Barents Sea licence awards

The Norwegian Ministry of Petroleum and Energy has issued ten new production licences in the Barents Sea as part of Norway’s 23rd licencing round, following applications made by 26 companies in January. This is the first time since 1994 that new exploration acreage has been made available to the industry in the southeastern Barents Sea. 

From the International E&P names:

• Lundin has been awarded interests in five licences (three as operator)
• Det Norske has been awarded interests in three licences (one as operator)
• Tullow has been awarded an interest in one licence (non-operated)
• Cairn (through its Capricorn Norge subsidiary) has been awarded three licences (one as operator)

The companies have committed to binding work programmes that primarily include a drill or drop decision to be made within two years.

Barents Sea licence areas
Source: NPD

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Statoil acquires a further stake in Lundin Petroleum

On 14^th January, Statoil announced that it had acquired 37.1 million shares in Lundin Petroleum, corresponding to 11.9% of the company. Statoil says that it paid c.SEK4.6 billion for the shares, which equates to a price of SEK120/share or a 28% premium to the share price close as of yesterday at SEK97. Statoil purchased the shares over the past few weeks and says it is supportive of Lundin management, its board of directors and strategy, but there is currently no plan to increase its shareholding in the company.

This article was originally posted on 14^th January 2016 and has since been updated

Statoil says "this is a long term shareholding. The Norwegian Continental Shelf is the backbone of Statoil's business, and this transaction indirectly strengthens our total share of the value creation from core, high value assets on the NCS". Despite the longer term strategic rationale, the move is unexpected. Lundin is one of the more expensive E&P stocks and the transaction further increases Statoil’s exposure to the giant Johan Sverdrup development. Questions are now being asked by the market on whether Statoil can continue to pay its dividend.

From an E&P sector perspective, the move is encouraging as it demonstrates industry interest in the subsector, and the news should help shore-up Lundin’s share price. Nevertheless, corporate activity is likely to remain muted until the oil price starts to recover and confidence returns to the sector.

**Update**
On 3rd May, Statoil and Lundin announced than it had acquired an additional 15% in  Edvard Grieg (licence PL388) from Statoil in exchange for issuing 31.3million shares to Statoil worth USD578million. The transaction is expected to close on 30^th June 2016, pending regulatory approvals.

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Ophir's Fortuna farm-out terminated

On 29^th April 2016, Ophir announced that it had terminated its Fortuna farm-out discussions with Schlumberger. Back in January, Ophir announced that it had entered into a non-binding Heads of Terms Agreement with Schlumberger for upstream participation in the Fortuna FLNG development that would result in the oilfield service company carrying Ophir to first oil. However, the two companies have been unable to complete the transaction on the terms agreed and discussions have been terminated.

Ophir’s management must now demonstrate its continued confidence in its ability to attract an alternative partner for the FLNG project. Although development costs have continued to fall as studies continue, reservations still exist about any plans for Ophir to self-fund and sole risk this development.

Having completed the upstream FEED studies, gross upstream capex requirement from FID to first gas has been reduced again, to USD450-500million from USD600million. Ophir continues to progress the project, and fully-termed LNG sales agreements are nearing completion. Offtake selection has progressed to a decision between three alternative solutions. But given additional time is required to fully develop these options to binding agreements, FID has been pushed back to Q4 2016 with first gas now forecast for 2020.

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Gran Tierra the Consolidator

On 30 March, Gran Tierra announced the private offering of USD100 million convertible notes which successfully closed on 6 April. The new funds will allow Gran Tierra to accelerate its exploration programme and places the company in a strong position to act as consolidator in Colombia.

Gran Tierra completed two acquisitions in Q1 2016, building out its portfolio particularly in the Putumayo Basin of southern Colombia and supplementing its interests in the Costayaco and Moqueta fields. With development drilling on Costayaco and Moqueta due to end through Q1 2016, the company will be starting its 2016 exploration campaign shortly, commencing on the newly acquired PUT-7 block. The newly acquired assets provide ample opportunities to accelerate reserves and production growth through the drill bit.

Through a combination of acquisitions and re-investment in the core producing fields, the company is expected to increase production by c.20% from 2015 levels of 23mboepd to c.28mboepd in 2016. The company retains a strong balance sheet with c.USD180 million of cash following the recent fund raise. The company’s cash position, together with operating cash flow of c.USD100 million (if Brent averages USD40/bbl in 2016) is more than sufficient to fund its 2016 base capex budget of USD107 million and its discretionary budget of an additional USD61 million.

