Email

Platform Hopping in the North Sea

by | published March 8th, 2012

Normally, my next Oil and Energy Investor would come on Friday.

However, in addition to providing briefings and attending policy meetings during my < href="http://oilandenergyinvestor.com/2012/03/consensus-200-oil-and-thats-a-lowball-figure/">current stay in the U.K., I have also been involved in something else while up here in Scotland: the evaluation of offshore platform procedures for a client.

And that is changing my schedule for everything else.

Offshore Development in the North Sea

The U.K. began its development of the North Sea off Scotland. Since then, field work has moved into deeper water reserves further out. Yet the country’s primary extraction volume still comes from the area nearer the coast.

Operations have turned the sleepy (and impoverished) city of Aberdeen into a global oil service center. The transformation was remarkable. From a city known for textiles and out-of fashion manufacturing, an entire generation of oil technicians and specialists was born.

That may be the main enduring legacy of this transformation. It is now very rare when walking on the deck of a deepwater production platform anywhere in the world not to run into a Scottish electrician, pipe runner, or oil analyst.

But those days are drawing to a close. Production from the main (and largest) offshore fields reached peak levels several years ago, and is now in rapid decline. While satellite formations are being exploited and moderate-sized new discoveries are coming online off Norway to the east, the era of North Sea oil is coming to an end.

Two things are resulting here. One is obvious, while the other rather unexpected…

Smaller Companies Can Maximize Extraction Potential

First, London and Edinburgh (the location of the Scottish parliament) have had to compensate for the expected decline in revenues for some time.

With a cut in export proceeds, the rising demands for public services in an already strained budget will result in a range of problems.

There will be sufficient volume of crude coming onshore to meet British requirements, with a greater number of swap contracts to balance rising offshore production prices with spot discount purchases in a broader market.

But the end of North Sea primary oil flow will engender a new and more problematic environment.

The second result is more positive. As the big boys ponder whether additional offshore moves are warranted, a new stage is rapidly emerging. This one involves smaller companies moving in, either acquiring lower-reserve existing fields or farming into ongoing projects.

Such developments are becoming the norm in many regions of the world. Focused and well-managed smaller companies are likely to provide better overall returns than larger operators with higher overhead.

In addition, new types of holding structures have sprouted up in the mature offshore zone. Combining assets with known (although declining) production levels and acquisitions/production trusts and related operations allows leaner companies to maximize returns.

In these approaches, the extraction potential is maximized, even if the overall volume is in decline. This allows a holding to utilize across-the-board per unit proceeds rather than field-specific returns as its basis for determining the bottom line.

In such a scenario, being smaller is better… if the management knows what it is doing and can adequately evaluate the assets in question.

Which is why I am bouncing on the waves these days. The technical aspects of determining a farm-in or acquisition are better left to the petroleum engineers, while the legal aspects of the contract are the responsibility of solicitor specialists back in Dundee.

My part in all of this is to value market prices for the resulting crude, and the most likely locations for export.

A Model for Other Regions

Now I could do this from land, and most of it will be done there (up against a fire with a nice cup of Lord Grey tea).

However, early in my career I tried to determine market factors without actually seeing the operations platforms… and it was a disaster.

So these days I need to review the wellhead process, as well as the amount of crude likely to come online.

The production facilities determine the crude flow – not the book figures of the extractable reserves. Therefore, the three platforms involved in this potential deal are essential to gauge profitability.

Of further interest is the model being developed here that will be of use in other offshore production regions. With the absolute majority of large fields yet to be discovered worldwide resting offshore, and the costs to develop them rising, these new ways of bringing in additional participants and capital will be expanding.

Which means I better have my sea legs intact; there may well be more platform hopping ahead.

Sincerely,

Kent

Please Note: Kent cannot respond to your comments and questions directly. But he can address them in future alerts... so keep an eye on your inbox. If you have a question about your subscription, please email us directly at customerservice@oilandenergyinvestor.com

  1. Peter Rush
    March 8th, 2012 at 13:48 | #1

    Lord Grey tea? An earl may be a lord but not all lords are earls, Kent!

  2. Jack B.
    March 8th, 2012 at 14:12 | #2

    What are we to do with the Icahn offer for CRV Energy?

  3. March 8th, 2012 at 16:02 | #3

    Sorry to corrrect you Kent but it’s EARL Grey tea.
    I’m an ex-pat!!!!!!!!!!!

  4. eric taylor
    March 8th, 2012 at 16:30 | #4

    If you think Lord Grey is flowery you should try Lady Grey, but
    I am a Jasmine drinker myself!

  5. March 9th, 2012 at 02:38 | #5

    The tea drunk is EARL (not Lord) Grey from TWININGS of London, as supplied to Her Majesty Queen Elizabeth II.

  6. Mahmoud Rateb
    March 9th, 2012 at 11:51 | #6

    Gents
    Thank u for highlighting the difference between a lord and earl of tea.
    Kent, we rely on you to know the difference between ,the lord and earl of petroleum

  7. Penny T.
    March 9th, 2012 at 18:54 | #7

    I agree with Jack B., please advise concerning what we are to do with the Icahn offer for CRV Energy? Time is of the essence.
    Also, Cheniere Energy Partners(CQP)we were told the dividend was 11.9% but I just read elsewhere they quoted the dividend as 7.1%. Which is correct?

  8. March 10th, 2012 at 02:40 | #8

    Kent,
    Welcome to offshore Scotland, I’m also currently offshore. Hopefully your timing is good with the worst of this winter’s gales behind us now.
    In your presentations on what remains of our North Sea Oil and Gas industry please make reference to the Westminster Government’s fiscal rape of oil company revenues forcing premature abandonment of mature and producing North Sea oil fields.

  9. Les
    March 12th, 2012 at 18:54 | #9

    For heavan’s sake, Earl Grey is simply black tea ruined by the addition of bergamot. A good blend of black African and “Ceylon” leaves stand quite well on their own.At least, in my opinion. 😉

  10. Les
    March 12th, 2012 at 18:59 | #10

    Hopefully Dr. Moors, you will elucidate on Statoil and the Norway find in the near term. Statoil has, as I understand it, a 5% dividend as well as newly discovered oil.

  11. Tom Stavros
    March 14th, 2012 at 14:44 | #11

    Kent:

    It seems that most currently producing and formerly produced oil fields are fed oil from deeper and tighter shales. Have they done 3D seismic and not found deeper shales that feed the North Sea fields? Or have they not looked? I can’t believe they would ignore such a possibility with billions and perhaps trillions already invested in the North Sea. There must be deeper shales that gave rise to the currently produced fields.

    It would make sense to do the seismic now and to drill from existing platforms, rather than to tear down the existing platforms, then have to back in later and try to do 3D seismic to find the mother shales and to build whole new platforms to produce the deeper shales at some unknown time in the future. Can horizontal wells and frac jobs not be done at sea? Are the current platforms not capable of supporting horizontal drilling and multi-stage frac jobs? Is production from shales limited to onshore? Knowing what we know now, it seems that there is a very high probability of oil bearing shales deeper than the currently producing fields and it does not make much sense for the big boys to just walk away.

    Tom Stavros

  12. enthusceptic
    March 18th, 2012 at 16:42 | #12

    Mr Taylor, Lady Grey, now you are in the deep end!? His wife maybe…

  1. No trackbacks yet.