The extraordinary convulsions continue and you can bet your bottom dollar that the North Sea exploration and production landscape will have changed dramatically by this time next year regardless of whatever fiscal changes are implemented in the spring 2009 UK Budget following the just-published Treasury consultation paper on the topic.
In particular, the shoal of minnows attracted to play on the UK Continental Shelf by Government come-ons, especially Frontier and Promote licences, will suffer a large reduction in number.
Many that have achieved tangible results from their efforts – commercial oil&gas finds – will most probably become snacks for larger players unless they have sufficient cash in hand to enable them to weather the current storm.
Will there be mergers between such companies? It’s possible, except that I would question the value of huddling together when starving as one refugee might suddenly turn cannibal, or everyone dies anyway.
There is, of course, a tendency to lump E&P companies together in the same basket, forgetting that they can be very different from one another. Encore is an excellent example; it calls itself an exploration and appraisal company, not an E&P outfit.
For now, at least, this firm’s CEO, Alan Booth, is more interested in making discoveries, proving them up, then monetising the results through trade sales than he is participating in actual field development.
Pull off enough good results and Encore is in with a chance of building a decent war chest with which to pursue what it regards as the plum opportunities.
In this particular company’s case, the primary current options for filling corporate coffers would appear to comprise:
Cash in the Breagh gas discovery through a co-ordinated trade sale to another company with the resources necessary to develop what is increasingly regarded as being the largest gas discovery made in the Southern North Sea for many years – perhaps as much as 1trillion cu ft or recoverable resource of which Encore would hold 15%.
Monetise Ceres/Barbarossa, for which field development approval has been granted by the UK Government to operator Venture Production. The upside is that Encore could be earning revenues from this development by late-2009; the downside is that 10% of 45billion cu ft isn’t much and a sale to Venture is logical as it would release valuable cash.
Sell on Cobra, a “tight” gas discovery that may require considerable additional spending to get a commercial outcome, assuming that is ever possible. Problem is that a sale would yield buttons.
Get to a definitive result with Esmond, a fully depleted Southern Gas Basin field that Encore and Petronas unit Star Energy own 50:50 and hope to convert for gas storage.
There was consternation last month when a supposed no-brainer re-entry of the field using the rig, Maersk Enhancer, generated initial results that led to Encore’s share price being slaughtered on the news.
Patience on this one could yield a positive result in the end and, for Encore, the chance of selling its half of the field. If this happens, small shareholders such as myself might get something back after all.
Judging by the initial result, the biggest prize for Encore could turn out to be Cladham. The odds on this North Sea stratigraphic trap yielding a prize were not good, but the partners in the £12million exploration well got lucky last month. Will Cladham eventually turn out to be commercial? One day perhaps, but it will take time and scarce money to find out.
At least with Revus (recently acquired by well-heeled Wintershall) in the partnership, which also includes Sterling Resources and Dyas (it recently took a stake in ailing Athena), finding the money needed to develop Cladham could be a little easier.
Of course, Encore may choose to monetise that stake, too, as Booth, who has a shed-load of personal money committed, continues his quest to find the really big one. It should be borne in mind that his name is forever attached to the Buzzard field discovery of 2001, a find that turned into the largest made offshore the UK in many a year.
Whether Encore rides the current storm successfully depends not only on the skills of people like Booth, it depends, too, on a stock market that is blighted by a reputation for ruthlessly punishing E&P firms for the smallest of slips, and even marking them down when successful – a case of damned if you succeed and damned if you fail.
That story is being repeated many times over across the North Sea – from solid players like Dana, to Venture Production and Faroe Petroleum, to downright brazen (and successful) Oilexco, to promising newcomers like Encore, Stirling, Athena and a heap of others.
However, pound to a penny – dollar to a cent – a wardrobe full of shirts will be lost before the current crisis is over and “calm” returns to the North Sea.
Come mid December, I fully expect Opec to commit to a further 1million or so barrels cut in oil output.
Swing producer Saudi Arabia made it clear in Cairo on November 29 that it wants $75 a barrel and that this is in any case essential to enable marginal oil producers to remain viable, which increasingly means the North Sea too.
When Saudi Aramco delays two major projects because of the massive oil price slide of recent weeks and rising costs … I am referring to the $1.2billion revamp of the Dammam field that first came onstream in 1938 and rescinding of a contract associated with the $10billion Manifa project … that is bound to raise eyebrows among the Riyadh non-oil establishment.
They will want action, not grovelling to the Americans.
When President Hugo Chavez – a man the West loves to hate and who personally doesn’t give a stuff about the US – is faced with having to implement massive cuts to social programmes designed to keep the Venezuelan proletariat quiescent, you can bet that he will want output slashed.
When President Ahmadinejad, who has staked his presidency on sharing out Iran’s oil wealth more fairly, is also forced to make cuts to social programmes in an election year because of $50 oil, one can expect action, especially if it riles the Americans.
The big surprise is that Russia is now willing to join Opec members in making a co-ordinated cut in output in order to bolster barrel prices.
On that basis, a return to $70-plus oil seems only a short period away.