Chris Bulley, Hannon Westwood LLP
Last year, drilling activity on the UK continental shelf reached a high not seen since just prior to the oil price crash in 1998. At present, there are 16 rigs engaged in exploration and appraisal (E&A) activity across the UKCS, the highest number since 1997.
With oil prices at all-time highs, the incentive to drill could not be greater, so even small finds of less than 10 MMboe are being considered economically viable, if they are close to production infrastructure. The main constraint on progress is rig availability and cost inflation: even last year the rig market was stretched to accommodate the 70 E&A well spuds.
Looking forward, UKCS consultant Hannon Westwood has identified around 184 planned E&A wells on the UKCS for which the operators are hoping to secure a slot within the next 24 months. Inevitably, some of these wells will not be drilled for different reasons, including a change in view concerning the technical case, partner drag, or lack of access to a rig. Perhaps the main factor will be the lack of available drilling funds.
However, this shortage, combined with the wide range of drillable prospects, also can provide investment opportunities to existing players and newcomers to the UK shelf, thereby sustaining a vibrant farm-in and farm-out market. Of the 184 planned E&A wells, around 70 likely will require third party farm-in funds. Of these, 52 are exploration prospects while 18 are existing discoveries awaiting appraisal.
In terms of licensed acreage, there are now more than 1,400 licensed blocks or part-blocks on the UKCS and 160 companies participating in E&A activity. With ownership ranging from just one property per company to over 150 properties each – in the case of Shell, Exxon and BP – these properties break down into 3,260 individual working interests. Of this number, Hannon Westwood considers 1,255 as currently “non-core” – i.e. they are without support for material funds in the face of an active government-imposed Fallow program that requires either drilling or seismic within any three-year period.
The key issue now is funding and, with typical well costs approaching $40 million per well on average, the implication is that at least $3 billion will be needed this year to complete the projected program. In the recent past, about one-third of E&A wells have required farm-in funding, which suggests that today around $1 billion of planned investment will depend on farm-ins to go forward.
The constant flow of farm-in documents that bombard the market certainly demonstrates activity. However the mass of information can be too much for business development teams to process in a relatively short time. Opportunities may be lost as a result and to curtail this problem, business developers need to become more proactive, more selective, and more efficient.
In 2007, Hannon Westwood assisted many international and UK based clients to focus on farm-in and farm-out opportunities through a combination of client workshops, consultations, and bespoke reports generated from drilling down into the firm’s proprietary intelligence database. These activities played a part in the successful conclusion of a number of transactions that might not otherwise have been obvious to either side of the farm-in deal.
Forecast well count
Hannon Westwood has scout intelligence on 184 E&A wells that currently are scheduled for spud during 2008 and 2009, although the current rig market cannot support such a population and indications are that there is a very competitive market for rig slots. This total compares strongly to the 61 E&A well spuds during 2005, 55 E&A well spuds during 2006, and the 69 E&A spuds during 2007. By end-June this year, 42 E&A wells had been spudded, a significant increase on last year, suggesting that 2008 could bring close to 90 E&A well spuds.
Of this total, 89 planned wells are in traditional joint ventures, with a further 25 wells already fully funded through farm-in agreements and 12 partly funded through farm-in agreements. In addition there are a further 58 wells that will be fully offered for farm-out, mainly by independents seeking to fully fund their portfolio of proposed wells. Of the wells where some farm-in funds are still required, 23 are on Promote or Frontier licenses.
Of the 184 wells lined up for the next two years, 49%, or 90 wells, are planned for the central North Sea and 27%, or 52 wells, for the gas basin. The upturn in activity in the West of Shetlands/West of Britain areas has continued in the east Irish Sea, as operators there prepare for a concerted drilling campaign, probably in 2009. However, the number of wells planned for the West of Shetlands has decreased as a result of several relinquishments in late 2007 following pressure to meet Fallow and Frontier license commitments – and also because a continuing drilling campaign has reduced the outstanding well list.
Last year, 82 companies participated in 70 well starts in the UKCS, with the West of Shetlands the biggest “winner” in terms of reserves added. The move by the majors to tap the greater materiality in this region resulted in this area contributing the greatest volume of exploration reserve additions and appraisal reserve progression for any one area — about 942 MMboe.
Well results, however, have been kept tight generally, so this figure is perhaps more speculative than for other more established areas of the North Sea. Total recorded a wildcat success with Tormore, and appraisal continued at the Chevron-operated Rosebank/Lochnagar and on the Clair Ridge, where significant potential is likely.
The central North Sea has consistently contributed the lion’s share of reserve additions annually, and in 2007 a robust 525 MMboe were found and progressed. Quad 22 was the most active area. Drilling in the northern North Sea was highly successful, with all 10 appraisal wells producing positive results and progressing an estimated 251 MMboe. Notable successes were achieved at Bentley, Kraken, Crawford, Causeway, and Don SW. In the southern North Sea, some 192 MMboe was progressed by eight successes, notably for Sterling at Breagh, and Venture at Ensign.
License rounds
Historically, the acreage held under licenses awarded in rounds one to four was regarded as being the most prospective. As a result, the majors held these licenses for many years, often without any significant activity. The onset of the Fallow Initiative and, for 1st and 2nd Round licenses, the approach of the end of the full license term, has prompted greater activity with the operators facing losing the license unless significant new work programs are undertaken in a timely manner.
The early Round licenses still accounted for about a third of the E&A wells drilled in 2007. But the contribution of the early Round licenses will probably wane as the number of near-field appraisals are drilled out. Being of lower materiality to the larger companies, they may be farmed-out to smaller companies before the license terms expire over the next few years, or as a result of Fallow status designation.
There were 78 active companies in the UKCS, at the end of 2003, rising to 161 by the end of 2007. Each year, the number of wells with new entrant (post-2003 UKCS entry) participation has increased at an ever-faster rate and, for 2007, represented 67% of well spuds. New entrants in 2007 focused more on participation in low-risk appraisal drilling, with increasingly successful results.
Conclusions
The increase in exploration and appraisal well count continues into 2008 despite the upward climb in rig rates and a recent upswing in gas prices has brought a return of interest to the gas basin. Overall, the main beneficiary remains the central North Sea. Although there are plans to drill 184 wells there currently is rig capacity to drill only around 90 per year, so there will be disappointment.
Despite the increasing participation of new entrants, the wells likely to be drilled over the next two years will be operated by a healthy mix of oil majors, large independents, and smaller E&P companies. Based on the past three years’ farm-in activity, funds should be secured for up to 30 farm-in wells per year, and with 25 wells already farmed out, a further 35 or so farm-in wells may secure funds for 2008 and 2009.
While the central North Sea continues to dominate the well population, the number of farm-in wells has decreased markedly to 35 from 44; perhaps reflecting the greater number of Promote licensees that were unable to secure third party funds within the period of the Promote licenses. The upturn in activity in the West of Shetlands and West of Britain also seems set to continue, with the east Irish Sea preparing for a collective drilling campaign, probably timed for 2009, as operators seek to maximize the mobilization of a rig away from North Sea duties.
