OGV Energy's UK North Sea Oil & Gas Review – November 2020

A big merger deal, the prospects of UK’s oil and gas production, company strategies and operations updates marked this past month’s major news stories in the UK North Sea.    

The recent massive downgrade of Hurricane Energy’s Lancaster field has prompted Rystad Energy to revise down its oil and gas production forecast for the UKCS, with output expected to never exceed 2 million boepd again.

UK oil and gas production has dropped steadily since its peak at 4.3 million boepd in 1999, never exceeding 2 million boepd after 2010. Before Hurricane Energy’s downgrade of the Lancaster field, Rystad expected UK output to reach 2.1 million boepd by 2035. After the downgrade, Rystad now sees production reaching a maximum of 1.7 million boepd in 2035. 

“The main takeaway here is that we may never again see any significant production upsurge in UKCS production. A possible game-changer could now only be a development of technical skills for producing from fractured basement reservoirs to increase the recovery factor,” said Olga Savenkova, upstream analyst at Rystad Energy.

The Oil and Gas Authority (OGA) has for the first time expanded its benchmarking to the flaring and venting of greenhouse gases on the UKCS, revealing flaring and venting activity levels in the North Sea and the resulting contribution to UK oil and gas greenhouse gas emissions. According the OGA, the volume of gas flared and vented in offshore upstream oil and gas production last year was equivalent to 3% of all the natural gas produced. However, the volume of gas flared last year was down by 4% compared to 2018—the first annual reduction since 2014.

“While it’s encouraging to see a fall in volumes flared and vented, we believe there are clear opportunities for industry to go further to advance cleaner production,” said Hedvig Ljungerud, OGA Director of Strategy.

“Our benchmarking has already been proven to raise performance levels in other areas, such as production and decommissioning cost efficiency, enabling operators to learn from good examples set by others and allowing us to focus our attention and interventions in the right areas,” Ljungerud added. 

Environmental groups Platform, Friends of the Earth Scotland, and Greenpeace UK published a survey, saying that 81% of offshore oil and gas workers consider leaving the industry.

The survey drew reaction from the OGUK, the leading representative body for the UK’s offshore oil and gas industry, which repeated calls to campaign groups to meaningfully engage with the sector to ensure a fair transition for energy communities.

“At a time when all industries are navigating unprecedented financial pressures, it is disheartening that some campaign groups are painting a misleading picture to suit a particular agenda, when in fact we could be much more effective if we work together to embrace the net zero opportunity,” OGUK Chief Executive Deirdre Michie said in a statement.

“A huge proportion of companies in our industry have been supporting projects across the full energy spectrum including in renewables for years,” Michie noted.

In early October, the OGA awarded a carbon dioxide (CO2) appraisal and storage licence (CS licence) in the Liverpool Bay area of the East Irish Sea to Eni UK Limited. Under the licence, Eni plans to reuse and repurpose depleted hydrocarbon reservoirs and associated infrastructure to permanently store CO2 captured in northwest England and northern Wales.

“This is a vitally important project for Eni and represents a milestone for the 2050 Net Zero ambitions of the UK and a fundamental pillar for the strategy of energy transition and decarbonisation that Eni is strongly committed to,” Eni CEO Claudio Descalzi said.

Small and medium-sized enterprises (SMEs) in the subsea supply chain are cautiously optimistic about the immediate future in the next six to twelve months, according to a snapshot survey of the UK’s £7.8-billion subsea supply chain carried out by industry body Subsea UK.

Nearly 75% of respondents do not expect to make redundancies in the near future and 56% are fairly optimistic about the next six to twelve months. Yet, nearly 23% are reducing staff, while just 3.5% are actively recruiting. As of 2019, the subsea industry in the UK employed 45,000 people.

The top three priorities for subsea SMEs now are the health and well-being of employees, cash-flow, and lack of visibility over project work and their order books.

“Although there have been major redundancy programmes across the tier one companies, the situation among SMEs – who make up the bulk of the subsea supply chain – does not appear quite so gloomy. However, this cautious optimism must be put in context with the overall bleak outlook we are seeing,” said Subsea UK’s chief executive, Neil Gordon.

