Hannon Westwood Reports on 2015 Drilling Activity, Results and M&A Transactions in NW Europe

2015: UK delivers quality, Norway provides quantity

A year on since the oil price collapse and the effects are making themselves felt across NW Europe, particularly in the UK and Norwegian sectors. The count of E&A well spuds in the UK is an all-time low, a level not seen since  offshore drilling commenced in 1964, whilst in Norway a glut of dry holes and technical-only, rather than commercial, successes have plagued otherwise buoyant activity levels.  However, whilst the UK saw just 13 exploration spuds last year, matching that of 2014, commercial success rates have been the highest for over a decade, and in 2015, the UK delivered the same volume of new resources through the drill-bit as Norway, despite far fewer wells, with 16.5 mmboe per well comparing favourably to just 6 mmboe per well east of the median line. Meanwhile, continued caution in the M&A market has resulted in only a handful of transactions in the UK, whilst it is business as usual in Norway with over 40 deals conducted, Hannon Westwood reports.

The spike in new reserves coming on-stream from UK fields that commenced production in 2014, totalling over 500 mmboe, failed to be maintained into 2015, when seven fields containing just 63 mmboe reserves saw first oil, comprising Alma/Galia, Cladhan, Enochdhu, Godwin, Peregrine and Ythan. In addition, with tax receipts to the Treasury predicted to be to the tune of just £130 million in 2015/16, compared with £2.2 billion the year before, a reduction of 94%, there are very few companies actually making a profit from production – on the last day of the year, a barrel of oil was trading at just $36.50, 36% below the start of 2015.  For all that by year end oil and gas production is expected to show an increase of between 7% and 8% in 2015, the first increase in 15 years.

HW records some 16 E&A spuds in 2015, and whilst the exploration spud count matches that of last year (13), a sharp reduction in the number of appraisal wells is evident; just three (including wells at Humphrey, Sparrowhawk and Jasmine) compared to 12 the previous year. By area, just one well was spudded in the West of Shetlands (WOS), whilst the Northern North Sea (NNS) saw three exploration spuds, and the Southern North Sea Gas Basin (SNS) just one exploration and one appraisal.  No wells were drilled in the East Irish Sea (EIS), whilst the Central North Sea (CNS) saw the lion’s share of drilling with some 10 spuds, split with eight exploration and two appraisal wells.

In terms of success, the NNS saw discoveries at Boatswain, K Prospect (Callater) and Corona, whilst success at Mustard (WOS), Baroli (Shearwater) (CNS) and Sillimanite (SNS) helped the sector achieve a 46% commercial success rate, the best since 2002. Just one technical success, at Corfe (CNS), was recorded, whilst dry wells at Niobe, Manhattan, Bear, Wall, Red Castle and Les Arcs are noted.  Total resources of 165 mmboe are estimated to have been found through exploration in 2015, whilst the re-entry appraisal at Seagull adds a further 100 mmboe to the year’s findings, thereby totalling some 265 mmboe discovered through the drill-bit.

In the M&A market, the oil price collapse created a predator-prey scenario, with Shell’s takeover of BG, announced early in the second quarter of the year with a value of $70 billion, being one such example of this. Immediately following this takeover bid it seemed further mergers might follow, however a further fall in commodity price served to dampen any enthusiasm for M&A, to the point where the value of the BG/Shell deal is now being thrown into question in the current price environment.

HW records 36 deals that took place during the year in the UK, compared to over 50 recorded in 2014, with a total value estimated at $3.5 billion for those 13 deals with published values, over 35% of which is attributed to infrastructure related transactions, in particular Total’s sale of interests in the SIRGE and FUKA pipelines, and St Fergus Gas Terminal, to North Midstream Partners for $905 million and BP’s sale of CATS to Antin for $486 million.

Edison’s acquisition of Apache’s interests in the Scott and Telford fields, along with Shell and Exxon’s exit from their Anasuria area illustrates there remains significant value to be derived from late life assets, whilst INEOS’ purchase of DEA’s UK assets for a reported $750 million constitutes one of the year’s key transactions. Meanwhile, Statoil has bolstered its position in cross median line Alfa Sentral, through the purchase of interests from First Oil and subsequently Repsol, whilst EnQuest’s Scolty and Crathes tie-backs are being progressed, with the operator having acquired Ithaca’s 10% interest.  Also dealing in the development arena is SSE, which acquired a 20% interest from Total in the WOS Laggan, Tormore, Edradour and Glenlivet fields, in a deal with a headline value of $876 million.

In the farm-in market, five deals took place in 2015, which have led to two wells spudding in the year, with a dry well at Wall and an oil discovery at Mustard, the remaining three deals are on yet to be drilled promote licences in the Gas Basin.

In Norway, production in 2015 increased to 1.46 billion barrels of oil equivalent (bnboe) according to Hannon Westwood figures – up from 1.33 bnboe in 2014. Drilling on the NCS has also remained buoyant through 2015 with 45 E&A well spuds at year-end, compared with 46 E&A well spuds in 2014; significantly higher than UK levels for both years.  Of these 45 spuds, 39 were exploratory whilst only six were classified as appraisal.

Once again, the North Sea saw the highest level of drilling activity in the Norwegian sector with 26 E&A wells (22 exploration and 4 appraisal), followed by the Norwegian Sea where 14 wells were drilled, all of which were exploration. The Barents Sea has seen a lull in activity in 2015 with only five wells drilled, three exploration and two successful high impact appraisals on Lundin’s Alta Discovery.  As was the case in 2014, the Norwegian Sea was the most technically successful region, with an average exploration success rate of 50%; the North Sea followed closely with an exploration success rate of 47.6%.  Of the three exploration wells in the Barents Sea one has been temporarily suspended, one was dry, and one made a sub-commercial gas discovery on the Ørnen Prospect towards the end of the year.  In total 16 new discoveries were made in 2015 to which Hannon Westwood attributes an estimated 268 mmboe, substantially less than 2014 volumes when an estimated 838 mmboe could be attributed to a total of 18 discoveries.  Of particular note are the 45.5 mmboe (18 mmbbls condensate & 165 bcf gas) Julius Discovery, the 42 mmboe (250 bcf) Snefrid Nord Discovery and the 22 mmbbls Boomerang Discovery.

Similarly, deal activity in Norway has remained active with HW recording that some 41 deals took place in 2015, compared to 36 the previous year, with a total value of $2.65 billion for the 11 deals with published values that related specifically to NW Europe. Of these 41 deals seven are corporate acquisitions, the largest of which includes the previously mentioned $70 billion Shell/BG deal, DEA’s acquisition of E.ON’s Norwegian assets for $1.6 billion and Det norske’s acquisition of Premier’s Norwegian assets for $120 million.  One of the largest asset transactions of the year, Tellus’ acquisition of various assets from Wintershall, valued at $602 million plus a contingent $100 million, was announced in mid-year but was cancelled just before the festive break.

Positive results from the UK, in particular with regard to high commercial success rates and production levels, and Norway, where activity levels have remained high despite the current environment, are supplemented with encouraging signs elsewhere in NW Europe. The largest gas discovery in the Netherlands for some time was reported last year, albeit at 150 bcf, along with substantial interests in the latest offshore Ireland licensing Round provide optimism for the industry.  Looking forwards, a number of potentially high impact E&A wells in the UK are expected in 2016, whilst the deals market in Norway is anticipated to remain stable despite a forecast drop in E&A drilling.  So whilst investment is flagging, and companies are becoming ever more averse to unnecessary or risky expenditure, there remains quite a lot to be positive about in the coming 12 months.