New Entrants to UKCS Have Avoided Risk: Report
Producers that have set up operations on the UK continental shelf (UKCS) since 2008 now control 46% of production, with over 300mn barrels of oil equivalent/year of production. They have 39% of reserves and 64% of potentially commercial volumes yet to be developed.
But their appetite for buying producing assets has not yet been matched by their appetite for investment in new production according to research by Douglas Westwood published July 15.
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New entrants have so far moved only 577mn boe reserves into production since 2008, a sixth of the total in that time, and they have funded only the same proportion of exploration drilling, it said.
But "this is set to change as new entrants hold the key to sustaining UKCS production, controlling over 60% of the 1.7 billion boe of unsanctioned and potentially commercial resources in the UKCS. New entrants are also stepping up exploration efforts and will be funding over 16 net exploration wells in the next two years, 70% of the total planned and a step change from previous levels," the report says.
Summary graphic of various UKCS metrics split between incumbent companies, new entrant companies backed by Private Equity and all other new entrant companies. Data labels indicate the underlying values. Source: Westwood Atlas
The study found that 170 new companies have entered the UKCS since 2008 and of those, 72 remain active but only 31 hold reserves and production. Of the total, 94 were exploration-led, many of them private start-ups, which collectively have delivered a commercial success rate of just 15%, compared with the UK average of 27%. The effectiveness of the UK regulatory regime in encouraging so many undercapitalised private companies to acquire exploration acreage is questionable. the report finds.
New entrants since 2008 have spent $29bn in UKCS asset and corporate deals where a consideration has been announced, but successful exits have so far been rare. New entrants have to date sold $1.1bn in assets but only three have exited completely for cash with a positive return on investment. A further 12 have exited through a merger.
There have been 23 private equity (PE) backed new entrants who have collectively spent $11bn acquiring assets with several high-profile deals since 2016. These companies are yet to make a material impact on reserves and production with the exception of Chrysaor. But 12 PE-backed companies remain active, controlling 14% of 2019 production and 12% of 2P remaining reserves, of which Chrysaor accounts for about 70%.
These companies have so far sanctioned only 128mn boe, 4% of the UKCS total, and funded just 3% of exploration wells, finding only 1% of the discovered volume since 2008. Although several of these companies are expected to increase their contribution by investing in developments and exploration, many of them will be looking to exit sooner rather than later.
Reinvestment levels by the E&P sector in the UK offshore fell to below 25% of pre-tax cash flow in 2018. The big deal values grab the headlines, but it is how new entrants balance reinvestment of cashflows from the assets they buy with paying dividends that will determine their lasting impact on the UKCS, the report says.