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Has a new era of small producers arrived in the UK North Sea?
The latest round of offshore licensing for the North Sea has been important for the rise in smaller new players bidding for blocks, as big players like Total put their assets up for sale. Are we seeing the dawn of a new era of small companies dominating the North Sea? Molly Lempriere finds out
espite fears of a decline in recent years, the North Sea remains one of the biggest and most important offshore oil and gas regions in the world. Following transformative oil price crashes in 2008 and 2014, operations have become more streamlined, with companies taking advantage of new technologies to economise activities at ageing fields.
In May, the UK Oil and Gas Authority (OGA) awarded 123 exploration licences as part of the 30th Offshore Licensing Awards. The awards cover 229 blocks or part-blocks, spanning an area of 26,659km². This is a big increase for the UK Continental Shelf (UKCS), and if all of the licences are taken up by the 61 companies awarded them, total acreage held will increase by 50%.
“Despite the difficult economic environment, industry responded strongly to the 30th Offshore Licensing Round confirming the high remaining potential of the UKCS,” says OGA head of exploration Nick Richardson. “The round focused on ‘mature’ regions with existing infrastructure, which provided companies with an excellent opportunity to take a fresh look at a large inventory of opportunities from which to rebuild their portfolios to help sustain future production.”
One of the more surprising trends this recent round has highlighted is a move away from large oil and gas companies to smaller exploration and production (E&P) companies. But what can they bring to the region that the big players can’t?
The rise of the small producers
The first thing to note is that a number of the Big Six oil and gas producers have started to move away from the North Sea. Total announced in July that it would divest a number of its UK North Sea assets, worth as much as $1.5bn, including some of its shares of the Laggan-Tormore gas field, and the Golden Eagle, Dumbarton, Bruce and Keith fields.
As the North Sea matures, Total is not alone in looking to move elsewhere. Chevron is also reportedly looking to divest some of its assets, with younger fields holding greater potential over a longer period of time.
However, as these large players move away, the space is opening up for smaller E&P companies. These companies, such as Neptune Energy and Tangram Energy, have a number of advantages over their larger counterparts. “They are resilient and adaptive with a strong focus on being fit for the future,” says Richardson.
The second important point is that there is still an estimated 1.5 billion barrels of oil equivalent (boe) resources in undeveloped discoveries on the UKCS. Previously, much of this was too small or difficult to access, but technology and best practices have changed, providing opportunities for smaller, more agile companies.
“Smaller E&P companies tend to have a number of advantages over larger operators that can give them a strategic advantage,” continues Richardson. “Many have nimble decision-making processes, allowing them to act quickly to develop and explore, and adapt to the changing business and investment environment.”
There is still an estimated 1.5 billion barrels of oil equivalent resources in undeveloped discoveries on the UKCS
Many of these companies have become specialists in specific production techniques, taking advantage of the fast-advancing technological landscape to compensate for their scale.
“Often such companies also have strong technical specialisms that can be applied to particular subsurface and engineering problems to unlock resources where larger companies have previously tried without success,” says Richardson. “Where companies lack the scale of the majors and supermajors, they must be much more open to collaboration with their neighbouring operators, supply chain and infrastructure owners to realise the full economic benefits.”
Regulatory changes in a number of areas are also facilitating the shift, making it easier for smaller companies to be awarded blocks.
“Strong progress has been made by industry with the OGA acting as a catalyst to deliver change,” says Richardson. “The OGA’s work on addressing barriers to investment seems to be working – addressing issues such as access to infrastructure, lack of capital, commercial behaviours – and we are clear on the importance of what we call ‘right assets, right hands’. Significant M&A deals have been struck, bringing new investment and ideas, demonstrating that companies are seeing the remaining potential of the basin.”
This includes the Transferable Tax History draft legislation released in July, which has been designed to make the purchase of late-life fields more attractive by expanding the availability of tax rebates for decommissioning for new investors.
Smaller players, big impact
The 30th licensing round signalled change in the North Sea, and the suggestion is that operator demographics will start to shift. The OGA is hoping that this will help with production for years to come.
“The challenge going ahead is safeguarding our production and operational performance and driving innovation to deliver the 3.7 billion barrels added to our forecast in recent years,” says Richardson.
“We’ve made strong progress already and can raise this to the next level through solid collaboration and engagement between industry, investors and government, so that the UKCS continues to be an attractive investment proposition.”
Since 2014, the UKCS has recovered and increased production by 16%. It is predicted to maintain current production levels until 2020, when they will begin once again to decline. The OGA, together with oil and gas companies, is working to ensure the maximum economic benefit is gained from the shelf.
“In the short term the OGA’s aim is to continue delivering value by having the right conditions for industry to add more barrels,” says Richardson. “We’re keen to see more exploration projects get over the line and doing all we can to strengthen confidence to stimulate appraisal and drilling activity.”
The challenge going ahead is safeguarding our production and operational performance and driving innovation
With that in mind, the coming licensing rounds will become tailored to match the ageing field.
“Next year, we’ll be announcing the results of 31st Licensing Round, leading to new exploration in frontier areas and launching the 32nd ‘Mature’ Licensing Round later in the year,” says Richardson. “Area Plans remain a priority and we’re escalating our work with operators, licence holders and other parties to develop partnerships across the oil and gas lifecycle. We’re also excited to see the UK’s first Oil and Gas National Data Repository set up in Q1 2019, providing the basin with a rich resource of valuable and trusted data which can be utilised to unlock the huge prize of the UKCS’s potential 10-20 billion barrels.
“Going forward we will continue to work in partnership with industry, government and other stakeholders in pursuit of the considerable prize highlighted by Vision 2035, which sets out the opportunity for the UK-based industry to grow by an additional £300bn between now and 2035.”
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