Final North Sea Yarn

Abstract:Apache joins the move toward the rebirth of North Sea resources. The Houston-based company's $1.3 billion purchase of virtually all of the Forties field from BP signals renewed life for the UK's largest producing property. More asset disposals are expected this year.

Analysis:An axiom in the petroleum industry, particularly in the exploration and production sector, has always been that the biggest players—the major companies—usually sit down at the table first. Then, having eaten their fill from the choicest "dishes," they leave in search of fresher, more abundant bills of fare. But that makes room for smaller entrants—the independents—who usually can extract additional nourishment from the leftovers.

Nowhere has this been more evident than in the Gulf of Mexico. As major companies have moved to explore deeper and deeper Gulf waters, in shallower areas they've left considerable acreage behind—both producing and untouched by the drill—for follow-up development by independent companies. The result has been several "rebirths" in Gulf of Mexico activity.

Well, thanks to BP's recently announced hand-me-down sale to Houston-based Apache Corp. of its 96 percent share of the UK Forties field, such a rebirth appears to be assured for the North Sea. Major companies seem to be embarked on a significant rationalization of their North Sea assets as they focus attention on other parts of the world—and BP is no exception.

The Forties field sale was announced last week. Apache will pay a $1.3 billion tab, constituting what's thought to be the largest such transaction in the North Sea area thus far. The actual handover is expected to be final in late May. The deal also includes a number of shallow-water Gulf of Mexico producing properties, one result being that neither company could be pinned down on the actual price paid for the Forties field, but it was to all appearances a lot of money.

However, that sale was preceded by a number of similar, but smaller major-to-independent trades in the North Sea area, some stemming back to the late 1990s. Producing properties that have been turned loose in "mature" areas with apparently limited upside potential are part of the reason for these trades. The kicker, however, at least in the UK sector, has been a clear British Government policy designed to encourage continued exploration and exploitation of its remaining North Sea oil and gas resources, with smaller independent companies leading the search. It also portends a hoped-for economic recovery for participants in the UK's offshore industry infrastructure, which have been hurting since production peaked there in 1999. The government hopes to continue collecting sizable royalties and tax revenues from North Sea resources, as well as creating new job opportunities. Similar policies are being endorsed in Norway and Denmark in their North Sea sectors.

In addition, area governments are encouraging major companies to explore and develop mainly natural gas production in deeper, more hostile offshore waters to the North. Activity there, however, thus far has been extremely costly and, as a consequence, carefully measured.

But back to the UK North Sea. The Forties field, discovered by BP in 1970, was the earliest and largest major oil find in the UK sector, with production peaking at 500,000 b/d in the early 1980s. It still ranks number eight, even after thus far producing some 2.5 billion barrels. Apache estimates conservatively that Forties will produce an average of 45,100 b/d of oil this year, with net proved reserves of 147.6 million barrels. And, of course, they intend to use the latest drilling and completion technologies to induce a higher recovery factor than the current 65 percent.

Wood Mackenzie (Woodmac), the global energy consultancy based in Edinburgh, Scotland, says the BP/Apache deal represents the start of a significant volume of asset sales by "super-major" producers, including national oil companies, not only in the North Sea, but also around the world. A Woodmac report filed days before the sale predicted the long-awaited restructuring of these portfolios would get underway this year, owing to a switch by major companies from production growth targets towards a period of portfolio management aimed at disposing of non-core assets. And those assets will be at the disposal of independents.

But if the Forties field—which Woodmac says represents around 5 percent of the value of BP's UK portfolio and is its fifth-largest UK asset in terms of value—is an example of "non-core" assets suitable for disposal, the industry's likely to see some very big trades this year, indeed. Woodmac believes, for example, that even in the North Sea, there's no reason to suppose BP might not choose to divest other of its top properties, which could include its interests in the Brae/Miller field area, among others. In adjoining Norwegian North Sea waters, BP's asset portfolio is valued at some $1.3 billion, and Woodmac implies that underperforming assets there, too, could be given a shakeout.

Actually, it's no secret that BP, for one, intends to dump assets. The company in December 2002 announced plans to sell more than $3 billion worth this year alone, mainly in the North Sea, the onshore U.S., and in South America. In fact, BP okayed a deal almost immediately to sell to UK-based newcomer Paladin Resources its 30 percent interest—bolstered with Amerada Hess's 29 percent share—in three central North Sea properties, for $153 million. Shell operates those fields.

Meanwhile, BP's expected to announce additional asset sales during the next several months. And Shell, another North Sea stalwart, also may hop on the bus. It's expected to dispose of some of the North Sea assets it received in its acquisition in 1998 of Enterprise Oil, even though Shell Expro, its UK unit, figures to remain heavily involved in redevelopment of its own North Sea fields, particularly in the southern gas province. Several other majors and even large independents like Kerr-McGee already have sold off North Sea properties, and probably can be counted on to dispose of even more this year.

Meanwhile, to take advantage of the trend, both industry analysts and the UK government see probable diversification into the North Sea area by more existing independents. And, as usually is the case, several new companies also may be created to do likewise. Lower overhead, a knack for fast-track development, fewer committees, and a hatred of waste will give independents a better-than-even chance to enhance production from existing fields. What's more, independents are long recognized for their ability to find new oil in old fields.

But if all this trading-off of assets suggests that the North Sea eventually will come to be known as a "dead" sea—as the Gulf of Mexico has been labeled, several times—there is ample evidence that such probably won't be the case, at least not in the near future.

Take Encana, North America's largest independent, and its recent success at finding at least one gold streak, as it were, amongst the North Sea's silvery tresses.

In 1998, Encana, formerly known as PanCanadian Petroleum, acquired an exploratory license in UK Block 20/6-5 in the central North Sea about 62 miles northeast of Aberdeen. The license had been held previously by BP Amoco, but had not yet been tested by the drill bit. Encana acquired the license partly as a result of the British Government's fallow—or undeveloped—fields initiative, which strives to persuade companies holding long-term licenses to "fish or cut bait" where exploratory drilling is concerned. In this instance, BP Amoco apparently preferred to cut bait.

But Encana, with a 45 percent interest in the license as operator for BG (20 percent) and several smaller independents, drilled a prolific producer on the license area's Buzzard prospect in mid-2001 that led to a multi-well appraisal program. The upshot of that program, completed in late 2001, is that the field holds estimated oil in place of between 800 million and 1.1 billion barrels. That further suggests the field—called "Buzzard" somewhat appropriately, given the long wait before drilling got started—probably will be the largest North Sea oil discovery in the last 25 years. Encana plans to file a development plan any day now, with a target date for first oil of late 2005.

The anticipated asset disposal boom, at least in the UK sector of the North Sea, promises to draw more such "buzzards" in the form of independent companies, all circling the area, awaiting their turn to feed on the remains left by the majors. And, as in the Gulf of Mexico, these new birds most likely will help new life return, phoenix-like, to North Sea oil and gas development.