North Sea oil may be in decline, but last week’s news of a potentially big discovery by Hurricane Energy PLC (LON:HUR) has sparked hopes of a mini-renaissance in the region.
Shares in Hurricane jumped 40% on Friday after it revealed better-than-expected results for its first new well at the Lancaster field west of Shetland.
On Monday they were up another 4.1% at 39.56p, meaning the share price has more than doubled since its level of 15.5p last September.
The find has been confirmed as one of the biggest on the UK Continental Shelf (UKCS) in recent history, with estimates putting possible reserves at half a billion barrels.
Experts said the discovery could be just the start for Hurricane, which has other portfolio prospects to assess and could use Lancaster to strike partnerships on better terms than before.
But it is also likely to lift sentiment more generally towards other mid-tier players such as EnQuest PLC (LON:ENQ), Premier Oil PLC (LON:PMO) and Ithaca Energy Inc (LON:IAE).
Even smaller companies such as Jersey Oil and Gas PLC (LON:JOG) are getting in on the act by doing deals.
Last month, JOG said it had agreed to farm-out a 70% working interest in one of its offshore licenses in the UK Central North Sea to Norwegian firm Statoil ASA (STO:STLO).
JOG's shares have gone from 19.25p a year ago to 37.6p now.
And on August 10, The Parkmead Group plc (LON:PMG) doubled its stake in the Polecat and Marten oil fields in the UK Central North Sea.
Many companies are working on fields that have been dropped or passed over by oil majors as too small or technically complex to bother with.
Hurricane's Lancaster is what’s called a basement play, which essentially means the oil is trapped in crevices between hard granite rock.
Analysts say exploration in the relatively unexplored west of Shetland area is not without its challenges, but Hurricane has shown it can be done.
Cantor Fitzgerald analyst Sam Wahab said: “Hurricane has proved that the technical barriers to exploiting fractured basement in the UKCS are not too high.”
Big projects
The fall in the oil price from more than US$100 in late 2014 to less than US$50 now has hit investment by oil companies in the North Sea and elsewhere, but BP and others are still pursuing some big projects in the region.
But the majors are prioritising other, more lucrative oil and gas plays elsewhere, such as deep-water fields off the coasts of India and Brazil.
In an echo of Cairn Energy's oil find in Rajasthan after Shell decided to bale out of the region, mid-tier companies are moving in on the best of the remaining prospects in the North Sea.
In an extensive note on the industry earlier this year, Barclays Capital said the absence of any ‘overweight’ ratings on North Sea explorers that it covers reflected its view that “more compelling risk-reward propositions lie elsewhere in the European exploration and production sector”.
But it said investors seeking exposure to the region could do worse than look at the likes of Ithaca, Cairn Energy PLC (LON:CNE) and Premier.
Premier has started production at its Solan field and said last month it was on track to achieve first oil at the Catcher field in 2017.
Meanwhile, EnQuest is working to complete its Kraken development, which is due to start producing oil next year.
Liberum Capital noted that EnQuest was on track with key projects such as Kraken and keeping costs under control.
But the broker’s Andrew Whittock said its valuation of EnQuest “could do with higher oil prices”.
Plugging the gap
Nevertheless, the Barclays analysts said the exploration activities of such companies could play a key role in plugging a potential oil supply gap in 2018 and 2019.
“The successful completion of ongoing developments (Solan, Stella, Catcher and Kraken) coupled with a gradually rising oil price should allow North Sea management teams to shift from their current defensive stance, “ Barclays said.
“Infield and near-field development activity in the mature basin offers the short-cycle production growth that can contribute to addressing the probable shortfall in global oil supply we foresee in 2018-19 as the impact of constrained spending across the upstream industry reaches its conclusion.”
Barclays added: “We believe growing development experience and substantial tax losses make the coverage group optimally positioned to benefit as larger participants continue with divestment plans in the region.”
Tax and accountancy group PricewaterhouseCoopers pointed to tie-ups and government incentives as a way in which smaller operators could unlock the remaining potential of the North Sea.
It said the creation of “super joint venture” vehicles, which consolidate smaller and fragmented assets under one operator, was one option.
Another was a government-backed decommissioning fund or equity-backed guarantee scheme to help smaller companies cover their letter-of-credit requirements.
With government assuming a degree of risk from the majors, independents could focus on squeezing the last drops of oil & gas from the basin, PwC said.
PwC’s office senior partner in Aberdeen, Kevin Reynard, said: “The North Sea still has a strong couple of decades ahead of it, but the decisions to sustain it in that period need to be taken quickly.
“It’s vital government and industry come together to agree a blueprint for action.
“No one company standing alone can weather this, but if all interested parties join forces to address the issues, then there is hope for the North Sea.”