Someone taking an arbitrary view of the UK offshore oil and gas industry could be forgiven for coming to a confusing conclusion.
On the one hand, this is a maturing petroleum territory with the lowest level of exploration for decades, but, on the other, British waters are host to major new projects supported by large-scale investments from private equity and power utilities.
On Monday, French oil giant Total SA along with UK utility SSE PLC (LON:SSE) and Grangemouth refinery owner INEOS, announced a major new gas discovery that they said would be ‘monetised quickly and at low cost’, thanks to existing nearby infrastructure.
Total’s gas finds in the Glendronach exploration well, has been estimated at 1 trillion cubic feet which are seen by many as a key threshold for a ‘major’ or ‘world class’ discovery.
“Glendronach is a significant discovery for Total which gives us access to additional gas resources in one of our core areas and validates our exploration strategy,” said Arnaud Breuillac, Total president for exploration and production.
Elsewhere, Deirdre Michie, chief executive of the offshore industry group Oil & Gas UK, similarly said: “This is a major discovery by Total which demonstrates the exciting potential the West of Shetland frontier region holds.”
He added: “As our Economic Report recently highlighted, an increase in drilling activity is key to unlocking the remaining potential of the UKCS. This significant discovery demonstrates that the improved competitiveness of the basin is having positive results.
“It also highlights what can be achieved when companies maximise the potential yield from their existing blocks. This increased activity is critical as we look to maximise economic recovery from the UK Continental Shelf.”
Politics, pessimism, and perspective
It is fair to say that, over recent years, perceptions around the North Sea’s potency and longevity has been weaponised politically - first by both sides of the Scottish independence debate, and, later in the matter of post-Brexit energy security.
Other than to point out that the UK is heavily reliant on oil and gas imports, much of which is piped from the European mainland, this article isn’t bothered with the political rhetoric.
Whether or not investments by SSE and Centrica reflect a greater prioritisation of domestic resources ahead of Brexit, is something of a side-story - at least it is as far as investors in exploration and production stocks are concerned.
To take a somewhat simplistic view of offshore UK, it is helpful to compartmentalise two quite separate areas, the North Sea and the West of Shetland area, and, it is worth noting, that those investing (substantial amounts) of capital in the latter are fairly keen to distance themselves from the former.
West of Shetland
It doesn’t take a geographic genius to understand where this particular section of the UK Continental Shelf is located, nonetheless, it is important to grasp that it is not the ‘North Sea’.
This area, partially because of more challenging operating environments, is much less explored than the North Sea. It is still viewed by most in the industry as a ‘frontier’ area – which means most of its potential has yet to be proved, or indeed, disproved.
Unlike most of the North Sea, most of the ‘blue sky’ remains in play.
It is not, however, virgin exploration territory. There are already a number of significant discoveries in the West of Shetland.
BP PLC’s (LON:BP.) Clair field is probably the most significant. It is, actually, a collection of discoveries together believed to contain over 7bn barrels of crude.
The original discovery was made in the late 1970s and was sanctioned for development in the late 1990s before the first production came online in 2005 - a broader and larger scale development to take production up to 120,000 bopd was subsequently given the green light in 2011.
BP this summer announced a deal to increase its stake in Clair to 45.1%, though in the context of the ‘supermajor’s’ worldwide portfolio, it is one of many assets.
Oil investors in London may, therefore, be more familiar with Hurricane Energy PLC (LON:HUR), which is something of a new kid on the block in the West of Shetland (in comparison to BP at least).
Hurricane has in recent years proven successive new West of Shetland discoveries and in doing so, has unearthed a ‘multi-billion barrel opportunity’.
It is now on course to start production next year, from a small portion of what is ultimately expected to be a much larger project – the early production system is set to flow 17,000 bopd as it addresses an area with about 40mln barrels of reserves, out of a possible 500mln barrel project.
This summer, Hurricane put in place a phase of exploration and appraisal activity as it agreed on a new partnership with Spirit Energy, majority owned by Centrica, which is to fund nearly US$400mln of drilling and development activity across the Greater Warwick Area field, which neighbours its Lancaster field.
The North Sea
In the North Sea, where the giant finds have likely all been made, the average size of new discoveries is now around the 20mln barrel mark – albeit, a number of significant projects are still being delivered.
There are exceptions, but, exploration in the North Sea now tends to focus on resources that have the potential to be plugged into existing infrastructure. Otherwise isolated finds must be large enough and profitable enough to justify the installation of new facilities.
Activity in the North Sea, for the independent oilers, is increasingly about getting the most out of what’s there, and, in some cases, picking up assets from the larger majors which are now less interested in holding onto ex-growth fields in maturing basins.
A report earlier this month highlighted that the UK North Sea had seen the slowest period of drilling activity since 1965, with only four wells sunk in the first eight months of the year.
Analysts claimed the statistic showed that only the most appealing targets would now be drilled by explorers.
It added to an apparently growing pessimism around the sector.
Nonetheless, such a snapshot also likely reflects the environment in which explorers were making investment decisions 12-to-24 months previously, when capital was being held on the sidelines as a result of low oil prices.
Counter to the doom-and-gloom narrative companies such as Cairn Energy PLC (LON:CNE), EnQuest PLC (LON:ENQ) and Premier Oil PLC (LON:PMO) have invested significantly between them, in delivering new North Sea fields such as Catcher and Kraken – both of which have been in the ‘ramp-up’ phase.
Indeed, Premier Oil is presently advancing its next North Sea development after it greenlighted the Tolmount gas project back in August.
Due online from late 2020, Tolmount is expected to yield around 500bn cubic feet of gas over its lifespan with peak production rates anticipated at up to 300mln cubic feet per day. Premier’s share of the development costs is estimated at just US$120mln as a separate infrastructure venture is set to pay for export facilities.
Meanwhile, smaller explorers have also advance projects albeit at a generally smaller scale.
Jersey Oil & Gas PLC (LON:JOG), for example, had a successful discovery with the Verbier well in partnership with Norwegian giant Statoil in late 2017 and in the coming months, it is working to deliver an appraisal well as a further test of the field.
Distinctly different opportunities
The North Sea and West of Shetland are, plainly, distinctly different.
Whilst the narrative around the North Sea’s demise is both exaggerated and premature, it is still fair to say that it is not the same oil and gas territory that it once was.
In the West of Shetland, however, very substantial opportunities clearly remain.
Either way, investors would do well not to write off the UK offshore just yet.