North Sea exploration defies doommongers with better performance

London — North Sea oil and gas exploration looks set to persist as success rates show signs of improving and companies still see a demand for hydrocarbons, even as some global companies rein in their production plans, analysts say.

The North Sea, together with the UK West of Shetland area, remains Western Europe's largest indigenous oil and gas source and a center of expertise, as well as the home of the Brent benchmark. Output has been recovering since 2015, after declining from the start of the millennium, and North Sea crude is shipped as far afield as East Asia.

Exploration activity is one indicator of regional prospects, and the last decade has not been a resounding success; just 15% of the oil and gas produced in Norway and the UK in 2015-19 was replenished through commercially viable discoveries in the same period, according to London-based consultancy Westwood Global, which reckons 124 exploration wells were drilled in that time, at a cost of $5.2 billion. No discovery has come close to Johan Sverdrup, a 2.7 billion barrel discovery in 2010 that started producing last October.

Disappointing drilling results have also dampened hopes of expanding into the Norwegian Barents Sea. State-controlled Equinor has one Barents Sea project underway, Johan Castberg, which is due on stream in 2023 and will supplement the only current source of production there, Goliat, which is itself something of a disappointment.

In January, Sweden's Lundin Energy announced its main Barents Sea discovery, Alta-Gohta, was no longer sufficient for a standalone project, at 120 million barrels of oil equivalent.

However, following a slump in drilling in 2017-18, Westwood Global says the number of wells drilled and success rates have improved, with a 25% commercial success rate achieved in 2019, up from 6% in 2015, and several more finds this year.

Oslo-based consultancy Rystad Energy has also said 2019 marked an improvement for Norwegian exploration, estimating total Norwegian discoveries at over half a billion barrels of oil equivalent.

Drilling plans

Westwood Global expects as many as 46 exploration wells to be drilled in northwest Europe in the next 18 months, albeit with some delays related to COVID-19 and the oil price meltdown.

It is confident at least three-quarters of those will go ahead, despite spending cuts and pledges by the oil and gas majors to reduce their emissions over the long term.

Around a dozen wells have already been drilled or are underway so far this year.

"There's still a huge number of wells being drilled in the UK and Norway continental shelf. I don't think people's appetite for the North Sea has gone away," Westwood Global technical manager Alyson Harding told a recent online forum.

The key to continued exploration lies in reducing costs. Last year in the region the industry drilled roughly the same number of wells as in 2015, but at 60% lower cost, saving money partly by drilling shallower wells.

Operators are also focusing on opportunities close to their existing production in the hope of a cost-effective reserves top-up, rather than more adventurous 'wild cat' drilling, but their in-house local knowledge means this has pushed up success rates, Westwood Global says, although it adds Norway's exploration tax breaks can spur a more ambitious approach.

BP chief executive Bernard Looney reflected the cautious mood outlining plans this month for a 40% cut in the company's oil and gas output, saying: "You can expect us to do some exploration in the areas where we already operate, predominantly close to existing infrastructure, so that those barrels are the lowest cost, hopefully the most emissions-friendly they can be."

Changing lineup

When it comes to exploration, the oil and gas majors were not out in front even before the latest crisis, but for the most part neither are dedicated exploration companies with new concepts to prove scoring major successes. Hurricane Energy, a developer of UK 'fractured basement' prospects, has disappointed stock market investors recently with production glitches and a potential reserves downgrade.

The best performers in terms of success rates and discovery sizes are mainly midsize companies with years of in-house knowledge and experience and funding for sophisticated seismic surveys, Westwood Global says.

China's CNOOC International ranks among these, mainly due to its Glengorm discovery last year, although initial estimates of 250 million barrels of oil equivalent could prove overdone.

Another is Norway-focused Aker BP, founded in 2016, which has made several discoveries, including Liatarnet, a field discovered last year and estimated at 80 million-200 million barrels of oil equivalent.

"Recent discoveries such as Glengorm and Liatarnet show the North Sea can still deliver material volumes," Harding said.

This year's biggest discovery may be the Dugong oil find offshore Norway, announced in August by Neptune Energy, a midsize company backed by a Chinese sovereign wealth fund and private equity. It estimates the find at 40 million-120 million barrels.

Norway's state-controlled Equinor also regularly turns up discoveries alongside numerous 'dry holes,' while Houston-based Apache has made numerous finds, but of modest size, according to Westwood Global.

The exploration league table may change, but "there's always a cohort of companies, perhaps 10 or 20 at any one time, that are committed to the basin," Westwood Global's Northwest Europe senior analyst David Moseley told the same online forum.

He went on to play down the impact on exploration of the drive to lower industry carbon emissions, including a push by the UK regulator to reduce the emissions produced at offshore installations to meet their electricity needs, estimated at 10% of UK power generation emissions. "I can't see it having an impact in the next five years. After that, possibly," Moseley said.