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UK North Sea Energy Review

UK North Sea Energy Review


The UK’s energy policy, the investment climate for operators, and news about exploration and drilling plans and farm-outs dominated the UK’s North Sea oil and gas scene over the past month.

Before moving to restrict supplies from the North Sea, the UK must first drive down demand for oil and gas, Offshore Energies UK’s chief executive David Whitehouse said in a keynote speech at the end of March.

“Today, 76% of the UK’s energy needs are met by oil and gas. Oil powers the 32 million diesel and petrol cars on our roads and gas boilers provide heat and hot water to 85% of homes – over 23 million of them and rising. By 2025 the number of homes reliant on them is predicted to reach 24 million,” Whitehouse said.

He warned that if the UK wanted to tackle climate change it needed to “get serious” about driving down demand. But while that demand exists it should be met as much as possible from UK resources.

“Almost 40% of our domestic and industrial energy needs are met by natural gas, and the North Sea basin and wider UK Continental Shelf provides close to half of that total. It is only because of this vital resource and our offshore work force that we are not reliant on Russian imports of gas,” Whitehouse noted.

OEUK said in its Business Outlook report at the end of March that the North Sea could power the UK for decades, but a mix of windfall taxes and political uncertainty is driving away the billions of pounds of investments needed to maintain oil and gas production now and create low carbon energy in the future. According to the report, nine out of 10 of North Sea operators are cutting back investment, citing a mix of high taxes, political uncertainty, and inflation as key factors in their decisions.

The report also found that UK oil and gas output has shrunk over the past five years, with gas production down by 7% and oil output by 26% since 2018, due to falling investment and regulatory delays.

A continued lack of investment “could lead to overall production falling by as much as 15% a year by 2030, so output in 10 years will be 80% less than now,” says the report.

“The windfall levies are driving investment out of the UK. The total tax rate for offshore oil and gas operators is now 75% – three times that of conventional UK business. When prices fall, as is already happening, the ‘windfalls’ will disappear – but the tax will remain because it is locked in place till at least 2028,” OEUK’s chief executive Whitehouse said, commenting on the report.

“That makes these taxes a deterrent for investors. The same issue applies to offshore wind operators who face a similar windfall levy. Together these levies risk turning the North Sea, which should be the bedrock of the UK’s energy security, into an unattractive place to invest.”

While the UK’s latest Energy Security plan recognises the “vital role” of oil and gas in powering the nation and providing the bedrock for the transition to net zero and beyond, the lack of any detail on how the current 75% windfall tax can be revised to boost the long-term investment needed to simply maintain current levels of oil and gas production and supply remains a significant obstacle for North Sea firms, OEUK warned.

Scotland’s First Minister Humza Yousaf announced in early April that Scotland would boost the Government’s Just Transition Fund with additional £25 million to help the energy transition across the North East.

The £500 million, 10-year Just Transition Fund was established to accelerate the energy transition in Aberdeen and the North East, and establish the region as a world leader in the transition to a net-zero economy.

“Scotland is an energy-rich nation and the oil and gas industry has made a vast contribution to our economy, while its workers are some of the most highly-skilled in the world,” Yousaf said.

“But Scotland’s oil and gas basin is now a mature resource and, as a responsible government, we must take action to ensure the sector, and the communities it supports, are supported in a transition to cleaner, greener energy system.”

OEUK praised the First Minister’s announcement of an additional £25 million to the fund, but warned that Scotland and the UK would need secure supplies of oil and gas for many years to come.

While the funding was an important step forward, it is essential to recognise the continuing role of oil and gas in Scotland’s economy, OEUK said. The offshore energy sector’s workers will also be key to building a low-carbon transition both now and in the future, anchoring a world-class offshore supply chain in Scotland’s energy communities.

“As we build a sustainable future, it is important to remember there is no simple choice between oil and gas or renewables. The reality is that we need both,” OEUK’s Whitehouse said.

The North Sea Transition Authority (NSTA) at the end of March moved to speed up North Sea oil and gas production by proposing the removal of barriers to investment.

Operators and licensees worried about transaction delays which can damage working relationships, increase costs, and hold up operational and strategic decisions asked the NSTA to look into the situation. So the authority has opened a consultation on new guidance which aims to streamline the buying and selling of assets.

