Report shows North Sea minnows must become far more dynamic

May 03, 2005 02:00 AM

Independent North Sea oil and gas companies must become far more dynamic and broadly focused if the region's 25-30 bn barrels-worth of estimated reserves are to be tapped successfully, a new report has found.
According to the latest "state-of-the-industry" report from venture capital group 3i, the North Sea's oil and gas minnows need to evolve from traditional exploration and production groups into multi-faceted companies "with the resources to exploit market and technological developments".

Even with estimated North Sea reserves standing at about 28 bn, according to the UK Offshore Operators Association, the fields are becoming increasingly disparate and difficult to pump. The structure of the sector does not help the situation, with a number of fields owned by a raft of smaller operators, which have been unable to fully utilise them through lack of capital or technical expertise.
Despite calls for consolidation, many smaller outfits are unattractive as investment targets due to the level of risk involved with just one asset. As a result, the Department of Trade and Industry now estimates that more than 300 oil fields are lying dormant in the North Sea because operators haven't been able to sufficiently develop them.

However, according to Graeme Sword, 3i's head of oil and gas, this situation combined with record oil prices -- now tipped to stay at $ 50 for the year -- offers new opportunities for innovation.
He said: "Opportunities were excellent in 2004; now they are unprecedented for the industry itself. Smaller companies are really struggling to acquire assets. There are a lot of them chasing producing fields, but at current prices there's just no reason for the majors to sell when they can generate such strong cash-flows."

Instead, Sword is advocating a business model along the lines of Scottish company Energy Development Partners (EDP), which was founded by chairman Larry Kinch in September 2003.
Unlike most North Sea operators, EDP does not directly own assets, but through a partner takes technical control of projects. It then takes a share of production in each deal. Sword said: "The current market is playing right into EDP's hands; in this environment, when the majors don't really want to sell assets, when the need to keep reserves on the balance sheet, when they need to show that they're getting replacement ratios... all this fits the model."

Source: Scotsman
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