North Sea producer Serica ups oil activity after gas earnings fuel expansion

UK-focused Serica Energy is increasing well improvement work and drilling as it rebalances the business to increase the share of oil in its output following an acquisition enabled by last year's gas revenue surge.

Serica reiterated industry objections to the UK's Energy Profits Levy, which has raised the headline tax rate to 75%, describing it as a "wholly unwelcome burden" that is leading the industry to delay and cancel longer term investments. However, the company is still able to carry out short-term drilling and well activity thanks to tax allowances, it said.

Serica's first-half production jumped 85% year on year to 49,350 b/d of oil equivalent on the back of its purchase of Tailwind, a business backed by trading company Mercuria. The deal, completed in March, added oil assets in the Triton area of the North Sea, lowering the gas portion of the company's production to 55% from 91%. Historic tax losses acquired with the purchase provide an additional offset for Serica's tax liabilities, it explained.

Serica said it had begun the second of three well intervention programs at its core Bruce, Keith & Rhum (BKR) hub, which accounted for the bulk of its production before the Tailwind deal, and said it is now considering new drilling as it plots a future for the hub to around 2035.

The Rhum gas field is a significant contributor to UK gas supply that is part owned by a trust on behalf of Iran, an arrangement stemming from UK collaboration with Tehran before the Iranian Revolution.

CEO Mitch Flegg told S&P Global Commodity Insights the company still sees significant opportunity at BKR, after reinstating an abandoned well at Rhum and carrying out well interventions to improve the efficiency of production. He noted BP, the original operator, had expected BKR production to end around 2026-27, but said this picture had now changed.

"There's a huge amount more to give from that hub. There's been under-investment... over the last 15 years probably," Flegg said. "There's still a long way to go with what we think of as short-cycle investments, investing in the assets on quick payback projects that boost production and boost reserves," he said, noting carbon emissions from operations at Rhum had fallen on an absolute basis despite increased production.

"We believe that now we've established that these facilities can continue operating until the mid-2030s -- that gives us time and it makes it worthwhile looking at new wells. We now believe that the economic justification is there to look at new wells," he said. "We don't see Bruce, Keith and Rhum as being in terminal decline, this is not the end game."

Oil drilling

In addition to ongoing interventions at BKR, Serica plans a four-well drilling campaign starting in early 2024 in the Triton area, where it gained assets with the Tailwind purchase. The assets are shared with South Korea's Dana Petroleum, which operates the floating production storage and offloading vessel, along with independent Waldorf Production. Flegg described the acquisition as a "step change" for the company, saying "We look forward to near continuous well and drilling activity across the Bruce and Triton hubs during the next eighteen months."

After nearly quadrupling its pre-tax profit in the full-year 2022, Serica noted the impact of lower prices in the first half of 2023, particularly for gas. It reported cash flow from operations that was roughly in line with the first half of 2022 despite its increased production, at GBP266 million ($329 million). Its average realized gas price was 96 pence/therm, down from 136 p/th in the first half of 2022, while its average realized oil price was $64/b, down from $108/b.

With crude prices rising in the second half of this year, the Platts Dated Brent benchmark was assessed at $96.24/b on Sept. 18, up $1.10 on the day, and up from $88.55/b at the start of the month. The UK NBP day-ahead contract was assessed at 86.01 p/th. Platts is part of S&P Global Commodity Insights.