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    Editorial: Back to basics [NGW Magazine]

Summary

Two of a trade never agree, as the saying goes. There are as many views on the energy market as there are participants, as three of the majors’ widely differing views on something as critical to their fortunes as peak oil demand show. Will it be the 2020s, the 2030s or the 2040s? Nobody can accuse them of market fixing, if BP, Shell and ExxonMobil can put forward a range as wide as that.

[NGW Magazine Volume 4, Issue 8]

by: NGW

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Editorial: Back to basics [NGW Magazine]

Two of a trade never agree, as the saying goes. There are as many views on the energy market as there are participants, as three of the majors’ widely differing views on something as critical to their fortunes as peak oil demand show. Will it be the 2020s, the 2030s or the 2040s? Nobody can accuse them of market fixing, if BP, Shell and ExxonMobil can put forward a range as wide as that.

This makes for an exciting market as different companies take different views on the future. It also sets the scene for active trade in oil and gas fields, given a relatively stable oil price to work with.

The North Sea generally and the UK continental shelf (UKCS) in particular is a richly varied province that has become of great interest to private equity. Since the first well was drilled in 1964, it continues to lure the window-shopper, with a mix of mature assets, decommissioning business development and the prospect of unexpected discoveries, oil, gas or both. And quantitative easing over the last decade means a lot of money is looking for a home.

A relatively stable and favourable fiscal regime, the proximity to a 450bn m³/yr, liquid and competitive gas market and plenty of spare capacity in an extensive, amortised, offshore pipeline network – all these factors play a part. One small producer says there are enough idle pipelines to enable it to bring to the Bacton beach terminal some 600bn ft3 of previously stranded gas – a crucial saving of time, money and resources for the debt-laden company.

The ability to scale up is also important: most of the buyers talk about developing hubs. The aggregation of small fields and third-party access to infrastructure, either negotiated or enforced by today’s vigorously hands-on regulator, all help delay the inevitable cessation of production and so maximise the economic recovery.

The latest sizeable deal, Chrysaor’s buyout of ConocoPhillips, shows the bigger company trading UK gas for US tight oil; but for the buyer, the UK is all it has to work with, and it has enough to occupy it for years.

The purchase is unlikely to be the last, as another US major, Chevron, has been trying since last summer to sell its gassy, central North Sea assets. It too has ambitions to grow in the US, as its bid for Anadarko testifies.

The deal has made Chrysaor a roughly 50-50 oil and gas company, and one of the biggest on the UKCS. Other European companies in that super-independent sector include Spirit, the mostly gassy joint venture led by Centrica; Neptune Energy; and the forthcoming Wintershall-DEA merger, which could create a €15-20bn company when floated, according to press reports. And moving up the ranks is RockRose, which has just bought Marathon’s UK assets and is hungry for more.

Accidental or strategic, Chrysaor’s trend towards gas reflects what is going on in the larger world. For some years the majors have been shifting the centre of gravity of their hydrocarbon output from oil to gas as it represents the lower carbon option. Big companies that have activist shareholders have had to become ever more cautious about oil.

Equinor, which is majority owned by the Norwegian government, is just the latest company to announce plans to tie pay and bonuses to the carbon intensity reduction successes of its staff, falling into line with the spirit of the Climate Action 100+. “We see our low carbon strategy as a competitive advantage which creates long term value for our shareholders. The actions we announce today make us even more competitive in the energy transition,“ said CEO Eldar Saetre April 24. Other European majors Shell and BP have already announced similar plans.

Another recent manifestation of that trend has been Total, following Shell’s lead and setting up an integrated gas and power division. It will take care of integrated gas production and equity and third-party LNG marketing as well as low-carbon – as well as zero-carbon – power generation.

The national oil companies are also moving more into gas, with Saudi Arabia in particular making a claim – yet to be backed up with actions – for serious gas ambitions.

But for the smaller players, such as Chrysaor, producing oil and gas for a local market is a simple objective for the time being. Not everyone has the luxury of activist shareholders, and for the independents, the energy transition is one of the least interesting parts of their day to day lives.

Small producers are able to capitalise en passant from the energy transition, for example by exporting spare power to shore from their rigs using newly built windfarm infrastructure. But getting on with the job of producing oil and gas, finding investors, fighting off rivals and exploring for the next big find is what occupies their time.

This was well put by the CEO of the Danish state-owned producer Nordsofond, Birgitta Jacobsen, as she commented late in April on the partners’ investment in the ageing Tyra field, of which her company owns fifth.

While the country’s biggest energy company Oersted/Dong has sold off its hydrocarbon assets such as its Ormen Lange stake and become entirely green, Nordsofond believes oil and gas will continue to be of importance for many years to come, despite the green transition, owing to the needs of heating, transport and the petrochemical industry.

"We can secure our own production of oil and gas for many years with a visionary development of the Danish part of the North Sea. And here, an accessible, modern infrastructure, as the Tyra facilities, is an essential part of the foundation," she said.

NGW