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ASSET LIFE EXTENSION
Asset life extension: viable in the long term for oil and gas?
While much of the oil and gas industry moves towards decommissioning, there are a few companies going against the grain and investing in asset life extension.
JP Casey speaks to UK-based Rockrose Energy to find out whether pushing back decommissioning and focusing on life extension is viable in the long-term.
Credit: Henning Flusund
While much of the oil and gas industry begins to focus its efforts on decommissioning and transitioning to a world where oil production, if not oil usage, will form a smaller part of the global energy mix, there are a few companies continuing to invest in and extend the lives of their projects.
Equinor’s Statfjord field is perhaps the most obvious example, with the company recently announcing that the Statfjord A platform will continue to produce oil into 2027, close to its 50th year of active operation. The field is estimated to have generated $180bn in income over its lengthy lifespan, and with the drilling of 100 new wells planned, the operators seem to be confident that despite the general trend of the industry, profit and productivity remain in the field.
But it’s not just majors who are engaging in asset life extension, with this optimistic approach trickling down to smaller players in the North Sea. One such company is Rockrose Energy, a UK-based independent that announced earlier this year that production at its Ross and Blake fields in the North Sea will be extended by five years, pushing the fields’ expected lifespans into 2029.
With the operator is expanding the fields' potential production by more than two million barrels of oil equivalent, the project is an identical case study in optimism and a focus on the bottom line to Equinor’s expansion, but on a more local scale. Yet it remains to be seen if Rockrose’s project will prove financially viable in the long-term, and how the expansion work will fit into an industry that, despite a few examples, seems committed to decommissioning.
Proactivity in a stagnant sector
Decommissioning is becoming an increasingly vital aspect of the North Sea oil and gas industry. Oil and Gas UK reported at the end of 2019 that the UK offshore sector is expected to spend over $19bn on decommissioning over the next decade, with well decommissioning in particular accounting for 45% of the forecast expenditure for oil and gas companies over the next ten years.
Yet Rockrose is undeterred, with managing director Peter Mann noting that “it is part of the company’s strategy to extend field life and push back decommissioning. Plans at Ross and Blake are in line with that”.
The firm plans to invest $250m into the two fields, in which it owns a 30.8% stake, to fund new drilling work that will see two additional infill wells constructed.
It is part of the company’s strategy to extend field life and push back decommissioning
This optimistic investment follows a productive few years for the company that has encouraged Rockrose to take a more proactive, expansionist approach to its assets, at a time where much of the industry is looking towards decommissioning. Rockrose has seen productivity increase at its operations in recent years, posting an increase in annual production across all of its operations in the North Sea of 117% in 2019 compared to 2018 figures.
Furthermore, with over 100 million barrels of oil equivalent beneath its platforms in the UK Continental Shelf (UKCS) alone, the firm is optimistic that its projects will continue to be productive and profitable.
Ensuring high standards for health and safety
Mann was eager to point out Rockrose’s recent commitment to proactive asset acquisition and ensuring high standards of occupational health and safety. Both of these could help stabilise the company and its assets in an industry whose future is increasingly uncertain, creating a coherent identity for the firm to unite its operations across its assets.
In 2019 the total number of HSE incidents at Brae fell by 39% to 17
“Rockrose has established HSE policies in place, which ensure the safety and wellbeing of its employees and contractors,” he said. “This was reflected at Brae, where in 2019 the total number of HSE incidents fell by 39% to 17, with only seven of these taking place post-completion of the acquisition of the Marathon UK deal, which included the Brae assets.”
As a result, Rockrose has aimed to position itself as an active and dynamic actor in a sector often considered backward-looking and resistant to change; last July, for instance, the company completed the $95m acquisition of Marathon Oil, a deal which saw assets worth 28 million barrels of oil equivalent come under the operation of Rockrose, significantly expanding the company’s influence in the North Sea.
Rising costs and long-term goals
Rockrose’s approach appears to have yielded financial dividends, at least in the short term, with dramatic improvements in raw production figures and profits over the last year. The company saw a 311% increase in gas production from 2018 to 2019, alongside a 55% increase in oil production over the same period, and a total increase in revenues of 64% across its oil and gas operations.
Perhaps most concerning is the 292% increase in abandonment expenditure
In the company’s annual report, executive chairman Andrew Austin echoed this sentiment, predicting a 9% increase in production between 2019 and 2020 that would see the firm’s total output reach around 21,000 barrels of oil equivalent per day
Yet while these figures are undoubtedly impressive, they are undermined by the company’s vast capital expenditure. This has been enough to keep the company producing in the short term, yet it is unclear as to the sustainability of this level of investment.
Between 2018 and 2019, capital expenditure increased by a dramatic 624% to $76.9m. Perhaps most concerning, however, is the 292% increase in abandonment expenditure, with RockRose spending over $9m on abandonment work in 2019, despite its broad aims to delay decommissioning work where possible.
Rockrose’s long-term financial viability
In 2017, Rockrose commissioned oil and gas evaluation firm ERC Equipoise to assess the company’s long-term financial viability, and the company’s conclusions could be a concern. ERC Equipoise predicted that cost inflation would increase from 1.02% in 2018 to 1.4% in 2034, which could drive up operational expenses for a company that has already invested a significant sum across its operations.
Yet according to Mann, this ever-increasing spend is simply part of a changing oil and gas landscape in the UK.
There is a changing of the guard in the UKCS, with some of the larger international companies refocusing elsewhere
“The UK North Sea continues to represent a significant opportunity,” said Mann. “There is a changing of the guard in the UKCS, with some of the larger international companies refocusing elsewhere, which leaves opportunities for smaller, flexible and ambitious companies with strong balance sheets, like Rockrose, to take on the assets and maximise their economic recovery and potential.”
Should the oil and gas landscape shift away from major companies with decades-old projects, towards these smaller, more agile firms with fewer assets, Rockrose’s vision of smaller projects with significant financial margins could be realised.
Despite investment of $248m into the Ross and Blake fields as part of the latest round of expansion alone, the firm still posted an end-of-year balance of $203m at the end of 2019, compared to $38m at the end of 2018.
Financial risks certainly remain for those eager to pursue asset expansion at this point in time, but Rockrose is proving that there could be a way forward for independent companies willing to take these kinds of financial risks.