The End is Nigh?
“In a time of dire economic downturn, is it better to be unrealistic, or to tell the sober truth?” This was the question Richard Hardman, former North Sea Exploration Manager for Amerada Hess and now a Director of FX Energy, put to the assembled delegates at the conference, many of whom had themselves spent most of their working life exploring in the area.
Putting the alternative argument and showing that there is still a purpose in North Sea exploration, was Jim Hannon, Managing Director at consulting company HannonWestwood. It should be noted that there was a certain amount of disparity between the protagonists as to the understanding of the phrase ‘North Sea’ in the title of the debate. Richard Hardman defined it geographically as the area of the North Sea Basin, including the seabed belonging to Norway, Germany, Denmark, the Netherlands and the UK, while Jim Hannon tended to use data citing the UKCS, including the area west of the Shetlands, which is not technically the North Sea. However, although this difference has some bearing on the facts and figures discussed, the main thrusts for and against the argument were unaffected by it.
Reserves and Results
In Jim’s opinion there are four interrelated components to the debate: resource potential, drilling results, commercial issues and the nature of the participants in the North Sea. Without looking at other North Sea countries, the original potential of the United Kingdom Continental Shelf (UKCS) was originally estimated at 60 Bboe, of which about 35 Bboe have already been produced, leaving potentially 20 Bboe still in the ground to be recovered. But, he asks, “can it be recovered? Is there the technical, political and business resolve to pursue the remaining opportunity?” According to the HannonWestwood database, 8 Bboe of these reserves have already been found, in 430 undeveloped discoveries. But that gives an average discovery size of just 21 MMboe, emphasising Richard Hardman’s point that in the UK, new plays are either of moderate risk and small, or large and very risky, involving new and untested ideas. The Netherlands sector of the North Sea, he points out, may still have potential, but it is a very complex area and investment in the most modern technology will be needed to identify these subtle traps.
Jim Hannon pointed out that between 2004 and 2009 more than 250 exploration wells were drilled in the UK North Sea and West of Shetland area. “This has lead to success rates of 86% for appraisal wells and 42% for exploration wells. By 2011 a further 190 wells will have been drilled, suggesting that enthusiasm for the basin remains undiminished, despite the suggestion in the title of the debate that the North Sea is ‘finished’. The database also details of over 1,500 prospects, with total unrisked potential of 65 Bboe, the average prospect size being around 40 MMboe.
Oil price or investment
Ultimately, as with so many things, does the final answer to this discussion lie in economics? Both speakers would agree that it does, while arriving at very different conclusions. Taking conservative parameters in his economic models, Jim analysed the UK undeveloped discoveries and undrilled prospects and concluded that “at USD40/bbl only 18 of the undeveloped discoveries, 4% of the total, are commercial, but at USD60/bbl around 200 discoveries become viable. Similarly, at USD 40/bbl only 6% of the identified prospects are commercial, rising to 45% if the oil price is USD 60/bbl. This means that with an oil price of USD 60/bbl, the UKCS has some 900 commercial, undeveloped structures containing a total of 9 Bboe, with a net present value (NPV) of USD100 billion – a very substantial business opportunity, by any measure.” He adds, however, that “present investment in the North Sea is not sufficient to realise this potential. Is there the technical, political and business resolve to pursue the remaining opportunity?”
Richard, by comparison, believes that costs in the North Sea are now too high and the rewards too uncertain to allow it to be viable for much longer. “Compare the red tape and cumbersome procedures in Norway, the lack of unexplored acreage in Denmark, and the small prospect sizes in the UK, with somewhere like Poland,” he says. “Unless you have infrastructure, it is just too expensive, particularly for a newcomer, to exploit these minor reserves. Most discoveries will be activated by a company already established in area.”
Too soon for the wake!
Which leads on to Jim’s final factor in this discussion: the number and nature of the participants in the North Sea? In March 2009 there were 176 licensees on the UKCS alone, in an area which he believes would be best served by only 40 to 50 companies. A good range is needed, and Jim noted that the larger organisations are still buying into the North Sea, for both exploration and production. “The majors will continue to target high value prospects, while for others, the key for success will be some consolidation and the innovative alignment of funding to talent,” he concludes. “The North Sea may be on hold for a while, but it’s too soon to hold the wake!”
However, Richard Hardman says, “the North Sea used to be a company maker. The Piper field made Occidental back in the 1970’s, while in the 1990’s Buzzard was a company maker for Encana. Now, however, it is in danger of becoming a company breaker”.
So, did the delegates listening to the debate think that we are we refusing to face reality in the North Sea? They sided with Jim Hannon, declaring there is yet life in the North Sea – but then, as Richard Hardman so aptly put it, a pessimistic explorer is a contradiction in terms. “To explore satisfactorily you have to think creatively, and then take a risk that you may be wrong, so exploration geologists are inclined by trade, training and inclination to be optimists.” Perhaps this result was actually a reflection of what they wanted to think, rather than what they actually believed. Only time will give us the true answer.