November 8, 2016 • Vol. 6, No. 5docFinder alert
docFinder alert

UK North Seas: Will lower costs and higher oil prices spur renewed investment?


Apache North Sea costs fall, margins widen

Apache Corp

November 3, 2016

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North Sea investment plunges since 2014

Providence Resources

July 27, 2016

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We were reviewing Apache Corp.’s investment strategy when we uncovered some surprising information. Although the company’s US resource plays, especially the Permian Basin, have garnered the most recent interest, Apache is allocating 21% of its 2016 capital investment to its UK North Sea portfolio. And in its third quarter results, EOG reported a cash margin from that play that significantly exceeded its Permian results. That caught our attention because we knew industry interest and investment had fallen dramatically after the plunge in oil prices. At the same time, investment in the Permian Basin was surging. Were Apache’s results a sign of renewal for the UK North Sea? To find out, we turned to docFinder, the fastest and most comprehensive source of global oil and gas financial and operational information. What we found was that the cost of operating and drilling in the North Sea, while still relatively high, was falling dramatically.

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Data from industry association Oil & Gas UK show that total capital investment declined 39% from 2014 to £9.0 billion in 2016, and investment in new projects fell to under £1.0 billion from an average of £8.0 billion in the preceding five years. The number of new wells decreased to just seven to 10 per year from a high of 45 in 2008. And the number of jobs the industry supports fell 33% from 2014. Apache’s continued investment runs counter to this trend. The company has been running four rigs in the North Sea in 2016 and drilled eight wells in the first nine months of the year, primarily to tie in satellite fields to its aging Forties Field. Apache said that its operating margin stemmed partly from the higher oil mix in its North Sea production along with the highest NGL and natural gas realizations in its entire portfolio. But what stood out most was that Apache's operating costs were just $15/boe, which ran counter to the general perception of high costs in the region. Further investigation shows that Apache's per-barrel operating costs in the UK have fallen more than 10%, from $17/boe to $9/boe, between the second and third quarters 2016, driven by a lower post-Brexit Sterling exchange rates. While investment trends in an offshore area like the North Sea change much more slowly than in the US unconventional plays, the recent increase in oil prices, high regional gas realizations, and lower costs may indicate that the outlook for the UK North Sea is brighter.

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featured.slides from docFinder

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North Sea breakeven still exceeds US tight oil

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Costs fell 41% in two years

September 1, 2016


UK-focused producer's path to low cost base

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More significant cuts in drilling costs coming

November 3, 2016

EOG Resources, a top-tier US producer with international assets in the East Irish Sea, recently compared breakeven oil prices in leading global plays. While higher than the most economic US tight oil plays, the North Sea was ranked on a par with the US Gulf of Mexico and offshore Angola at $50-$65/bbl. Canadian integrated Imperial Oil reported a wider range for North Sea breakevens, but the lower end dipped well below $40/bbl and compared favorably to the Gulf of Mexico.

The lower end of Imperial Oil’s range is confirmed by Canadian Natural Resources operations in the North Sea. There, CNRL's costs in 2014 were over C$74/boe (US$55), but have since declined 41% to a midpoint of C$43.50/boe (US$32.50). While still not competitive with other assets in the company’s portfolio, the magnitude of the reduction is the second largest among its plays. Because its costs are higher than its competitors, future declines are likely.

Major UK-based North Sea E&P EnQuest said its operating costs were $42/bbl in 2014. It instituted a process to lower costs based on increasing internal efficiencies such as consolidated procurement and integrated logistics with external measures such as open book contracts, sharing inventory with other operators, and creating a supplier forum. The result was a decline in costs to $30/boe in 2015 and another 23% reduction to just $23/bbl in the first half of 2016, a level not far above the efficiency reported by Apache.

Leading oil service firm Prosafe indicates that future reductions in drilling costs in the North Sea are likely to exceed overall global declines. The company forecasts that dayrates for offshore drilling rigs will fall as much as 70% in the North Sea in 2017 before recovering in 2018. Other regions will be less affected. Lower drilling and completion costs, continued operating efficiency gains, and recently implemented UK tax benefits could make near term North Sea investment more competitive with other offshore opportunities around the globe.


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