The peace process between the Colombian Government and the FARC is expected to conclude shortly and it is anticipated that southern Colombia, historically an area of focus for the FARC, should benefit from greater stability.

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Further payments by the KRG

DNO and Genel Energy announced on 22 March that the Tawke and Taq Taq participants have been paid by the Kurdistan Regional Government (“KRG”) for oil sales during February. News of another month of payment should help boost sentiment.

Given that the export pipeline was out of service during the second half of February, sales at Taq Taq and Tawke were down materially month-on-month at 62,091bopd and 73,124bopd, respectively. Sales into the local market from both fields were, however, invoiced at the wellhead export netback price, in line with the payment mechanism announced by the KRG on 1 February; this process helped limit the month-on-month reduction in revenues. Flows into the export pipeline resumed on 11 March.

Genel, as operator of Taq Taq received USD12.6 million for oil exports, down from January’s USD16.3million. An additional USD2.5 million payment has been made towards recovery of the receivable, down from USD3.2 million.

DNO, as operator of Tawke has reported receipt of USD11.29 million for exports, down from USD17.99 million in January. An additional USD2.17 million has been paid for past deliveries, down from USD3.46 million in January.

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Troubles at Jubilee

Jubilee FPSO

On 18^th February, Tullow and Kosmos warned of a potential maintenance issue with the Jubilee FPSO’s turret. At this stage oil production and gas export is continuing as normal but the vessel is now set to be held in position by tugs rather than weathervane. The implications are that the turret may require maintenance that results in unscheduled shut-in and additional costs to rectify the issue. The length of any repair work is not yet known. Jubilee is forecast to contribute nearly half of Tullow’s H1 2016 production, and all of Kosmos’ H1 2016 production.

Following a recent inspection of the turret area of the Jubilee FPSO by SOFEC, the original turret manufacturer, a potential issue was identified with the turret bearing. As a precautionary measure, additional operating procedures to monitor the turret bearing and reduce the degree of rotation of the vessel are being put in place. SOFEC will now undertake further offshore examinations.

New field start-up have been a cause of concern for investors, as a number of recent offshore projects have cost more and taken longer to deliver. However, the news is a reminder of the risks of the focussed nature of E&P portfolios – many of the international E&P companies are dependent upon a single asset, and even the largest companies – including Tullow and Lundin (Edvard Grieg) remain heavily depend on just a couple of assets.

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Senegal offshore reaches threshold for commerciality

On 8th February, FAR Ltd announced an updated independent resource report (by RISC) of the SNE discovery offshore Senegal (Cairn 40%, ConocoPhillips 35%, FAR 15% and Petrosen 10%). The report increases contingent resources for the discovery to 240mmbbl 1C (from 150mmbbl), 468mmbbl 2C (from 330mmbbl) and 940mmbbl (from 670mmbbl). This assessment includes the SNE-1 discovery well and subsequently reprocessed (more accurate) 3D seismic. Significantly the update does not include the successful SNE-2 appraisal well. Given the lack of major oil discoveries worldwide, SNE is an important find (largest since 2014) and on further positive appraisal drilling, will be an increasingly desirable asset.

Cairn previously indicated that around 200mmbbl is the commercial threshold to underpin a 'foundation' development offshore Senegal, where fiscal terms would yield a 20% IRR at USD45-50/bbl oil price. The resource report would imply that the discovery now has the scale to support a development and the SNE-2 appraisal well demonstrates deliverability following strong production tests (8,000bbl/d from blocky sands and 1,000bbl/d from hetrolithics). The next element of the appraisal campaign is to test for connectivity and the upcoming drilling should help to determine this. Significant further drilling needs to be completed; however results to date are encouraging.

The second appraisal well SNE-3 has now been cored and logged with production test results expected later in February. This will be followed by the Bellatrix exploration well testing a 168mmbbls P50 prospect, then deepening to test the northern extent of SNE (no production test planned). In addition to a more comprehensive resource update in mid-2016, there is the option for three further wells later this year. With drilling time currently ahead of expectations, there is scope to drill an additional well without extending timeline or budget.

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