The discovery of significant new oil reserves off Abedeen has raised hopes of an extended shelf life

Published on Thursday 1 July 2010 18:26

WHEN Tony Hayward wakes up this morning and tunes in to the latest movements of Hurricane Alex, the storm threatening to derail BP's clean-up in the Gulf of Mexico, he would be forgiven for wondering why he ever accepted the top job at an oil major.

With oil bosses having overtaken banking chief executives as Public Enemy Number One in many countries, it's a job that seems more hassle than it's worth in the current climate.

But while Hayward continues to bat off a barrage of criticism over the Deepwater Horizon disaster, over in Aberdeen a small group of five oil chief executives have been rubbing their hands with glee.

For Alan Booth, chief executive of EnCore Oil, a medium-sized oil and gas exploration company focused on the UK Continental Shelf, life has, in fact, never been better.

Booth and his counterparts at Edinburgh-registered Premier Oil, Wintershall, Nautical Petroleum and Agora Oil & Gas would not have been blamed for popping the Champagne corks last week after an investigation into the seabed 110 miles east of Aberdeen unearthed what many are already proclaiming to be the greatest oil discovery in the North Sea for a decade.

The first studies of the "Catcher" prospect indicate the Aladdin's cave could hold at least 300 million barrels of oil. Further investigations, the findings of which may be announced as early as this week, are expected to reveal even more, lining up Catcher as the most exciting North Sea find since the billion-barrel Buzzard reservoir which was discovered off the coast of Aberdeen in 2001.

With the group of five companies due to press the button on a second drilling campaign later this year, some analysts have estimated that the entire project could yield up to 800 million barrels.

After deflecting years of suggestions that the North Sea is on its last legs, the Granite city went into party mode last week, with everyone from oil rig workers to engineering firms hoping to cash in on this latest gold rush.

Booth toasted the initial results of the consortium's drilling programme as "truly exceptional". He added: "Initial analysis of the seismic data... could possibly contain a series of discoveries that would form one of the larger North Sea oil accumulations of recent years."

As Aberdonians soaked up the news with a whisky or three, an air of vindication dominated the city's bars and restaurants. Those that have remained faithful to the North Sea while many of the big producers have turned their focus to foreign shores felt justified for sticking with an industry they believe still has a shelf life of at least 20 years.There was even talk of a "new dawn" in the North Sea with expectations that the find will win back interest from areas such as West Africa, Central Asia, Brazil and the Gulf of Mexico.

"The Catcher prospect is really important because it helps to dispel two myths," Bob Collier, chief executive of the Aberdeen and Grampian Chamber of Commerce said, barely masking his delight.

"The first myth being that the only prospects left in the North Sea are tiny ones. There are still finds out there that are substantial and worth going for. The second myth it helps to dispel is that North Sea oil is running out."

Malcolm Webb, chief executive of Oil & Gas UK, said: "Encore's oil discovery could be hugely significant when compared with the average UK North Sea find which, over the last ten years, has been around 25 million barrels of oil and gas. Given that new exploration is the lifeblood of an industry which has a central role in the UK's energy supply, it is very encouraging that the tally of new finds on the UK continental shelf (UKCS] has been added to."

In Edinburgh, the Catcher prospect sent the SNP administration into a frenzy. The timing of the announcement could not have been better for Scottish finance minister John Swinney, who just a few days earlier sparked a fierce war of words over public finances when he claimed Scotland would be 1.3 billion in the black had it received its "geographical share" of North Sea oil revenues. With the energy tax take at the centre of the nationalist case for independence, news of another major discovery off the coast of Aberdeen caused more than a few smiles in the corridors of Holyrood. But with fierce competition from other deep sea drilling industries around the world, will the Catcher prospect really mark a new dawn for the North Sea, which has been in decline since 2000?

According to Paul Love, senior market analyst at McKinnon and Clarke, politicians should calm their expectations of a renaissance in Aberdeen.

Although it has been estimated that the discovery could replenish the Treasury's depleted reserves to the tune of 2 billion, Love says Catcher is unlikely to herald a return to the halcyon days of the Nineties.

"It's not really going to be a renaissance," says Love. "It is very good news from an economic point of view as it will mean that the UK will rely less on bringing in outside sources of oil and it will boost government coffers. But I'd be surprised if it did herald a second boom."

Love acknowledges that 300 million barrels is a "significant volume". However it won't mark a step change in the industry, he says.

Mark Higginson, office senior partner at PricewaterhouseCoopers in Aberdeen, agrees. He argues that Catcher is vital in that it will help maintain the current size of the North Sea industry but it is unlikely to spark an expansion.

STARS IN THEIR FIELDS

DANA INTEREST

The Scottish darling of North Sea oil admitted this week that it had received a "very preliminary" takeover approach from a rival firm.

