Emerging from one of the worst downturns in decades, one of the world’s oldest producing oil basins, the UK North Sea, is now taking a leaf out of U.S. shale’s playbook to replicate the leaner, meaner shorter-cycle production developments of one of the newest—and fastest-growing—oil regions globally.
Large operators offshore the United Kingdom have been looking at ways to cut costs at major projects, and the majors and smaller players alike are also developing resources via tie-backs to existing infrastructure to reduce expenditure. Leaner quicker-return projects, typical of the U.S. shale patch, have become the norm in the conventional UK North Sea basin.
After more than half a century of oil production and development, the UK North Sea has a lot of infrastructure. As output from mature fields declines, the platforms and pipelines in place serve new—albeit smaller—developments on the UK Continental Shelf. This reduces overall project costs as operators are more inclined to invest millions of U.S. dollars in a project that would begin returning on investment in five years’ time, instead of splashing billions of dollars on projects whose lead time to first production is a decade away, and return on investment is even further away.
Tie-backs and shorter lead times from discovery to production are core to the development plans of many smaller independent players, managers told Bloomberg this week.
Even the bigger players are approving smaller-sized developments to take advantage of existing infrastructure that makes even smaller finds viable for commercial oil and gas production.
According to data compiled by Bloomberg Intelligence, the trend is already set; the ten oil and gas fields approved for development since the beginning of 2018 by UK regulators will have production rates of up to 50,000 barrels of oil equivalent per day (boepd) each, and seven of those would yield less than 25,000 boepd.
Exploration and production companies across the UKCS are now “more focused on spending $100 million and recouping it over five years,” instead of investing US$1 billion over seven years and recoup that huge investment over 30 years, Chris Boulter, UK business development manager at UK company Neptune Energy, told Bloomberg.
Earlier this year, Neptune Energy and partners announced the final investment decision for the Seagull oil project in the UK North Sea, expected to produce initially around 50,000 boepd—of which 80 percent is oil—across its 10-year design life with first production planned for 2021.
“Seagull is a low cost, near-term development in close proximity to existing infrastructure,” Neptune Energy’s CEO Jim House said. Mike Tholen, Upstream Policy Director at the leading industry association Oil & Gas UK, commented on the FID, saying that “This project also highlights the importance of the UK’s existing infrastructure network in making the basin an attractive place to invest.”
“It is estimated that there are more than 3 billion barrels of oil and gas contained in marginal fields on the UKCS and being able to tie back to existing infrastructure will be key to unlocking this potential, helping to ensure the industry’s bright future for many decades to come,” said Tholen.
Another producer, Zennor Petroleum, is developing the Finlaggan gas condensate field in the UK Central North Sea with two wells that will be tied back 20 kilometers (12 miles) to the Britannia platform.
Commenting on the development for Bloomberg, Zennor’s financial director James Henry said: “If you were not able to develop these discoveries as tie-backs, they probably wouldn’t get developed at all.”
Tie-backs are the trend in the UK North Sea as operators target shorter payback periods. The other trend that has emerged on the UKCS in recent months is that major U.S. companies are divesting their UK portfolios as they focus on the even shorter-cycle faster-payback U.S. shale.
Marathon Oil said in February that it would be exiting the UK North Sea as it continues to focus on high-return U.S. shale oil operations. In April, ConocoPhillips sold its UK oil and gas business to Chrysaor Holdings for US$2.675 billion, while Chevron sold in May its North Sea assets to Delek Group’s Ithaca Energy for US$2 billion.
“The deal continues the UK trend of smaller companies taking on assets from the majors. Following hot on the heels of Chrysaor’s deal with ConocoPhillips, we’ve seen assets worth almost US$5 billion change hand in the last few months,” said Kevin Swann, senior research analyst, North Sea upstream at Wood Mackenzie.