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Is There a Future for the North Sea?

There has been a lot of talk in recent months about the future of the oil and gas industry in the North Sea. Here Jim Hannon, director of oil and gas intelligence consultancy, Hannon Westwood and a world renowned expert on the topic, gives us his view.
This article appeared in Vol. 6, No. 3 - 2009

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Jim Hannon has developed Hannon Westwood LLP into a successful brand-name in UK market intelligence & consultancy. He is a former oil company Exploration Manager with over 35 years experience in both major companies and consultancies, and specialises in oil and gas strategy, the development of analytical tools and workshops for company and asset acquisitions, and senior management reviews of the market and the business environment. Photo: Jane Whaley Do you believe that the North Sea is still a vibrant area for hydrocarbon exploration?  

We've seen over 100 companies acquire acreage in the North Sea in the past five years; between them, they've drilled more than 250 wells on prospects or old discoveries. While it is difficult to disentangle the current oil price drop and bank problems from activity levels, the undertone in the form of planned wells continues at the same levels, and suggests a widespread desire to drill.  

Is the North Sea more attractive to the small independent or to the major?  

The oil major still invests in exploration on the UKCS, targeting specific high volume plays, such as HPHT and the Frontier plays. These more material plays come at a heavier price in terms of well costs and capital investment. On the other hand, the smaller remnants of the more traditional plays are there for the independent, and usually come with lower cost wells and capital investment. So in a sense, the UKCS holds attraction to both groups, with each sector playing to its strengths and needs.  

It has been suggested that a rationalisation of small oil and gas explorers in the UKCS is long overdue. Do you agree?  

In general, yes. Even before the oil price drop and the banking crisis, the expansion in small companies was just a step towards a more consolidated group of larger companies - natural growth, as we have seen before. Of course, these new circumstances are likely to push people and acreage towards those companies with cash or cash flow. It is still interesting to see the slow rate of progression towards a more consolidated group; perhaps much to do with companies going into a kind of "hibernation", consuming and spending nothing, and waiting for spring.  

Drilling versus acquisitions and mergers: which is the best route to success in the North Sea?  

Larger companies with cash and cash flow now have a chance to secure acreage and drilling options through corporate acquisitions; right now, with companies probably under- or more reasonably valued, this year seems right for acquisitions. The singular well-by-well farm-in route has always been the slower but more targeted option; and while this provides a first look at a basin, it has not provided the materiality that larger companies seek. On balance, acquisitions seem the more material way to go in this particular climate.  

If you had the ear of the governments of the countries bordering the North Sea, what one thing would you advise them all to do?  

Probably to remind government that it has a duty to manage the balance between tax take, energy resource and jobs - and that maximising short term tax take isn't necessarily the best option for tax payers. In these cash-short times, they should consider national investment in a vital industry that needs relatively modest funds to more fully determine its resource potential, rather than rely wholly on market forces that have been shown to be short term and fickle.  

It has been suggested that by rejecting the idea that the North Sea is ‘finished', you are refusing to face reality. How do you respond to this?  

The question revolves around the lack of dedicated funds to persevere with high commercial failure, common in any basin anywhere in the world, coupled with a risked view of an extra 15 billion boe. "Finished" in my view refers more to finance or corporate structure than to the geology or the competency of the basin to deliver. If memory serves, we celebrated $45 about three years ago, and now we are supposed to panic with the same oil price. It says more about the human condition that the basin we're drilling.  

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