering $4.5bn price tag, by far the biggest pure play Norwegian transaction outside the establishment of SDFI back in 2001.

The implied oil price in the transaction was, according to Rystad Energy data, north of $80/b. This indicates either a strong belief in higher oil prices, robust confidence in the fields improving their values, or all of these and a low applied discount rate.

Going forward into 2020, speculation persists over the divestment of ExxonMobil’s remaining positions in northwest Europe. If such a deal happens, ConocoPhillips’ Norway holdings will become the sole remaining major American position in the region.

Climate storms

Next year will likely also continue the trend of additional scrutiny on the industry and its ‘license to operate’ in the region, alongside the continued exploration, investments and transactions.

Denmark is considering scrapping its next award rounds due to environmental concerns and the Netherlands may ban further production from its giant Groningen gas field. Norway’s parliamentary elections are not until 2021, but it is likely that the petroleum industry and its framework will be a hot topic as political parties jostle for position.

Oil companies are responding to the challenge with projects such as Equinor’s Hywind Tampen floating wind project, which reached FID in 2019. This facility will help decarbonise production facilities across Equinor’s Tampen area, which is a major source of carbon emissions in Norway.

Beyond 2020, in the decade ahead this will likely exemplify a new type of projects in the upstream sector, as firms strive to further decarbonise production across the region and maintain the industry’s license to operate.

Simon Sjøthun is principal at Rystad Energy

Keep up-to-date with how the predictions in Outlook 2020 are playing out and get a first look at the themes that will shape Outlook 2021, as well as with relevant events such as the Outlook launch party and publishing schedules, by subscribing to Petroleum Economist’s bi-monthly Outlook newsletter.

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