Premier Oil chief executive Tony Durrant talks to S&P Global Platts senior editor Nick Coleman about the changes underway in the North Sea and why the industry has nothing to fear from the exit of the oil majors, or from Brexit. Durrant also discusses Premier's ground-breaking oil project in the Falkland Islands, known as Sea Lion, which he expects to get the go-ahead next year.
NICK COLEMAN: Hello my name is Nick Coleman, senior editor for oil news at S&P Global Platts and we're here for a Conversation with Tony Durrant, CEO of Premier Oil, one of the UK's leading upstream oil and gas companies. Premier has much of its production in the North Sea, and some big projects in Mexico, the Falkland Islands and Vietnam. Do recent strikes in the North Sea signal an upsurge in industrial strife?
TONY DURRANT: It arises really out of the Total purchase of the Maersk assets in the North Sea and the fact that therefore there are two sets of t and cs and there is a negotiation going on between Total and the workforce as to which set of conditions will go forwards. That is a fairly specific case. In Norway where there has been some recent strike activity it was settled by negotiation. So far I think it's fairly specific rather than any general trend in the relationship with the workforce.
NICK COLEMAN: Why would anyone invest in the declining North Sea?
TONY DURRANT: The UK on most people's estimates is something like two thirds of the way through its producing life, having produced having produced about 40 billion barrels out of a possible 60 – 20 billion barrels is a lot of life left in the UK. What you have seen as the province becomes more mature is that it becomes less material for the bigger companies. I think over the next one to two years there will be more and more examples of the majors, the bigger companies in effect selling assets to mid-cap companies like ourselves for whom the UK is still very material and there are many many opportunities. It's not just frankly that the majors are selling, it's that over a period of time now, maybe as much as five years, they've not been actively investing in opportunities. For us, first of all we have some growth opportunities in our portfolio already. Secondly we see the opportunity to take on assets that the majors are really not investing in and still plenty of life in those assets for the future.
NICK COLEMAN: What about Premier's North Sea investment plans beyond the Tolmount gas project?
TONY DURRANT: We've actually as Premier taken that decision, at our June board meeting. All the approval processes are now under way both with our jv partners and indeed with the govt. We expect to be signing crucial contracts in August and work commencing in earnest at that point. Tolmount: very exciting project for us, material for us. These projects can be material for us even if they're not material for the majors. That will provide a long life gas production stream for us and our partners over a long period of time. Finding new oil projects in the UK North Sea, and I should probably except WoS from this, which is under-explored. But in the CNS, in the NNS, the traditional oil producing areas of the UK North Sea it is tough, because the exploration is very mature. Where I think there is lots of life again material for us is in incremental reserves surrounding existing projects, surrounding existing infrastructure. The Catcher field, which we brought on stream last Dec, doing very well today, but the Catcher field is surrounded by a number of prospects and discoveries which were not part of the initial development. They are probably not material, certainly not in terms of the majors. But the infrastructure is in place. We should be able to bring on incremental reserves, incremental production in the area around Catcher. By the way the same is true of Tolmount. That will be incremental gas in the future. In the short and medium term our attention beyond our existing fields is going to be focused on bringing additional resources in in what you might call near field areas.
NICK COLEMAN: Do you share concerns about the handover of pipelines such as Forties and other infrastructure from the majors to smaller less established players?
TONY DURRANT: Ineos the new owner of the pipeline system, the example you refer to, were extremely responsible and extremely responsive to all their customers -- people like ourselves when there was a small crack that developed in the Forties pipeline system. I would have no qualms about Ineos and the way that they've operated the Forties pipeline system since taking over from BP. Some of the major infrastructure pipelines are being handed over to what you might call financial investors, infrastructure funds, and that I think is a trend that we shouldn't fear at all. Those infrastructure funds have a very low cost of capital. We saw only in the last week a Kuwaiti fund buying in with a very low cost of capital to infrastructure. From the oil industry's pov particularly if you're a mid-cap independent, it's a very value adding process for an infrastructure fund who is interested in a utility type return to own some of the infrastructure that we're utilizing. We can then focus on development drilling, the addition of reserves, the sub surface, which is our natural skill set if you like (and pay the infrastructure utilities a rate of return which they will seek over a longer period of time.) I actually think it's a very positive thing for the independent sector for the mid caps and not at all a bad thing for the UK industry as a whole at this stage of its life.
