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North Sea newcomer Neptune warns UK on Cygnus natural gas field

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North Sea newcomer Neptune warns UK on Cygnus natural gas field

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Field hit by 79 outages in 2018 due to lack of blend gas

Field hit by 79 outages in 2018 due to lack of blend gas

Company eyes 200,000 boe/d output after Engie deal

London — North Sea producer Neptune Energy could divert gas from major UK gas field Cygnus to the Netherlands, heightening UK energy security worries, unless there is progress resolving a regulatory issue with the government, Chief Executive Jim House has warned in an interview.

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Speaking to S&P Global Platts, House outlined expansion plans across Neptune's business, which spans the North Sea, Algeria, Australia, Egypt and Indonesia, saying it aimed to raise its output from 160,000 b/d oil equivalent at the end of last year to 200,000 boe/d in 2023.

Neptune was founded in 2015 by ex-Centrica CEO Sam Laidlaw and a year ago bought the upstream arm of French utility Engie, including stakes in LNG production projects offshore Norway and Indonesia. It derives half its hydrocarbon output from Norway and 12% from the UK, including as operator of Cygnus. The latter, described by House as a "keystone" asset, came on stream in 2016 and accounts for 6-8% of UK gas production, rivaling Total's West of Shetland gas hub, Laggan-Tormore.

Cygnus has exceeded expectations in terms of the productivity of the reservoir. Compression equipment being installed in anticipation of a drop in pressure probably won't actually be needed for a number of years, he said in the interview at company's headquarters, overlooking Buckingham Palace.

But last year output was disrupted by 79 "events" relating to a regulation that means Cygnus falls slightly short of UK requirements on the energy content of gas entering the national grid. The shortfall, amounting to 1.3% on the industry's "Wobbe" index, means output has to be blended with gas from other sources such as Total's Elgin-Franklin and Shell's Shearwater fields. If they are shut down, Cygnus is also affected.

The three-week shutdown of the Forties pipeline at the end of 2017 resulted in one such disruption for Cygnus, described by House as a "strong dose" of the difficulties ahead. With additional investment and a slight easing in the specification, Cygnus output could rise to as high as 16% of UK gas output, according to some estimates. Output currently averages 250 MMcf/d, well short of the current capacity of the facilities, of 320 MMcf/d.

"Cygnus is performing very well as a reservoir, and we'd like to see the ability to export more gas," House said, noting plans to add in a nearby discovery, Pegasus, by Neptune's partner at Cygnus, Spirit Energy, which is majority-owned by Centrica.

Neptune has raised its concerns about the energy content specification with the authorities. House noted the UK's rising LNG imports tend to be at the high end of the energy content requirement, and other UK sources may also offset the shortfall from Cygnus.

"It's a real opportunity for the UK to do a few things which would allow more of the Cygnus gas to be delivered," he said. But without a satisfactory resolution, Neptune could turn to infrastructure in the Netherlands, where it also has offshore installations, he said.

"There are opportunities to look at alternative export routes," House said. "It's not an overnight decision, this is a multi-year event. But in the event we don't get the changes that are needed and blend gas continues to be an issue, then there's always the possibility we could take the gas to the Dutch sector."

Concerns about the UK's energy security have risen in recent years, notably with Centrica's closure of giant long-term storage facility Rough.

RESHAPED ORGANIZATION

Asked about the UK business environment, House said Neptune was "neutral" on Brexit and added the newness of the Cygnus facilities may limit the impact of any issue importing equipment from the EU. Neptune aims to start work shortly on an oil project in UK North Sea waters known as Seagull, having bought a stake from House's former employer, the US' Apache Corp. And it is a partner in three Norwegian projects, Cara, Fenja and Njord; the latter entails redeveloping a facility shut down in 2016 due to structural issues.

Neptune is backed by US private equity giant Carlyle Group, Luxembourg-based private equity company CVC, and Beijing-based sovereign wealth fund China Investment Corporation. House said it had undergone a major revamp in the last year, resulting in improved safety and production, and its overall production costs are now around $10/boe. Its preliminary estimates show it replaced 143% of its production last year, resulting in a likely reserve increase of 15%. It aims to increase its reserves to 800 million boe from the "mid-500s" currently.

"We've taken a subsidiary of a large French utility that arguably would have a different approach to the business than a focused independent that's standalone, and we've reshaped the organizational structure," he said. "We've put the right kind of measures into the organization to drive responsibilities and accountabilities, as well as the ability to win."

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

-- Edited by James Leech, newsdesk@spglobal.com