A long-overdue rationalisation among the smaller oil and gas firms in the North Sea is on the way, according to an industry expert.
Chris Bulley, of UK oil and gas consultant Hannon Westwood, told a London conference that having up to 160 oil and gas companies active in the North Sea was inherently unstable, with as many as 90 of them having little or no production or cash flow.
He added that the sector was not even stable before the recent oil-price drop but, combined with the current financial market turmoil, the new climate should lead to a long overdue rationalisation among the smaller players.
He said: “We have already seen the European utilities and sovereign wealth funds starting to invest heavily in the UK continental shelf through asset acquisitions.
“It would be no surprise to see these acquisitions accelerate, with both asset and corporate purchases starting to drive the market.
“Interestingly, we see either stronger companies select juniors for the quality of their assets or simply for the technical ability of their team, or juniors seeking to merge to achieve some materiality and a hedge against immediate acquisition.”
Among smaller companies highlighted recently as potential acquisition opportunities were Canadian firms Oilexco and Bow Valley.
Hannon Westwood says North Sea exploration is still attractive, and estimates that there could be more than 60billion unrisked (unproven) barrels of oil equivalent (boe) waiting to be discovered from about 1,400 undrilled exploration prospects in UK waters, including west of Shetland.
Mr Bulley said, however, that with exploration wells having about a one in five chance of success, the realistic figure for proving up reserves would be around 12billion boe.
The firm says that, in addition, there are more than 350 discoveries containing close to 7billion boe unrisked that require funds, resources and innovative thinking to move beyond being just a discovery.
Hannon Westwood said that, in the past three years it had noted a change in emphasis away from exploration drilling efforts to appraisal and development drilling.
It said the change was most marked among new entrants, where the realisation that value was calculated on booked reserves rather than undrilled potential had been at times brutally hammered home.
Mr Bulley said: “2008 has seen a high level of exploration and appraisal drilling with around 70 wells started. But the volume of hydrocarbons discovered is decreasing year-on-year. We are only replacing less than half of our produced reserves through the drillbit.
“Despite the air of gloom at the moment there are high levels of drilling activity planned for the next two to three years and there are already opportunities to participate through farm-ins in up to half of these wells.
“Of the other half where full funding had been assumed, there will likely now be some participants wishing to realign their budgets in the light of lower oil prices resulting in one-off or even multi-well opportunities to participate.”
Just last month Alec Carstairs, oil and gas partner at Ernst and Young in Aberdeen, said the situation for many oil and gas juniors was nearing critical.
He added: “The doors to equity and capital are fast closing and the importance of cash cannot be underestimated. A number of companies are already beginning to warn of uncertainty as to their ability to continue as a going concern.”
E&Y said the downfall of some firms could create opportunities for others.