NICK COLEMAN: Should aging pipelines and platforms be replaced with a more dynamic system based on floating infrastructure?
TONY DURRANT: We do need to get our product to market, and pipelines are still very often the most productive way of doing that. Floating production where the infrastructure can be moved from a shorter life field onto another shorter life field in the future I think is a very important part of the UK North Sea going forward. We happen to be focused on floating production, we have nine floating production fields around the world, six of which we operate, our Catcher field in the UK North Sea is a new FPSO so that suits us very well. In the longer run when it comes to abandonment of those facilities frankly it is a lot cheaper and easier to abandon a floating production system than one that is fixed in the ground. From our point of view as a mid-cap that reduces our long term exposure to abandonment costs.
NICK COLEMAN: Are you concerned about UK government instability and Brexit upheavals?
TONY DURRANT: In the spectrum of industries that are the focal point of lots of discussion the oil industry is relatively immune to Brexit in the sense that we're a dollar revenue industry. We have mostly dollar costs, we borrow in dollars. We don't have the foreign exchange exposure to euros that many other industries have. On the regulatory side frankly the UK North Sea invented safety cases and other regulatory regime elements. And we've given those to the rest of the world. We've been operating under UK standards, if anything those standards have been exported both to Europe and the rest of the world. The direct impact of Brexit I think is relatively low on the oil industry. It is true of course that we will as an industry buy equipment from Europe from time to time and therefore the whole debate about tariffs, or free trade is relevant to us. But in general we are less exposed. We are a dollar industry that's been very well established in the UK over many years. I think though like every other businessman in the country we favor stability and certainty and predictability. Thus of course the uncertainty that we're all reading about and seeing in the newspapers and elsewhere is not good. I do think the sooner we can get back to a more stable future the better for all businesses.
NICK COLEMAN: Has the UK regulatory revamp done its job?
TONY DURRANT: It was 30 years ago since the Piper Alpha disaster, the UK regulatory system and the UK industry as a whole responded very dramatically as it needed to to the Piper Alpha disaster 30 years ago at the time. To an extent the UK and the companies operating there have continued to lead the world in safety and regulation.
NICK COLEMAN: Does Premier expect to make faster progress on the Falklands Sea Lion project and are there concerns about Argentinian opposition?
TONY DURRANT: Like many other offshore projects especially in new areas there was a dramatic slowdown in the pace of the sanctioning of those projects largely driven by the oil price. Very few projects of that nature got sanctioned during the let's say 2014-17 period. Particularly where you have a new oil field in a new basin as we do have in the Falklands there are a certain amount of startup costs for the first phase. That puts the breakeven cost of our Falklands project somewhere in the low- $40s/b. Clearly when the oil price was below that we were not going to sanction that project. We're in a different world now. We can see our way forward to higher stable oil prices. The economics of that project now look good, attractive. We've used the time in effect to engineer the project. It's a very similar project in many ways to our Catcher project. We have some synergy across those projects. We're making good progress I would say on finalizing the engineering elements of the project. As Premier we have to raise the funds for that project and that's what we're very actively engaged in. That was also a feature of the last three years. Raising capital in our sector was challenging. There's been a noticeable change in the appetite of external investors – equity, debt, banks etc, for oil projects in the last 12 months, so we're pretty busy on that and remain hopeful that we can put a satisfactory financing package together for the Falklands. We've told everybody we would target year end this year for that, which would allow us to sanction the project sometime in 2019. There has been a lot written and talked about the relationship between the UK and Argentina in respect to the Falklands and indeed of future hydrocarbon production in the Falklands. The reality is that the relationship between the UK and Argentina has improved immeasurability in the last few years. There have been many areas of discussions between the two governments, future trade arrangements for example. My impression is that the Falklands is really not very high on the list of topics being discussed between the two governments, and that's fine with us because we'd just like to get on with the project.