UK Tries to Keep the Offshore Going

UK-listed Faroe Petroleum gave a flavour – in its annual results on March 29 – of the stresses facing  smaller North Sea-focused independents.

Faroe’s overall net production of 10,530 boe/d – split 58-42% between oil and gas – was 15% higher than in 2014, but it said this was likely to fall to 7-9,000 boe/d in 2016. Despite reducing costs, the fall in oil and gas prices meant it lost £52.9mn -- only slightly less than its 2014 loss of £55mn.

Faroe rationalised its exploration portfolio down from 50 licence areas at end-2014 to 33 at end-2015, with more of the same planned in 2016. Yet it said it is “well-positioned to capitalise on market conditions to add value through further selective value-enhancing asset acquisitions.” CEO Graham Stewart said the firm was “in a good position… to seek to capitalise on our relative financial strength as we pursue attractive consolidation opportunities in our core areas on the UK and Norwegian continental shelves.” Shares were 1.9% down at close of March 29 at £0.645.

Faroe is operator, with a 60% interest, in the Schooner and Ketch gas fields, which it acquired in 2014 and which are tied back to the ConocoPhillips-operated Theddlethorpe gas terminal on England’s east coast, reportedly threatened with closure by around 2018.

“Discussions are ongoing with the terminal operator to extend the lives of the terminal and other infrastructure to allow the continued production of Schooner and Ketch and the others fields in the catchment area with remaining economic potential,” said Faroe, but added: “The longevity of these fields is dependent upon a recovery in market prices and continued access to the infrastructure.”

UK offshore regulator the Oil & Gas Authority (OGA) is also in talks with ConocoPhillips regarding the US major's plans to decommission it.

It told NGE March 29 that it could not comment on whether the government might step in to provide support, possibly by acquiring the terminal and the associated offshore Lincolnshire Offshore Gas Gathering System (Loggs), which is used by Ineos, Centrica and Faroe to land their production. The short-term cost could pay for itself in taxes that would otherwise be lost along with production.

The terminal can handle 1.6bn ft³/day, although 2015 throughput averaged about 300mn ft³/d, or about 3% of UK demand.

ConocoPhillips said it was working closely with the OGA, shippers and other stakeholders around the long-term plan for the terminal, but said there are no immediate plans to decommission it. A number of the ConocoPhillips-operated gas fields which feed into the Theddlethorpe gas terminal have ceased production. ConocoPhillips has developed a phased decommissioning programme to responsibly decommission the offshore infrastructure in those fields over the coming years, its statement said.

Swiss-registered petrochemicals company Ineos bought the stake in the Clipper field, which relies on Theddlethorpe, from its operator Letter 1 last year. The Russian-owned company bought the assets of RWE-Dea, but was then forced by the UK government to sell in the interests of UK security of supply. The government was concerned that further economic sanctions on Moscow could hit UK security of supply. 

Maximizing the flow 

The OGA was set up a few years ago on the recommendation of offshore engineer Ian Wood, who was commissioned by the government to research ways to ensure as much oil and gas was produced as economically possible. Budgets since then have lowered tax rates for producers, but the low oil price makes more fields uneconomic.

He told The Times on March 26 that he hoped that there would be no need for direct government intervention in asset ownership to prevent the domino effect of closing infrastructure downstream. However, if there were no private investors, "There may well be bits of central infrastructure that the government would have to find ways of financing," he said.

So far, two thirds of the UK's original 62bn barrels of oil equivalent have been produced, but he said it is now conceivable that only 10bn – half the remainder – will be produced, owing to low oil prices and resulting investment cuts.

Mark Smedley, William Powell