The UK continental shelf has experienced a resurgence in exploration and appraisal (E&A) drilling over the last two years, and this looks likely to continue as the twin pressures created by the Fallow and Promote License initiatives continue to recycle acreage onto the market for commercial deals and re-licensing. The level of E&A well spuds is pegged in the range of 50-60 per annum by the availability of rigs and the ability of the industry to evaluate the numerous opportunities for investment.
With the North Sea experiencing the highest levels of E&A investment since the late 1980s and the UK’s 24th Licensing Round expected to add to activity levels, there is a significant number of potential third-party drilling opportunities on the UKCS. Of particular interest are the central and southern North Sea, where license holders plan to drill within the next 15 months or so. Of course, many of these are subject to securing farm-in funds and, in some cases, obtaining rig slots. However, after a very tight market in 2006, the area also is seeing some capacity in the rig market as rigs contracted for multi-well programs offer sub-let slots.
E&A drilling on the UKCS is trending upward.
North Sea intelligence consultancy Hannon Westwood has been compiling data on E&A wells (where spud is anticipated within the next two years) as well as recording past well spuds and their results to act as control on the level of future activity and reserves additions that might be anticipated. Over 100 wells are on record, and the impact of the 24th License Round will add to the forecast. So far, indications point to at least 48 exploration prospects and discoveries in which there could be potential for third-party investment through farm-in.
In 2005, Hannon Westwood recorded 61 E&A well spuds, plus a further 22 “geological” sidetracks for the North Sea. Intelligence gathered from published figures, pre-drill estimates, and speculation has allowed reserves to be assigned to each discovery or appraisal project.
The combined technical success rate for all E&A wells is calculated as 50% of wells spudded. This compares favorably to the long-term success rates achieved on the UKCS, which for many years ran at 25-33%, then rose to about 60% on the back of near-field or “snuggle” exploration over the last five years or so. The year 2005 saw the re-emergence of true wildcat drilling with Fallow acreage being accessed and, to a much lesser extent, Promote acreage starting to attract well spuds.
Hannon Westwood estimates that about 773 MMboe of reserves were found or progressed in 2005, with about two-thirds newly discovered oil and one-third attributed to progressing previously moribund one- or two-well discoveries.
In the first three quarters of 2006, 41 E&A wells were spudded. Seven were drilling at the end of September. Three were tight, and four were in-field appraisal wells, leaving 27 wells for statistical purposes.
These 27 wells had a 75% success rate (about 50% for wildcat exploration; about 80% for appraisal). Hannon Westwood estimates the wells found or progressed 664 MMboe - a better success rate and reserves-per-well than in 2005.
When the outstanding wells are completed and results are known, it is anticipated that 2006 will be one of the most successful years for reserves additions since the early 1990s, providing encouragement for continuing E&A drilling into 2007 and 2008.
Forecast well count
Currently, scout intelligence indicates 107 E&A wells are slated to spud between November 2006 and early 2008. This total compares well to the 61 E&A well spuds for the 12 months drilling in 2005 and underpins a fully utilized rig market.
Of this total, 41 planned wells will be traditional joint ventures, with a further 16 wells already fully funded through farm-in agreements. An estimated further 50 wells will be either partially or fully offered for farm-out, mainly by independents seeking to fully fund their portfolio of proposed wells. Of these 50 wells, 17 or so are on Promote licenses, leaving 31 wells to be drilled on Fallow blocks.
There are 107 E&A wells slated for spud between November 2006 and early 2008.
While the 41 joint venture wells appear to be fully funded at this stage, Hannon Westwood expects some equity in this program to be offered as third-party farm-ins as some non-core holders seek to avoid material spend on exploration wells.
The 24th round awards are likely to impact the total in 2007-2008 as well. The current stock of 50 farm-in wells is a minimum expectation for the two-year period and compares well to the level of farm-in activity seen in 2005 (31 farm-in wells).
Forecast well count by area
The geographic distribution of potential wells has not seen such a surge toward the gas basin for many years. There are 36 potential wells in the making, although the first three quarters of 2006 saw the number of wells spudded in the central North Sea (CNS) only slightly ahead of the gas basin. Although reserves potential in the gas basin is not considered as great as in the CNS, the lower drilling costs and perceived easier access to infrastructure outweigh the lower materiality for smaller, more resource constrained companies.
The growth in popularity in the area has been generated by two key factors. First, the DTI Promote license rounds have unlocked marginalized acreage to test the Carboniferous and feather-edge Rotliegendes plays. Second, smaller independents are aggressively drilling out their portfolios. Based on current rig rates, dry hole drilling costs in the basin are typically $15 million per well.
The CNS is forecast to be the most active area overall, offering wells that will exploit Jurassic and Palaeocene oil plays; most of which involve Canadian companies, which dominate the areas to the north, away from the condensate trend.
The planned well count in this acreage is swelled by a fair spread of Promote license opportunity from the 21st, 22nd, and 23rd license rounds.
Production levels in the region continue to rise.
The lower CNS includes three wells that target the next wave of deep gas-condensate reserves. Reserves size and high well costs in deep reservoirs involve high commercial risk, making this very much a niche program for oil majors or energy conglomerates. These types of wells typically cost $50 million or more, and very little by way of farm-out is offered in the HP/HT area. There are strong barriers to entry into this prolific and under-drilled play.
The well count in the northern North Sea (17 wells forecast) belies the high level of reserves potential being targeted. It may offer the shallow-well investor one of the more interesting under-drilled sectors in terms of higher risk/major impact. Much of the potential resource is in heavy oil in the Tertiary reservoir at depths of around 1,829 m (6,000 ft) subsea. This is a niche business not well understood by most current players, although international expertise is being brought into this sector.
Unlike in the condensate play, the cost of drilling the Tertiary plays is likely to be around $10 million per well dry hole. Further north, on the East Shetland platform, there are several wells planned that target unproven plays in the Upper Jurassic as opposed to the long-known Brent play. There is large potential in the new plays, but drilling in the new areas brings significant risk.
The west of Britain is seeing a revival, with six E&A wells forecast. Joint-venture money is being used to drill and appraise what may be a fairly low-risk activity set by the oil majors to secure material reserves.
The opportunity to farm in to this sector appears limited, and well costs are generally high with deepwater rigs at a premium.
Jim Hannon
Hannon Westwood
North Sea Intelligence
