Thursday, 29 October 2015

Falklands exploration: Humpback results finally in

by Elaine Reynolds

The long anticipated results from Humpback, the only well to be drilled in the South Falkland Basin in the current Falklands drilling campaign, have been disappointing, with the well encountering non-commercial quantities of oil and gas.
 South Falkland Basin acreage map
Falkland Oil and Gas (FOGL), together with operator Noble Energy was targeting oil in the Diomedea fan complex in the Fitzroy sub-basin to the south and east of the Falkland Islands. Humpback was assessed pre-drill to be sitting in the likely oil window in the basin based on geothermal modelling. In addition it was hoped that good quality Cretaceous sands similar to those found in the 2010 FOGL well Toroa on the edge of the basin would be present in Humpback, as it was believed that these Toroa sands had been eroded and redeposited in Diomedea. The presence of oil and gas gives credence to the geothermal modelling approach, however the sand quality was poorer than expected, with moderate porosities being reported.The oil and gas shows were found in 40m of net sand across in a number of sandstones, including the main target ,the Lower Cretaceous APX-200, with a further 25m of sandstone below.

Drilling of the well has proven to be complex and difficult, such that the well had to be sidetracked, and it proved impossible to retrieve fluid samples from any of the hydrocarbon bearing intervals. As a result, the well will have incurred significant cost overruns. Humpback was originally scheduled to take 65 days to drill at a cost of $110m. The well has now taken over 130 days, so we expect that gross well cost could be in the region of $200m. Although an element of this should be recovered based on the unforeseen equipment failures that contributed to the long drill time, we expect that FOGL will exit this well with very little cash. The company held a 52.5% WI in the well, but was only paying 27.5% of the costs as a result of an exploration carry paid by Noble under the terms of its farm-in. In addition, FOGL farmed down 32.5% of the deeper targets only to Noble to fund the drilling of the deeper section of the well.

The rig will next move to the North Falkland Basin, where it will drill the Elaine/Isobel appraisal well.  FOGL is fully carried for its share of Elaine /Isobel (including recovering $10m from its partners as compensation for switching this well from Jayne East). However, the company will still need further funding to carry out additional activity in either basin.

FOGL and Noble will now integrate the Humpback well findings into the geological model to provide an updated view of the exploration potential of both the Diomedea area and the overall oil and gas potential of their Southern Area licences. The licences also include the Hersilia  Fan Complex to the north of Diomedea and the Cretaceous Fault Blocks adjacent to Borders & Southern's (B & S) gas condensate discovery, Darwin. Inevitably, B & S will be impacted by this result being Southern Basin focused; however the merits of the Darwin potential development itself probably remain unchanged.

Wednesday, 28 October 2015

Is the Serica deal a sign of improved North Sea co-operation?

by Elaine Reynolds

A recent transfer of equity in a Central North Sea block may herald the beginnings of a new period of cooperation in the UK North Sea that would encourage undeveloped assets to be brought onstream. Serica Energy (WI 50%), together with partners Endeavour (25%) and EOG (25%), looks set to pick up 100% of the Columbus field, mainly located in Block 23/16f. Columbus extends to the south into the 23/21a block, where partners BG and SSE have agreed to transfer their equity in the part of the block covering Columbus for a nominal sum. 

Columbus field location map

Columbus was discovered in 2006 and fully appraised by 2008, but Serica has to date been unable to finalise plans to develop the field via the BG operated Lomond platform, located 8km from Columbus. The 15.5mmboe field is a typical example of the kind of stranded asset that has struggled to be developed in the North Sea; a small accumulation operated by an independent, close to ageing infrastructure operated by a major, and with each holding separate commercial concerns.

However, the Wood Report, published in 2014 and charged with identifying ways to maximise recovery from the UKCS, has highlighted the need for a fundamental shift in commercial behaviours between operators in order to benefit UK plc. Serica could be one of the early beneficiaries of this change in approach.

Serica's deal should help to push the development of Columbus forward as it removes the need for unitisation discussions; however infrastructure access still needs to be agreed. Lomond provides production facilities for the Erskine field in which Serica has held an 18% stake since 2014, strengthening its position in negotiations with BG.  Although the platform is ageing, a recent shutdown for major infrastructure improvements appears to have significantly improved performance since Erskine production restarted at the end of May this year. If sustainable, this would provide confidence that  the platform life can be extended. 

