New entrant E&P companies key to UKCS future

New entrant E&P companies are key to the future of the UK Continental Shelf (UKCS), but they need to step up investment in new production, according to a new study by Westwood Global Energy Group. The report shows that new entrant E&P companies to the UKCS since 2008 now control 46% of production, 39% of reserves and 64% of potentially commercial volumes yet to be developed.

New entrants are producing over 300mn boe/y but their appetite for buying producing assets has not yet been matched by their appetite for investment in new production. New entrants have so far moved only 577mn barrels of reserves into production since 2008, 16% of the total in that time, and they have funded only 16% of exploration drilling.

This is set to change as new entrants hold the key to sustaining UKCS production, controlling over 60% of the 1.7bn boe of unsanctioned and potentially commercial resources in the UKCS. New entrants are also stepping up exploration efforts and will be funding over 16 net exploration wells in the next two years, 70% of the total planned and a step change from previous levels. 

The study found that 170 new companies have entered the UKCS since 2008. Some 72 remain active but only 31 currently hold reserves and production. A total of 94 of the new entrants were exploration-led, many of them private start-ups, which collectively have only drilled 8.8 net wells finding 33mn boe of net commercial resource and delivering a commercial success rate of just 15%, compared to the UK average of 27%. The effectiveness of the UK regulatory regime in encouraging so many undercapitalised private companies to acquire exploration acreage is questionable, comments Westwood.

New entrants since 2008 have spent $29bn in UKCS asset and corporate deals where a consideration has been announced, but successful exits have so far been rare. New entrants have to date sold $1.1bn in assets, but only three have exited completely for cash with a positive return on investment. A further 12 have exited through a merger.    

There have been 23 private equity backed new entrants who have collectively spent $11bn acquiring assets with several high-profile deals since 2016. These companies are yet to make a material impact on reserves and production, with the exception of Chrysaor. A total of 12 private equity-backed companies remain active, controlling 14% of 2019 production and 12% of 2P remaining reserves, of which Chrysaor accounts for some 70%. These companies have so far sanctioned only 128mn boe, 4% of the UKCS total, and funded just 3% of exploration wells, finding only 1% of the discovered volume since 2008. Although several of these companies are expected to increase their contribution by investing in developments and exploration, many of them will be looking to exit sooner rather than later, comments the market analyst.

Reinvestment levels by the E&P sector in the UK offshore fell to below 25% of pre-tax cash flow in 2018. The big deal values grab the headlines, but it is how new entrants balance reinvestment of cashflows from  the assets they buy with paying dividends that will determine their lasting impact on the UKCS.

For more on UK North Sea M&A activity, see the forthcoming August 2019 issue of Petroleum Review.

Figure 1: Various UKCS metrics split between incumbent companies, new entrant companies backed by private equity and all other new entrant companies (data labels indicate the underlying values).
Source: Westwood Atlas