The state of independents

April 1, 2012

John ManzoniThe crucial role played by the independents in the energy mix and the slightly precarious position in which they find themselves was highlighted by Talisman Energy president and CEO John Manzoni at the Energy Institute's recent three-day gathering in London. Meg Chesshyre reviews some of the key presentations during IP Week 2012.

Excluding the NOCs, independents account for one-third of global oil & gas production, 50% of exploration and development spending, and 63% of exploration spending, Talisman boss John Manzoni told IP Week delegates last month. They also find about 50% of new discoveries according to one research house. In the UK, independents account for about 25% of production, with Talisman itself now operating 32 fields and producing around 65,000b/d having entered the fray in 1994 as the majors began to divest their older fields.

In the Gulf of Mexico, independents are the largest shareholder in two-thirds of offshore leases, and have taken 70% of the acreage farmed out by majors, Manzoni pointed out. Three billion barrels of oil found by the majors is now operated by the independents. In Western Canada, where at least a part of the basin is very mature, independents represent about 50% of production and spending.

He added that in Asia there are many mature basin opportunities, which are essentially controlled by the national oil companies. ‘And in that part of the world, we find that our relationships with Petrovietnam, or Pertamina, or even Petronas, offer tremendous opportunities for our company to work closely in redevelopment opportunities which are often too small for the majors to be focused on.'

Turning to the continuing development of mature fields, Manzoni attacked the current UK fiscal and regulatory structure. ‘I'm afraid in my view the UK has taken a step back in this area recently. If the normal evolutionary process were facilitated, there should be a queue of the next generation asset owners in the UK – but the queue isn't very long.

Among the IP Week panellists were (left to right): Didier Houssin, IEA; Patrice de Viviès, Total; Joan MacNaughton, Energy Institute; Andy Brogan, Ernst & Young; and Paul Newman, ICAP Energy.

‘This is a very real issue in my company today. I am not investing in smaller UK pools because I have bigger opportunities elsewhere, and I am unable to find ways of handing the assets to the smaller companies who otherwise would be keen to exploit the remaining resources,' Manzoni declared.

The prospect of future decommissioning costs deters smaller companies, he added. ‘The current regime means buyers of these assets have to be able to handle the full amount of decommissioning security, including the government's share which can be as much as 75%, and their balance sheets often can't handle these liabilities. Hence the transactions have stalled, and the resources are not getting the investments they otherwise might.

‘The problem is that the investments required to maintain the infrastructure in a condition which will ensure its safety and integrity for an extended life, or enable those smaller pools to be tied back, are often marginal under the current regime. And therefore as we look at these investments, we are having more and more trouble justifying them as valuable to our shareholders*.

‘I know the government is keen to promote investment and not to stop it, and that is exactly how it should be. The problem is that given the time frame for these investments, which often take years to plan and execute, we aren't seeing the impact of incremental changes to investment plans today. Those will only come to light some time in the future, and by then, it will be too late.'

According to Manzoni, the opportunity for independents was to continuously develop their skills and technologies, and thereby make themselves indispensible, particularly to the NOCs. ‘This way we insulate ourselves against the natural consolidation which otherwise could occur.'

Safety, trust, value

Bob DudleyThree themes – safety, trust and value – have become touchstones for BP over the past 18 months, said group CEO Bob Dudley addressing the IP Week closing dinner. Safety and trust have obviously been major concerns, he said. ‘After theDeepwater Horizon accident and oil spill, our corporate situation became precarious. Banks wouldn't extend us credit. Many shareholders fled. Our stock price dropped more than 50%.'

The first priority was to reinforce risk management processes and structures – not only engineering risk but fraud risk, explained Dudley. A new safety and operational risk organisation has deployed hundreds of specialist personnel across BP's operating businesses to advise and if necessary, intervene. The group was also building capability across the board, for example hiring over 2000 technical people upstream last year. ‘This an industry that creates jobs – one in five private sector jobs in the US in the last decade, he noted. And in the UK the company had just announced a 50% increase in its 2012 graduate intake to around 250.

On the grounds that ‘a supermajor can't be super at everything', Dudley said BP was today focusing on its strengths – ‘exploration, deepwater production, giant fields, gas supply chains, and a world-class downstream business, all underpinned by technology and relationships' – to create value. ‘We have had a record period for exploration access since October 2010, with the award of some 80 licences covering acreage the size of Italy. We plan to more than double our exploration expenditure over the next few years.'

On the technology front, he noted that BP was focusing on selected flagship programmes aimed at bolstering capability in areas such as seismic, water-flooding and deepwater hydrocarbons production at 20,000psi.

‘We thought very carefully before re-committing the company to the deep water following the 2010 accident,' admitted Dudley. ‘However, BP has decades of experience in the deep water. That capability needs to be preserved and so we are going forward, but with a great sense of responsibility.'

Investment requirements

The UK is not an insignificant producer, but obviously less significant than it was, observed Andy Brogan, global oil and gas transactions advisory leader at Ernst & Young.

He pointed out considerable amounts of investment were needed to keep operating in the North Sea and that the majors have other, more prospective investments to look for elsewhere. To compete globally for investment the UK North Sea needed to focus on its core advantages, such as an established infrastructure and location in an OECD economy. Unfortunately, however, it did not have the reputation for regulatory and fiscal stability that it could have, Brogan noted, and there were certain barriers to development particularly in terms of decommissioning liability. ‘I think we are rapidly getting to the point, where, if we want to see the best development of the remainder of the North Sea those issues have to be addressed.'

At first sight the UKCS seemed healthy enough, with investment continuing to grow over the past decade. But a few health warnings needed to be applied to this data, he added, notably cost inflation for oilfield services and a growing proportion of the offshore spend focusing on operating and drilling around mature assets. Also, the front-end lead indicator – exploration and appraisal expenditure – had been fairly flat. Development drilling dropped off a little last year, but E&A drilling came down quite significantly, he noted.

‘The last time we had levels like this in terms of E&A wells drilled, we were looking at an oil price in the $20-30 range, rather than the $80-120 range that we are in at the moment, so I think there is room to make the UK a more friendly environment in which to invest,' Brogan concluded. Since a lot of what remains is gas, he said it was important that the authorities recognised the different commerciality of gas versus oil.

French connection

Patrice de ViviesTotal Exploration & Production's SVP northern Europe, Patrice de Viviès, said his company's North Sea activity levels in the region were increasing sharply.

According to Viviès, Total notched up 11 million worked manhours across the North Sea last year and the figure is expected to rise to 17 million this year. The UK accounted for 6.5 million of the 2011 manhours and this is expected to almost double in 2012.

Total's North Sea spend in 2011 was about $3 billion, with a little more expected this year.

Seven of the ten rigs it is currently operating in the North Sea are in UK waters, as are four of its eight North Sea projects under development: Laggan/Tormore, West Franklin phase two, the Dunbar phase four drilling campaign and the Islay gas condensate subsea tieback (OE December 2011), which is due to come onstream this spring. In Norway, Total recently launched the Hild field development project and is participating in the redevelopment of Ekofisk South and Eldfisk, while in the Dutch sector the company is working on K/4-Z.

‘These developments will contribute to 40% of our production in the North Sea in the coming five years,' calculated Viviès. ‘We will invest about $16 billion in five years and about 70% of this investment will be on new projects.'

He stressed that technological advances, especially in the geoscience area, were of crucial importance to the North Sea, adding: ‘We can now see things we couldn't see just two or three years ago.' OE



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