Optimism prevails in Irish offshore despite low oil prices

Low prices pose major challenge for sector, writes Geoff Percival.   

Optimism prevails in Irish offshore despite low oil prices

Where previous years have typically been marked down as false dawns for the much-touted, but still unproven Irish offshore exploration sector, 2015 — thanks to the complete meltdown in global oil prices — has been one of real change, with licence holders beginning to withdraw from the game.

December saw the first high-profile victim of the oil price slump, with Norwegian seismic surveyor Dolphin Group filing for bankruptcy and other Oslo-listed competitors in danger of following suit, with drilling firms also likely to feel the heat.

Here, US firm Kosmos Energy pulled out of its west of Ireland licences in order to focus on its African assets, earlier in the year, while Dublin-based Fastnet Oil and Gas changed its name to Fastnet Equity and its focus to healthcare and biopharma investments. Lansdowne Oil and Gas issued an SOS in the form of the launch of a complete strategic review. Petroceltic — although not invested in the Irish offshore, an Irish firm nonetheless — launched an all-options-open strategic review.

At best, surviving firms have seen their market values and share prices plummet. The domestic sector’s standard-bearer, Providence Resources, has seen its share price fall by over 80% this year, for instance.

Still, it seems not even oil prices hitting decade-plus lows this year, can dent the ‘glass half-full’ nature of many in Ireland. Arguably the most surprising thing about Irish offshore in the past few months is the level of optimism still abounding, from industry bodies such as Energy Ireland and the Irish Offshore Operators’ Association (IOOA) to active companies such as Providence and Europa Oil and Gas, which was the partner affected by Kosmos’ withdrawal.

The bulk of the optimism is based on the strong levels of overseas interest apparently shown in the recent Atlantic Margin Licensing Round — the full extent of which won’t be known until later in the first quarter — while others are pointing to historically low drilling costs as a reason to be cheerful.

No drilling is realistically anticipated in Irish waters until 2017, now, although hopes remain for this year. The last work undertaken — the first in two years — was by Lansdowne Oil and Gas back in August, but its Midleton exploration well, in the Celtic Sea, was abandoned when no commercially sized volumes were discovered.

PwC’s oil and gas partner, Ronan MacNioclais, recently underlined the true effect oil prices have had on the Irish sector, noting: “Ireland is viewed, internationally, as a high risk location for investment in oil and gas exploration, due to the lack of historic commercial discoveries. At times of low oil and gas prices, investors will invest in high return/low risk locations, which unfortunately we are not.”

Energy Ireland said in November: “The collapse in the oil price in the past year... has seen companies cut back, worldwide, on exploration budgets and deferring planned developments and drilling. Although the sector, with its lengthy lead times, tends to ride out market and price fluctuations over the long-term, there is no doubt the low oil price has had a dampening effect in the short-term. Certainly, the capital markets (as ever) have taken the short-term view with Irish exploration and production companies experiencing very substantial share price markdowns in recent months.”

For his part, Mr MacNioclais was speaking on the back of the publication of an interesting survey by PwC, which showed that 70% of exploration firms, with Irish assets, would like to see a change to the Government’s fiscal terms for the sector, in light of the changed commodity market.

Despite such calls, the Government recently used the Finance Bill to rubber-stamp its long since mooted widened tax terms for explorers with Irish offshore assets.

The new petroleum production tax, first proposed in mid-2014, sees the top rate of tax on profits made from any future oil and gas finds in Irish waters go from 40% to 55%, with an additional 5% royalty revenue payable to the State for each year of a producing field’s lifespan.

Deloitte has already questioned the effect of the new tax saying that with no medium-term substantial oil price increase likely, there must be concerns about the ability of companies to repay debt on borrowings and to refinance large asset bases.

The Government — on the back of advice from international energy consultants Wood Mackenzie — said the new fiscal terms were based on long-term oil prices of around $60, not specifically $100, where they were a year ago.

The Department of Natural Resources is also basing its optimism on a record number of applications for the latest licensing round and the fact that most of the options awarded in the previous round, in 2011, were converted into exploration licences (not to mention the fact that the number of offshore authorisations is currently running at a record high).

Interestingly, the firm that advised on the widened tax regime, Wood MacKenzie also sees Ireland as a high-risk play in international terms.

The tax issue, of course, won’t really be relevant for a number of years until future finds translate into commercial flows. Which leads to the question of when will companies drill. It won’t necessarily depend on when oil prices may rally.

The IOOA has already suggested 2016 may see a welcome increase in drilling in Irish waters.

While some don’t see much happening this year, firms themselves are still talking up 2016 and 2017 as potentially active years.

Recently, Providence Resources — which has upped acreage off the west coast in recent months — said it still sees progress being made on its long-awaited farm-out efforts at its much-touted Barryroe field off the Cork coast; interest apparently being boosted by a seven-year low in drilling costs.

In its December trading update, chief executive Tony O’Reilly Jr said that while Providence has been affected, as have most firms, by the fall in oil prices this year, despite the market turbulence, management’s Irish-centric strategy can still deliver appreciable returns for shareholders.

The UK firm Europa Oil and Gas is, meanwhile, resuming 100% ownership of the two licences it shared with Kosmos in the South Porcupine Basin, off the coast of Co Kerry, after Kosmos surrendered its 85% stake. Europa is, thus, looking to find a new partner to develop the assets.

And, crucially, it is extremely confident of doing so even in the current environment. The company plans to open its data room on January 11 and claims that it is already almost fully booked for the first two months of the new year.

Europa is hopeful of landing a new development partner — farming out the 85% previously held by Kosmos — by the middle of 2016. Drilling for its existing Irish assets had been planned for 2017, prior to Kosmos’ decision. But, if Europa were to get a new partner by mid-2016 such a drill date would technically still be feasible.

The timing of Europa’s movements are also taking into account the recent licensing round, for acreage off the west coast. In the round, the Government received 43 applications from 17 companies, with 80% for blocks in the Porcupine Basin. Europa has also applied for more acreage and could bundle whatever new awards it is granted in with its existing licences, as part of a farm-out offer.

Last month’s news of first gas flowing from the Shell-controlled Corrib gas field has also fuelled hope, with the IOOA, in recent days, saying it comes at an appropriate time and “sends a message to the industry domestically and internationally that the development of indigenous offshore energy supplies is a priority for Ireland.”

Ireland’s offshore is still heavily dependent on oil price movement, though. To that end, while prices have reached eleven-year lows to the mid $30s per barrel, many analysts expect a price recovery towards the end of next year.

However, traders disagree, due to most surviving explorers opting to cut costs to stay alive in the long-term and keep pumping oil at low prices to service current debt.

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