Company news

Shell said it was restructuring operations in light of its ambition to play a role in the energy transition and a lower-carbon future. The reorganisation and expected efficiencies mean that Shell will reduce between 7,000 and 9,000 jobs by the end of 2022, chief executive Ben van Beurden said.

In a major deal in the UK oil and gas sector, Premier Oil and Chrysaor said on 6 October they plan to merge, creating the largest listed independent oil and gas operator in the UK North Sea. Under the proposed all-share transaction, Premier Oil will merge with Chrysaor through a reverse takeover, and the London listing of the company will be retained. Premier Oil’s creditors will receive US$1.232 billion in cash, and Premier’s total gross debt of around US$2.7 billion, as well as certain hedging liabilities, will be repaid and cancelled on completion of the transaction. Chrysaor’s biggest current shareholder, Harbour Energy, and other Chrysaor shareholders are set to own at least 77% in the new group, while Premier Oil’s stakeholders will own up to 23% of the combined company. 

“Chrysaor and Premier Oil are great stewards, contributors and champions of this industry so this investment is encouraging news for the UK Continental Shelf,” OGUK’s Michie said, commenting on the news.

“With companies increasingly looking to see how they can work together to meet as much of our oil and gas demand from domestic resources instead of imports, this merger will help to stimulate further activity for our hard-pressed supply chain and contribute to an inclusive transition towards a low carbon economy,” Michie added.

Greig Aitken, principal analyst on Wood Mackenzie’s corporate analysis team, said about the deal: “Above all, the merger adds scale. Size matters in oil and gas. Particularly in tapping additional sources of finance during periods of volatility.”

“Bigger, more efficient producers that are resilient enough to see through the cycles – but small enough not to be weighed down by internal competition for capital and high G&A costs – are better equipped to collaborate with the supply chain, maximise recovery and deliver consistent returns to shareholders,” Aitken said, adding that the UK sector is “ripe for consolidation.”

Archer secured a four-year contract extension with Apache Corporation for the provision of platform drilling operations and maintenance services on Beryl Alpha and Bravo, Forties Alpha, Bravo, Charlie and Delta in the UK North Sea. The extension, of an estimated value of up to US$100 million, will begin on 1 January 2021 in direct continuation of the current contract. 

CGG said at the end of September it had completed the first phase of its multi-year program to deliver the largest OBN multi-client survey ever acquired in the UK Central North Sea. The company also began the second acquisition phase. The survey started in March 2020 and has already received significant industry interest and prefunding, with first images targeted for Q1 2021.

Neptune Energy and its joint venture partners BP and JAPEX launched the subsea construction phase of the Seagull tie-back project on 23 September.

In early October, Neptune Energy announced the appointment of Pierre Girard to the newly-created role of Director of New Energy. In August, Neptune had announced the decision to create a New Energy team to scale partnerships and investments in low-carbon technologies, particularly hydrogen, carbon capture and storage (CCS), and electrification. 

Cairn Energy PLC deferred Catcher North and Laverda wells from the 2020 programme as it adjusted its forward capital programme to current market conditions, the company said in the half-yearly results, which showed net oil production averaging around 22,400 bopd, at the top end of the full-year guidance. Full-year oil production guidance is 21,000 - 23,000 bopd net, and Cairn Energy targets an average production cost of around US$18 per barrel of oil equivalent (boe).

Independent Oil and Gas Plc said on 5 October that it does not intend to make an offer to buy Deltic Energy plc, after Deltic’s board rejected an improved offer earlier in October. 

Controls technology company Proserv Controls signed in early October a  strategic alliance agreement with power system monitoring provider Synaptec to develop a cutting-edge integrated holistic cable monitoring system, which will reduce downtime, improve safety, and lower operating costs at offshore wind farms.

Serica Energy plc said on 12 October that it had started offshore operations to prepare the Rhum R3 well for production in the Rhum field, some 380 kilometres northeast of Aberdeen.

Wood plc has signed a three-year agreement with Equinor to deliver operations, maintenance, modifications, and offshore services on the Mariner A platform and Mariner B floating storage unit. The agreement, valued at around US$75 million, will run for three years from January 2021, with options to extend. The work will be delivered by Wood’s Aberdeen-based onshore and offshore teams, with support from its global engineering community. The Mariner field is Equinor’s first operated development in the UK North Sea.