Tuesday, 12 January 2016

Governments need to adapt to the oil price too

By Will Forbes

The oil price is having a huge effect. Falling cash generation means oil companies are cutting capital expenditure to balance the books. Not even this is enough - many IOCs are paying dividends out of debt.

In this environment, exploration has been hard hit and we have seen a huge fall off in exploration wells drilled in the last 18 months.
Global exploration wells Source: 1Derrick

Governments need to adjust
The Brent forward curve  implies a muted recovery. While service costs continue to adjust, companies are unlikely to invest in exploration unless returns improve. Governments have a role to play in this. Just as they increased fiscal take in the upswing, they should be prepared to reduce the tax burden in the downswing.

We believe that Côte D'Ivoire is showing the way in this respect. The recent deal announced by African Petroleum in its farm-out with Ophir Energy includes a revision to the PSC in Côte D'Ivoire that reflects "the current commodity price environment and outlook for development of the deepwater prospects".

Ceteris paribus, this flexibility in approach means that exploration is more likely to happen in Côte D'Ivoire than in other countries. This means that Côte D'Ivoire could see increased investment and better long-term prospects when/if oil prices recover - even if this process is many years, or decades away, those countries that are not looking to incentivise exploration now will suffer in future.

Importantly, with the benefit of hindsight of the rise in oil prices from 2004-2008, it should be possible for countries to facilitate exploration in lower oil price environments while retaining the economic rent of higher prices. Effective incentivisation to explore by governments in exploration  in the short term should pay long-term dividends.

The effect of fiscal adjustment to boost exploration is very clear when looking at the tax rebate system introduced by Norway in 2005. The number of exploration wells increased materially, and production from the NCS has benefited as a result.

Source: NPD, Edison

Monday, 11 January 2016

Exploration Watch - West of Shetland

By Elaine Reynolds

West of Shetland remains the least-developed area of the UKCS despite the first significant discovery occurring there almost 40 years ago. A combination of technical challenges means the region has remained relatively immature, with an estimated 95% of resources yet to be developed. Until recently only three fields, the BP-operated Foinaven/Loyal and Schiehallion, were in production. Joined in early 2016 by Total’s Laggan-Tormore gas field and Premier’s Solan project, only the latter is a notable successful development by an independent to date. However, recent  independent activity includes Hurricane Energy’s appraisal of the 207mmboe Lancaster discovery and Chrysaor’s Mustard discovery within tie-back distance of Solan.

Infrastructure is key

West of Shetland is a technically challenging region, with deep water of up to 1,500m in places and extreme metocean conditions that necessitate a restricted operating window. In addition, the region had to wait for advances in seismic technology and a build-up of detailed geological knowledge for success rates to improve in the area. The lack of infrastructure remains a key barrier to commercial success, particularly for gas discoveries, with the Laggan-Tormore gas pipeline the first in the region. However, the independents covered in this report hold licences that are clustered together and could be developed as hubs in the case of success.

Independents active in the 28th round

In the 28th Offshore Licensing round, licences were awarded to just three independent operators:
Hurricane Energy is focused on fractured basement plays in the UKCS, recognised as a key underexplored region by the Oil & Gas Authority (OGA). The company is focusing on developing Lancaster, having established commercial rates from horizontal appraisal well 205/21a-6 in 2014, and is now seeking a farm out to fund an Early Production System (EPS). Beyond Lancaster, analogous prospects Lincoln and Warwick sit within tie-back distance of the proposed EPS. 
Parkmead Group is at an earlier stage of development with prospects Davaar, Sanda North and Sanda South clustered together and with combined P50 recoverable resources of 312mmbbls. Identified from similar AVO anomalies to that seen in Foinaven/Schiehallion, work is ongoing to de-risk the prospects.
Chrysaor is a private company and operator of the Mustard oil discovery, announced in September 2015. The company is reviewing the well data before releasing any resource estimates. Mustard sits 15km east of the Solan development and could be tied back in the case of commerciality.

West of Shetland: Remains underdeveloped

Exploration drilling began in the West of Shetland area in the 1970s, with the Clair field being the first significant discovery in 1977. Even so, it was another 20 years before any oil was produced
from the region when the Foinaven and Schiehallion fields were brought onstream in 1997 and 1998 respectively. To date these remain the only fields in production West of Shetland and all are
operated by supermajor BP. By early 2016, however, two further fields are due to come onstream; Premier Oil’s Solan field and the region’s first gas/condensate development, Total’s Laggan/Tormore. Meanwhile, the sanctioning of Chevron’s 240mmboe Rosebank, believed to be the largest undeveloped discovery West of Shetland, was postponed in 2013 while the company looked at ways to reduce development costs.

Please see the full note available on the Edison website: Full note available here