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Outlook 2019: North Sea Inc. lives to fight another day

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Outlook 2019: North Sea Inc. lives to fight another day

Highlights

Europe's majors, private equity provide reboot

John Sverdrup to boost Norway's flagging output

UK faces exploration hole, regulation worries

  • Author
  • Nick Coleman
  • Editor
  • Alisdair Bowles
  • Commodity
  • Oil

London — The North Sea oil industry is reviving after the price crash of 2014, helped by the commitment of the European majors and infusions of private capital.

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Portrayed as a threatened sector before prices collapsed, there are signs the industry, which emerged in the 1960s with a big dose of American know-how, is adapting to lower prices and the relative scarcity of new oil finds.

M&A deals have come thick and fast. Notable deals in 2018 included Total's purchase of Denmark's Maersk Oil, the creation by Italy's Eni of Norwegian joint venture Var Energi, and newcomer Neptune Energy's purchase of VNG Norway and the upstream arm of France's Engie.

There has also been a steady stream of new projects and output. Fields due to start producing in 2019 include Norwegian giant Johan Sverdrup in November, Total's Culzean gas and condensate field offshore the UK, and Equinor's Mariner heavy oil field, also in UK waters.

North Sea field startups 2018-2019

UK oil production remains around 1 million b/d, thanks partly to improved performance at the technically challenging Elgin-Franklin complex, operated by Total, and refurbishments of the Clair and Schiehallion fields by BP. And the handover of the Brent and Forties pipelines and Sullom Voe terminal from BP to smaller, more focused players has been deemed a success.

Norwegian oil output, though greater than the UK's, has been more wayward, prompting claims of too little spending on existing assets. Norway's oil output was down 6% on the year in the first 11 months of 2018, at 1.85 million b/d.

The European majors defend their continued presence, arguing that efficiencies achieved in the North Sea have knock-on benefits for their portfolios. State-controlled Equinor (previously Statoil) says it will transfer its experience boosting Norwegian oil recovery to Brazil's mature Roncador field, in which it bought a stake in 2017.

Not that the effects of the price crash have been erased: some argue it has created a need for consolidation of more fragile players. Two possible candidates, Premier Oil and EnQuest, racked up debts of $2.8 billion and $2 billion respectively during the downturn. And price volatility continues to unnerve.

"Raising money in these markets is bloody impossible -- stability is what you need," one senior industry figure told S&P Global Platts, going on to argue that UK regulation remained burdensome despite a revamp of the regime.

Against a fragmented UK landscape, state dominance of Norway's industry, in the shape of Equinor and state holding company Petoro, has its critics. Some argue Equinor cannot give sufficient attention to all 40 Norwegian fields it operates, and its international portfolio. Recent production glitches are not a good advertisement. But hybrid deals such as Eni's creation of Var Energi alongside private equity company HitecVision should inject dynamism, echoing a deal by BP in 2016 that created Aker BP.

RESOURCE DOUBTS

A lack of oil discoveries to replenish production remains a problem in the long term, at least for the UK. Norway's industry looks relatively blessed; Swedish family-owned Lundin Petroleum says it is early days for the Barents Sea, with serious infrastructure only just emerging as Equinor gets its teeth into the Johan Castberg oil project, due on stream in 2022. Lundin hopes its Alta find, estimated alongside the nearby Gohta field at 115 million-390 million boe, will become a fourth Barents Sea oil hub, along with Johan Castberg, Eni's Goliat, and eventually OMV's Wisting.

But UK exploration drilling activity has slipped to its lowest level in over 40 years, with 15 exploration and appraisal wells "spudded" in 2018, and some companies reneging on drilling commitments. Some see cause for optimism in improved success rates -- 36% of UK exploration wells yielded commercial discoveries in 2017-18, compared with under 10% in 2010, consultancy Westwood Global Energy says. By contrast Norwegian success rates dropped to 16% annually in the four years 2015-18.

UK hopes for bigger projects are mainly pinned on the costly, technically difficult West of Shetland area. Total should get this year's big West of Shetland gas discovery, Glendronach, on stream quickly. But there is uncertainty over the productivity of Hurricane Energy's "fractured basement" oil finds, the first of which, Lancaster, is due on stream in 2019. And Equinor remains vague about its planned 300 million-barrel Rosebank oil project, where it is has taken over from Chevron.

For all the sector's resilience, the steady departure of the US majors underlines the decline of the North Sea in the global pecking order. BP, Shell and Total show commitment to cultivating what Total CEO Patrick Pouyanne calls the company's "garden." But in the age of shale, the US powerhouses are dancing to a different tune.

-- Nick Coleman, nick.coleman@spglobal.com

-- Edited by Alisdair Bowles, newsdesk@spglobal.com