The equity transfer points to a more pragmatic and constructive approach to commercial deals in the region. The Wood Report, together with the prevailing low oil price, appears to be concentrating minds to focus on inefficiencies and applying pressure to perform. In addition, the regulatory body set up this year to implement the Wood Report's recommendations, the Oil and Gas Authority (OGA), is now expected to be involved in facilitating a commercial agreement for Columbus, along similar lines to that already employed by NPD in tariff negotiations in Norway. If successful, this could point the way for others to progress the development of further stranded assets on the UKCS. 

Tuesday, 20 October 2015

Genel trading statement

by Will Forbes

The headline from Genel’s trading statement this morning is perhaps the downward revision of the 2015 production guidance from 90-100mbopd to 85-90mbopd and revenue guidance narrowing at the bottom of the range (was $350-400m, now $350-375m) assuming $50/bbl crude.

Following GKP’s recent receipt of payments for production, Genel expect $24.5m in the short term, which we hope will be a further step towards reliable payments from the KRG for production. As with all KRG-focussed producers, Genel is restricting its investment until it sees returns from existing production, and the sooner that payments (and back payments) for production are received the more quickly Kurdistan will see further increases in capacity.

Importantly, the export volumes from Kurdistan continue to increase, with news yesterday (Bloomberg) that exports could be running at 656mbopd (from 564mbopd in September). Even with oil prices where they are, these kind of volumes give us hope that the KRG can afford to pay its contractors.

Elsewhere, the gas project is continuing with ING appointed as mid-stream debt adviser, Genel will be participating in the Aigle well (Cote D’Ivoire), and the completion of Taq Taq’s second central processing facility (90bopd) is on track for end-2015.

Friday, 16 October 2015

Is there a link between the oil prices and deals?

by Avanish Katkoria

Analysis indicates that there is a linkage between the prevailing oil price and industry deals, but this is unsurprisingly not linear and differs between types of deals. 

Deal number correlates well
The oil price saw a steady increase from approx $55/barrel up until its peak during the years 2011 – 2013 where it stayed approximately at the $110/barrel mark.  In this time the number of deals completed has somewhat kept up with the pattern of the oil price, as 1118 deals occurred in 2011 and 1041 in 2012, which were the most in a single year since 2005. 

However, since then oil has seen a massive decline in price, with the current price being $50/barrel. As expected, during this period, the number of deals gradually dropped from the heights of 2011 in line with the oil price.
Deal value not as well correlated
Total deal value does not follow quite the same trend as the number of deals, with the values of the deals significantly less in 2011 and 2013 suggesting that even though more deals took place in those years, many of the deals would have had lower values. 

The peak in total deal value was in 2012 at approximately $300bn, a contributing reason for this could be because the deals in 2012 involved much higher proved reserves than any of the other years hence the average value of the deals were higher.
Larger deals not affected
However, with further analysis, it becomes transparent that the oil price does not affect the bigger players in the market, for example deals with values above $10bn are not too affected by the oil price as there has not been a large change over the years in these types of deals. In fact the largest deal from the last five years has come in 2015, the year where the oil prices have been the lowest; this was the deal where Shell acquired BG for $81.9bn.

Corporate M&As buck the trend
When the deals were broken down into type of fields, a similar trend seemed to have continued on the whole amongst all the types. However, the proportion of Corporate M&As decreased from 26% of all deals in 2006 to 11% in 2013, but more recently they are increasing again with the figure at 18% in 2015 up until now.

In conclusion, we can see while there may be a trend between the oil price and number of deals occurring over time, there are many other factors to be taken into consideration and with more in-depth analysis the trend starts to fade.

Thursday, 15 October 2015

Kurdistan payments ~ two payments in two months

by Will Forbes

Today’s announcement that Gulf Keystone has been paid for the second month running is good news for all concerned. Gulf Keystone gets much needed revenues, and a second payment starts to give Kurdistan companies (and investors) a taste that these payments could be the start of regular, reliable cashflows. We note Genel and DNO have yet to announce payments themselves, though we would be surprised to not see these in the near future.

Two swallows do not make a summer, but once confidence in the payments (for current and historic production) is high, the companies will be able to fund further development in their assets, whether that is offsetting potential declines (Taq Taq/Tawke) or increasing production (Shaikan) or investing in new capacity (Sheikh Adi, Ber Bahr, Peskabir, Chia Surkh).

We note Gulf Keystone’s cash balance is now $76.2m, enough to cover the upcoming bond repayments of $26.4m. This will take the cash balance below the $50m level, which under the terms of the bonds will trigger the need for GKP to talk with bondholders. We note that cash dipping below the $50m level does not trigger anything other than a need to talk to bondholders (there are no penalties), and we would expect the company to have been actively engaging with bondholders throughout this period.