Edison Investment Research

2017 Senegal appraisal to kick off in January

Cairn Energy confirmed today that it will return to drilling offshore Senegal by the end of January this year, with two firm wells designed to further evaluate its 473mmbbl SNE discovery. The Stena DrillMax is contracted for these two appraisal wells together with multiple follow on options yet to be confirmed but which could include exploration wells in addition to further appraisal.

Decommissioning - changing the mindset

£1.1 billion was spent on decommissioning in the UK in 2015, accounting for 5% of total UKCS expenditure that is expected to increase to 12% in 2017. Oil & Gas UK has estimated that decommissioning on the UKCS up to 2025 represents a £17.6 billion opportunity.

With the UKCS accounting for 50% of the global decommissioning spend over the next 5 years, the North Sea is at the forefront of developing the techniques to optimise the process and could position itself as a major player in the global decommissioning industry. At a recent conference on the subject hosted by Edison, together with Addleshaw Goddard, the key themes of cost uncertainty and industry collaboration emerged.

Fortuna LNG deal underlines the structurally higher costs of capital seen by E&Ps

We believe the poor record of investment returns for large oil companies over the last cycle (taken as a proxy for the industry) should have far reaching effects across the industry. As majors look to increase their below-WACC ROICs (seen consistently over the last decade), they will demand higher returns for the investment projects. This should mean a continued drive for lowering costs and increasing efficiencies for service companies and a more aggressive negotiation with companies looking to farm-down the projects for funding.

Majors - failure to make sufficient returns will raise costs of capital across the E&Ps

By Will Forbes

The total shareholder returns of the majors outperformed the NY industrial average since 2000-2016 buoyed by the Chinese supercycle and resulting oil prices. However, the total returns seen by investors have lagged badly in the last decade, as inefficient capital bases in a newer world of higher costs and moderating/falling oil prices dragged on returns.

Development lead times

How long does it take to develop a new discovery to first production? The answer will of course vary greatly and depend on a wide range of factors, from the size of the accumulation, to the maturity of the basin and the presence or lack of existing infrastructure. But in many cases the time taken will probably be longer than originally anticipated.
The recently published Oil & Gas UK economic report contributes some interesting statistics on this subject from a UK perspective.In the North Sea, the current average is 17 years (for those fields entering production since 2005), with all developments during this time taking more than 10 years. This is a lengthy payback time for both operators and investors.

Skipper oil - heavier and more viscous than expected

Independent Oil & Gas(IOG) drilled its Skipper appraisal well in August this year, but despite initial indications that the heavy oil was moveable in the reservoir, the company has now announced that sample analysis points to a significantly higher viscosity than expected, forcing a rethink on potential development options.