The prospective bid, from South Korea's national oil company (KNOC), is expected to be at a 40 per cent premium on Dana's Friday closing price of 1,440p.

Dana's attraction to a foreign predator increased in April when it announced a significant gas discovery at its Platypus prospect in the southern North Sea. The Aberdeen-based company has been at the centre of takeover speculation for the past 18 months.

Rumoured suitors have previously included Austria's OMV, one of the largest integrated oil and gas groups in central Europe, German utility RWE and British group BG.

BIG CATCHER

Encore's Catcher prospect in the North Sea off Aberdeen is thought to have the potential to be one of the region's biggest discoveries since the billion-barrel Buzzard reservoir in the same area in 2001.

The find - which is believed to hold around 120 million barrels of extractable oil - could, based on oil prices of $80 a barrel, generate about 200 million a year in revenues over a decade when production gets under way.

Although small compared with other recent finds such as BP's billion-barrel Tiber discovery in the Gulf of Mexico last year, lead operator Encore said the outcome of further investigations could add "very significantly" to current expectations.

Encore has a 15 per cent stake in Catcher, alongside majority owner Premier Oil, Wintershall, Nautical Petroleum and Agora Oil & Gas, which is backed by Lord Rothschild. A number of Encore's team were responsible for the discovery of Buzzard.

CENTRICA VICTORY

Venture finally succumbed to a hostile takeover bid by Centrica in August last year after a long fight.

The Aberdeen oil and gas explorer long maintained that the 1.3 billion offer undervalued the company - but gave in to the bid after the takeover gained competition clearance from the European Commission and Centrica was able to declare that it owned or controlled more than 50 per cent of Venture's shares. Venture advised its shareholders to accept the offer because Centrica, which declared the bid to be unconditional, had effectively won control.

North Sea oil firm Ithaca Energy last year signalled plans to buy up a rival and move into the gap in the market left by Venture. Ithaca, which buys and develops discoveries too small for major players, said it was debt-free and in a position to expand.

"It'll certainly sustain the industry that is here but we shouldn't think of it as a new dawn - that would be overselling it," Higginson says. "It reinforces the case the industry up here has been making: don't write us off yet.

"The people who work up here still think there's life in the North Sea for the next 20 years. Catcher gives credence to that. But equally don't think it's suddenly a new bonanza. If you started finding four or five of these things only then would we be asking what is going on."

While few are willing to pour cold water on the find, particularly if it yields as much as 800 million barrels, Higginson says it has to be put into the context of other discoveries elsewhere in the world.

"The prospects that the likes of BP, Exxon etcetera have been finding in Brazil, deep water Gulf of Mexico, Central Asia and West Africa - we are talking about potentially many billions of barrels," he says.

As a result, analysts doubt that the Catcher find will entice the likes of Exxon to beef up their North Sea operations. But they suggest smaller, independent oil and gas exploration firms stand to do very well out of the area.

The so-called "independents" are now leading the charge in the North Sea while the multi-nationals concentrate elsewhere, according to Rosalie Chadwick, capital markets partner at law firm McGrigors.

"One of the trends in the North Sea is the fact the independents are coming in and a lot of the recent finds are associated with the independents," says Chadwick. "The pendulum has perhaps swung towards the independents from the supermajors." Chadwick suggests this trend is particularly good for Scotland as many of the independent firms are homegrown.

Tim Feather, energy analyst at Westhouse Securities, says Catcher will be "transformational" for the smaller companies involved in the joint venture, in particular EnCore and Nautical Petroleum which each own 15 per cent. "You just have to look at EnCore's share price," Feather said. "Before the announcement it was nearer to the 20p mark, now it's around 50p." The shares closed on Friday up 6.75p (13 per cent) at 58p.

Feather is optimistic that there will be plenty more good news from the joint venture partnership over the next couple of days. "It's feasible they'll announce even more barrels this week," he says.

While City analysts are warning about overselling the potential of Catcher, Collier of the Aberdeen and Grampian Chamber of Commerce is confident that it will help attract more investment to the area and promote the skills of Scottish firms in the north-east.

He says the fact that Scottish oil and gas exploration companies are continuing to make substantial discoveries in the North Sea is testament to the skills, technology and experience on offer from companies based in the area.

"This helps continue the reputation of Aberdeen and the north east as a global centre of excellence in oil and gas exploration - particularly in relation to offshore and subsea," he says.

While Higginson of PwC doesn't believe Catcher will trigger an expansion of the industry in Aberdeen, he would not, however, be surprised if more of these discoveries are made. He suggests we have not heard the last from the North Sea yet.

"You would expect, with the increase in drilling activity, that one or two [more] of these might come up," he concludes.