North Sea stocks were on the rise on Monday as investors position, not for the first time, for a revival in the UK’s offshore industry.
Harbour Energy PLC (LSE:HBR), Serica Energy PLC (AIM:SQZ), Ithaca Energy PLC (LSE:ITH), and Deltic Energy PLC (AIM:DELT) were among the London-listed stocks buoyed by proposals from Rishi Sunak and Grant Shapps for a new round of North Sea licensing, the promise of a new ‘carbon capture’ sector and expectation of further government initiatives to bolster Britain’s ‘energy security’.
It comes after a year in which the government was forced to subsidise and support UK households as energy bills soared as war in Ukraine exposed Europe’s vulnerability and dependence upon energy imported from foreign producers, especially Russia.
So what’s happening?
“Hundreds” of new licences will be granted in the UK in future competition rounds, in a bid to ensure “domestic energy supply and reduce reliance on hostile states,” the government said on Monday.
These will be on top of the ongoing 33rd licensing round, which is anticipated to see North Sea companies collectively awarded over 100 drilling permits from autumn.
According to the government, the new licences will aim to slow a fall in domestic supply to the UK “rather than increase it,” with piped North Sea fuel also said to have a far smaller carbon footprint than imported liquified gas.
At the same time, two new carbon capture projects in Scotland and the Humber were also greenlighted by the government on Monday morning, with captured emissions from the now four selected industrial clusters ultimately set to be stored in depleted North Sea oil and gas fields.
Political and environmental rancour
The announcements roused fresh political and environmental rancour, from the predictable sources, and claims that the UK government is backsliding on its ‘net-zero’ targets.
Greenpeace is among those already suing the government, alleging ministers have not considered the emissions set to be released from burning the newly produced fuels.
“Relying on fossil fuels is terrible for our energy security, the cost of living, and the climate,” Greenpeace said on Monday.
“Rishi Sunak knows that any oil and gas from the North Sea will just be sold on the international market, making oil companies even richer at the expense of the rest of us.”
However, the prime minister stressed the need for bolstered energy security, adding that the 2050 targets still rely on a quarter of the UK’s energy coming from oil and gas.
What does it mean for investors?
Put simply, it likely represents good news for players big and small.
Evidently, delivering projects is tougher than it used to be not least from a public relations point of view and, major companies are less active in bringing on new projects than they have been in the past.
Nevertheless, meaningful projects are still in play.
Gas rather than oil, is an easier pitch partly because it's seen as “cleaner” and that it can go more directly into heating and power generation domestically, compared to crude which needs more processing via refineries.
So, gas projects with material scale and easy access to the domestic market are seen as preferred opportunities for investors.
And, despite a broader malaise in the exploration and production sector, a number of North Sea firms have progressed assets and recently gained traction in the region.
Who is doing what in North Sea?
Deltic Energy PLC (AIM:DELT), up over 5% today at 31.55p, is a notable example as it's been propelled by Pensacola, its Shell-led gas discovery in the ‘southern North Sea’.
Pensacola is described as ‘one of the largest natural gas discoveries in the southern North Sea in over a decade’, and recently saw its resource estimates double.
Shell and Deltic could, meanwhile, unearth more gas should the upcoming Selene well – set to spud in mid-2024 - prove successful.
Deltic last week announced it would absorb full ownership of a series of projects being relinquished by exploration partner Capricorn, which is exiting the North Sea altogether, meanwhile, it retains other exploration acreage with Shell and is on record as having ambition to acquire additional projects through future licensing rounds in the UK.
Reabold Resources PLC (AIM:RBD), up 2.2% today at 0.11p, is another small-cap that is moulded to be an early-stage progressor of North Sea assets, ideally, as a project starter that adds value before bringing onboard partners or monetising through asset sales to larger energy firms.
Earlier this month, Reabold announced to investors it had "high graded" its exploration portfolio in the North Sea after previously picking up a basket of prospective but as yet unproven acreage. Among these is a project area in the adjacent neighbourhood to Pensacola.
Jersey Oil and Gas PLC (AIM:JOG, OTC:JYOGF), up 9% today at 195.4p, is a rapidly-maturing North Sea junior, with its flagship project the Greater Buchan Area development advancing towards first production.
In June, it was boosted by the completion of its farm-out deal to NEO Energy which delivered important capital to the AIM-quoted firm but also confirmed the trajectory of the project, which could now accelerate to key commercial and monetisation milestones, and, significantly first production in 2026.
With a liquid cash position and a schedule of milestone payments to further bolster the firm, Jersey has the potential to be an active participant in new North Sea projects.
Ithaca Energy PLC (LSE:ITH), up 7.75% today at 177.14p, which returned to the London market last year revamped and operating as scale, is nowadays a material producer in the North Sea – it has interests in 28 producing fields, and# boasts stakes in “six of the ten largest” UK fields, and, continues to invest.
Most recently, last week, Ithaca announced a new North Sea discovery in the K2 project and earlier in July bought out Spirit Energy to take the 40% of the Fotla Discovery that it didn’t already own.
It hasn’t all been plain sailing, however, as investors in Parkmead will attest.
Harbour Energy PLC (LSE:HBR), up 4.27% at 263.6p, which calls itself the UK’s “largest independent oil and gas producer”, threatened to focus future investments outside of the UK as it seeks greater diversification following last year’s ‘windfall tax’.
Serica Energy PLC (AIM:SQZ), up 6.7%, was another established North Sea producer that counted the cost of the tax and had, at the time, warned the government that it was damaging industry appetite to invest in the country - nonetheless, it was keen enough to acquire North Sea peer Tailwind Energy for US$782 million.
In June, Parkmead Group (AIM:PMG),up 14% at 16.57p, declared it would abandon the Perth oil field development blaming a lack of funding appetite and tightening regulations offshore the UK.
Parkmead said going forward it would pivot towards gas assets and electricity from renewable sources and focus on existing North Sea assets that can de be developed quickly.
Perth had stalled amid problems sourcing floating production facilities, and, the company commented that a lack of public and political support for new oil projects had resulted "in a very cautious and conditional approach from industry".
Tom Cross, executive chairman, commented: “Over recent years a great deal of our team's effort has been directed at trying to unlock the complex Perth area.
He added: “Our team is naturally disappointed that despite these huge efforts, working closely with neighbouring operating companies and highly skilled supply chain companies, the combination of challenging factors means it is not economically viable to take the project forward.”
It serves as a reminder that oil and gas remains a tougher proposition than it used to, and, that sentiments in the sector are frequently fickle.