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Norway's longer shelf life lures PE players

The private equity model targets the potential remaining in Norwegian waters

Private equity (PE)-backed independents acquiring offshore blocks in the Norwegian Continental Shelf (NCS) from downsizing US producers cite the greater undeveloped and yet-to-find reserve base as a key driver.

Norwegian firm Pandion Energy, backed by Asian PE fund Kerogen Capital, announced an agreement with US giant ConocoPhillips in July to acquire a 20pc interest in the PL 891 block in the Slagugle (Ural owl) prospect. Other PE-backed firms, including Mime Petroleum, Neptune Energy and Wellesley Petroleum, have also purchased existing fields and licenses on the NCS in recent months.

"There is more upside on the NCS than the UKCS [United Kingdom Continental Shelf]. There are still a lot of undiscovered resources here, less than half of these have been recovered," says Jan Christian Ellefsen, CEO of Pandion Energy. "The NCS is more attractive than the UK for smaller companies and this is fueling an increasingly heated M&A market, as well as a rise in farm-in and exploration activity."

The UK energy ministry estimates that 83pc of the UKCS's 32.5bn bl recoverable reserves have been produced. In contrast, the Norwegian Petroleum Directorate (NPD) in June 2018 raised its estimate of undiscovered resources from 18.2bn bl to 25.2bn bl.

"Google is building a global database of subsurface data and it is very much starting with Norway and Pandion" — Ellefsen

The stark difference in resource levels is leading to a North Sea divide in project activity. Norway is expected to lead capex in the region during 2019-25, with $40.6bn to be spent on new projects in comparison to just $18bn in the UK's waters, according to figures published by consultancy Global Data in March.

As of July this year, 21 NCS development projects are underway, according to the NPD, which note that most of these are focused on smaller discoveries that exploit existing infrastructure. "There is considerable diversity in the exploration concepts being tested. This reflects our diverse player landscape and the fact that the companies have creative geologists and geophysicists," says NPD exploration director Torgeir Stordal.

Pandion's Ellefsen says the PE-backed model will play an important role in Norway's production in the years ahead. "It has brought in new money with a strict focus on value-orientated activity. It is what the market needs, and overall is a good thing for the NCS."

The new set of entrants have also been emboldened by the country's reimbursement system for unsuccessful exploration costs—Norway allows companies to deduct up to 78pc of these costs from their taxable income.

"That system has been an enormous success not just for Norwegian companies but also the country's entire energy supply. Giant discoveries like Johan Sverdup would not have been discovered if it was not for those arrangements," says Ellefsen. Discovered in 2010, plateau production from Johan Sverdup is expected to be 660,000bl/d, making it one of the NCS's top five largest fields.

In contrast, while the UK has taken steps such as abolishing its Petroleum Revenue Tax in 2016, industry calls for the country's tax regime to be simplified and incentivised have fallen on deaf ears. The situation has been further clouded by political inconsistency—the UK has had some 16 different energy ministers in the past 18 years.

The openness to innovation on the NCS has even attracted the attention of US tech giants, with Google choosing to work with Pandion on applying AI and machine learning to new digital solutions to geological and geophysical data. Supported by it's main investor, Kerogen Capital, the ultimate goal is potentially building a digital subsurface platform.

"It is a long journey and we are only just starting to see results, but it reflects the huge potential for digitalisation on the NCS, " says Ellefsen.

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