Platform Hopping in the North Sea

Normally, my next Oil and Energy Investor would come on Friday.

However, in addition to providing briefings and attending policy meetings during my current stay in the UK, I have also been involved in something else while up here in Scotland: the evaluation of offshore platform procedures for a client.

And that is changing my schedule for everything else.

Offshore Development in the North Sea
The U.K. began its development of the North Sea off Scotland. Since then, fieldwork has moved into deeper water reserves further out. Yet the country's primary extraction volume still comes from the area nearer the coast.

Operations have turned the sleepy (and impoverished) city of Aberdeen into a global oil service center. The transformation was remarkable. From a city known for textiles and out-of fashion manufacturing, an entire generation of oil technicians and specialists was born.

That may be the main enduring legacy of this transformation. It is now very rare when walking on the deck of a deepwater production platform anywhere in the world not to run into a Scottish electrician, pipe runner, or oil analyst.

But those days are drawing to a close. Production from the main (and largest) offshore fields reached peak levels several years ago, and is now in rapid decline. While satellite formations are being exploited and moderate-sized new discoveries are coming online off Norway to the east, the era of North Sea oil is coming to an end.

Two things are resulting here. One is obvious, while the other rather unexpected. . .

Smaller Companies Can Maximize Extraction Potential
First, London and Edinburgh (the location of the Scottish parliament) have had to compensate for the expected decline in revenues for some time.

With a cut in export proceeds, the rising demands for public services in an already strained budget will result in a range of problems.

There will be sufficient volume of crude coming onshore to meet British requirements, with a greater number of swap contracts to balance rising offshore production prices with spot discount purchases in a broader market.

But the end of North Sea primary oil flow will engender a new and more problematic environment.

The second result is more positive. As the big boys ponder whether additional offshore moves are warranted, a new stage is rapidly emerging. This one involves smaller companies moving in, either acquiring lower-reserve existing fields or farming into ongoing projects.

Such developments are becoming the norm in many regions of the world. Focused and well-managed smaller companies are likely to provide better overall returns than larger operators with higher overhead.

In addition, new types of holding structures have sprouted up in the mature offshore zone. Combining assets with known (although declining) production levels and acquisitions/production trusts and related operations allows leaner companies to maximize returns.

In these approaches, the extraction potential is maximized, even if the overall volume is in decline. This allows a holding to utilize across-the-board per unit proceeds rather than field-specific returns as its basis for determining the bottom line.

In such a scenario, being smaller is better. . .if the management knows what it is doing and can adequately evaluate the assets in question.

Which is why I am bouncing on the waves these days. The technical aspects of determining a farm-in or acquisition are better left to the petroleum engineers, while the legal aspects of the contract are the responsibility of solicitor specialists back in Dundee.

My part in all of this is to value market prices for the resulting crude, and the most likely locations for export.

A Model for Other Regions
Now I could do this from land, and most of it will be done there (up against a fire with a nice cup of Lord Grey tea).

However, early in my career I tried to determine market factors without actually seeing the operations platforms. . .and it was a disaster.

So these days I need to review the wellhead process, as well as the amount of crude likely to come online.

The production facilities determine the crude flow—not the book figures of the extractable reserves. Therefore, the three platforms involved in this potential deal are essential to gauge profitability.

Of further interest is the model being developed here that will be of use in other offshore production regions. With the absolute majority of large fields yet to be discovered worldwide resting offshore, and the costs to develop them rising, these new ways of bringing in additional participants and capital will be expanding.

Which means I better have my sea legs intact; there may well be more platform hopping ahead.

Sincerely,
Kent Moors
Oil & Energy Investor