With interests in more than 30 fields in the North Sea, Viaro Energy has quickly established itself as a household name on the UK Continental Shelf. Pursuing a strategy of targeted M&A opportunities, the company has consistently capitalised on unfavourable market conditions through continuous investments in both exploration and production assets, made more affordable by the accompanying economic downturn.
Like other UK North Sea producers, the windfall tax has inevitably had a significant impact on Viaro’s cash flow. Despite the notable investment incentives included in the policy, a record number of producers and operators have announced a scaling down or reduction of their North Sea offshore activities in 2023. In the wider political turmoil and fiscal uncertainty of the past year, Viaro has positioned itself as a major contributor to the overall security and affordability of the UK’s energy supply. Its assets currently account for at least 9% gross total daily gas production.
Francesco Mazzagatti, Viaro Energy CEO, discusses the ever-changing political and economic factors that UK oil and gas companies have to navigate in the current landscape.
“The UK energy industry has undergone significant turbulence in the past few years. During the winter of 2022, we saw what energy supply shock could look like as countries across Europe turned to coal to keep the lights on following power shortages and increased electricity costs. The introduction of the EPL and EGL, both considered de facto windfall taxes, created additional obstacles for attracting investors, especially as they serve to further pit traditional and renewable energy producers against each other. Oil and gas companies argue that the tax reliefs do not meaningfully balance out the impact of the taxes, while renewable energy producers complain about comparatively fewer tax benefits.
“What’s more, the increased taxation is not necessarily followed by appropriate relocation of spending, as we keep seeing reports of insufficient investments in renewables. Not to mention the lack of properly planned funding allocated for retraining workers if they are to keep up with the radical changes the government insists on in order to reach its net-zero targets.
“No one is disputing the need for a global initiative to limit temperature increases caused by climate change. But if we are truly to make an impact, we need to acknowledge that we are talking about transforming entire industries that form the pillars of the world economy, and how they use energy and deal with emissions.”
The UK Government has faced severe criticism for its apparent lack of a proper energy transition strategy. The push for lowering emissions at the detriment of the stability of the local economy and energy supply, while at the same time calling for more investments in the North Sea basin, has largely been perceived as disorderly and short-sighted.
Mr Mazzagatti offers his perspective on the challenges associated with the transition.
He said: “In recent years, we have seen a call for establishing centralised international systems of power to tackle issues affecting various nations – regardless of whether it is a humanitarian crisis or global warming. It is easy to succumb to the pressure for immediate solutions in any crisis situation, though we sometimes seem to forget that the energy transition has never been about eradicating the oil and gas sector but rather lowering the carbon intensity associated with our operations. At the end of the day, any transition on a global scale requires a properly structured shift that will provide suitable alternatives for those affected by the changes, from workers to consumers.
“In the meantime, it is also important to be realistic about where we are at this stage of the transition. They say you have to spend money to earn money, and the parable is certainly applicable here. Regardless of government actions, North Sea investments are necessary for a planned transition that includes reduced reliance on energy imports and maximising the potential of local E&P assets. At the same time, only continued investments will attract capital providers to provide funding for what is already a known high-risk and high capex-intensive industry.”
Despite the above, there still seems to be an appetite for M&A activity in the energy sector. While 2022 saw a significant lull, the sector seems to have revived in 2023 with almost £10 billion worth of deals occurring in the first half of the year. Viaro has been one of the most active companies in this area this year, an important part of the company’s ongoing strategy.
“At Viaro, we maintain a balance between investments in mature producing assets that generate quick returns and development opportunities, which are more volatile but equally necessary for increasing the local energy supply. Such an approach has thus far allowed us to maintain a healthy, debt-free balance sheet and continuously pursue our growth strategy despite the associated challenges. Unlike publicly listed companies, whose investments carry the risk of bankruptcy and credit defaults that could cause a backlash for the financial sector, independent producers like Viaro can actually serve to decrease it by ensuring that the stranding of viable local assets is avoided.”
Viaro has completed two significant acquisitions in 2023 and has more planned in the near term. In February, Viaro entered into an SPA with Spark New Energies to acquire 100% of the share capital of Spark Exploration UK’s West of Shetland assets, which includes a 50% interest in the Tuck gas appraisal opportunity, and a 50% interest in each of the Boulmer, Cherry and Sammy exploration prospects. In April, Viaro acquired a 60% working interest in Licence P.2607 from Hartshead Resources. The projects is a phased redevelopment of gas fields located in the Southern Gas Basin. Phase 1 will see the development of the Anning and Somerville fields and Phase 2 will focus on the Hodgkin and Lovelace fields.
“Our 2023 acquisitions have mainly been gas exploration and development opportunities, which is consistent with our strategy to support the development of primarily natural gas assets. This is the majority of our portfolio, a conscious effort to lower the carbon footprint associated with our operations. Gas still provides almost 40% of the UK’s energy supply so establishing a secure, reliable source is increasingly important as the UK looks to reduce carbon emissions across the board.
“As a rule, we are on the lookout for opportunities of this kind – for example, in the event of a successful appraisal drilling of Tuck, we will evaluate the benefits of a tie-in to the Greater Laggan Area. This is a good way of maximising the benefits of exploration and appraisal opportunities without the additional investment risk and environmental impact of developing new infrastructure.”
The agreement with Hartshead will also see the return of Viaro to operatorship. As part of the deal, RockRose Energy, Viaro’s upstream subsidiary, will assume the role of operator prior to first gas being achieved, following all relevant regulatory approvals.
“The opportunity for our subsidiary, RockRose Energy, to assume the role of operator in the near future is an important part of our vision as we continue to establish ourselves as a serious contributor to safe and secure energy transition in the UK. The Southern Gas Basin remains one of the most important and longest-standing sources of gas in Europe, with strong potential to be a reliable energy source in the transition.
“We are also conscious of the fact that technological innovations are a major part of any operator’s effective contribution to net zero. We are yet to see a game-changing solution that is widely adopted across the sector. That said, we are carefully evaluating any improvements that can transform the way oil and gas operations are conducted in order to meaningfully support the transition, either as operator or investor.
“Resilience and adaptability have carried us through the economic challenges of recent years, and we are confident that similar tactics will allow us to keep delivering on our strategy as we continue to grow.”