The consultation “will allow licensees and investors to share their thoughts on matters including how best to strike a balance between market liquidity and preserving investor confidence, the role of self-regulation and what the NSTA guidance on licence assignments should include,” NSTA said in a statement.

In company news, Shell has completed the restart of operations at the Pierce field in the UK Central North Sea, following a significant upgrade to allow gas to be produced after years of the field producing only oil. Substantial modifications were made to the Haewene Brim floating production, storage and offloading vessel (FPSO), which is used to produce hydrocarbons at the Pierce field. A new subsea gas export line was also installed, connecting to the SEGAL pipeline system, which brings gas ashore at St Fergus, north of Aberdeen.

EnQuest increased in late 2022 its equity interest in Bressay to 100%, following the withdrawal of Equinor and Harbour Energy, EnQuest said in its 2022 results and 2023 outlook report. At Bressay, EnQuest is actively exploring farm-down opportunities while continuing to progress development planning of the asset. EnQuest aims to utilise its expertise in heavy oil developments to access hydrocarbons at Bressay and Bentley, with each field having more than 100 Mmboe of 2C resources.

Looking forward, the UK Energy Profits Levy “has also had implications for EnQuest’s capital allocation strategy as it limits the cash available for further deleveraging, capital investment and shareholder returns,” the company said. The impact of the EPL was included in the Group’s reserve based lending (RBL) facility redetermination for the first half of 2023, resulting in a reduction of the available RBL capacity and liquidity available to the Group, with an accelerated RBL repayment profile, EnQuest said.

Jersey Oil & Gas has agreed to farm-out a 50% interest in the Greater Buchan Area (GBA) licences to NEO Energy. Jersey Oil & Gas is set to receive a $2 million cash payment on completion of the transaction, a $9.4 million cash payment upon finalisation of the GBA development solution, a $12.5 million cash payment on approval of the Buchan final development plan FDP by the NSTA, and $5 million in cash on each FDP approval by the NSTA in respect of the J2 and Verbier oil discoveries. Jersey Oil & Gas will be working in partnership with NEO to select the preferred development solution, having confirmed a short list of attractive options for the GBA which utilise existing North Sea infrastructure.

Serica Energy said its pro-forma Proved plus Probable (2P) reserves increased to 130.4 mmboe as at 31 December 2022 compared to 104.0 mmboe as at 31 December 2021, following the acquisition of Tailwind. After the purchase, Serica is now a top 10 producer in the UKCS and a significant contributor to the UK’s energy security, the company said.

In a separate announcement a few days later, Serica said the acquisition had also added considerably to the organic investment opportunities in Serica’s portfolio. Rig slots have been reserved in order to drill infill wells on the Bittern, Gannet E, Guillemot North West and Evelyn fields in 2024, all of which are existing tiebacks to the Triton FPSO. The potential developments of the Belinda field as a tie-back to the Triton FPSO and the Mansell field, situated in the UK Northern North Sea, are being evaluated.

Hartshead Resources and RockRose have executed a binding agreement for Hartshead to farm-out 60% of its UK Southern Gas Basin assets (License P2607). Hartshead will retain the operatorship of the licence.

Hartshead has also said it is starting a geophysical survey across the Anning and Somerville fields and inter-field pipeline locations using GEOxyz’s Geo Ocean III vessel. The results of the geophysical survey will form a critical component of the Environmental Statement and understanding of the seabed and pipeline route conditions at the Anning and Somerville field locations required for the platform FEED jacket design verification.

United Oil and Gas plc has extended the long stop date for the sale of its licence in the UK Central North Sea containing the Maria discovery in Block 15/18e to Quattro Energy Limited. In January, United entered into a binding asset purchase agreement (APA) with Quattro Energy, with the long stop date for the satisfaction of the APA conditions set for 16 April 2023. On April 17 United Oil and Gas announced the parties to the agreement had agreed an extension of this long stop date to the 17 May 2023 to allow additional time for the APA conditions required for completion to be satisfied.

Read the latest issue of the OGV Energy magazine HERE

Published: 08-05-2023

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