North Sea Royalty Idea Paying Off

'Probably the Best Royalty Regime in the World'

Once upon a time the mere mention of an independent staking a claim in an offshore province would have elicited laughter from the E&P community — especially in the environmentally intimidating North Sea.

But that was then, this is now.

It's the usual scenario where the big folks drill the big finds and then move on to begin again elsewhere, leaving the supposedly smaller stuff for others. Depending on who's talking, the North Sea leftovers might include 30 to 50 billion barrels of hydrocarbons waiting to be tapped.

Larger independents such as Apache, Burlington and long-time North Sea player Kerr-McGee are among the names having a current stake in the action.

Given the major discovery at the Brenda Field early this year by Calgary-headquartered Oilexco North Sea Ltd. — which has a 10-person staff — opportunities apparently are rife for even the smallest companies who are chasing new finds using the latest 'n greatest approaches, techno-wise. These include such heavy-duty applications as GX Technology's (GXT) gridded tomography package and the PGS Mega Merge — a regional 3-D data set across producing areas of the North Sea.

In fact, startups are being formed with a sole focus on E&P opportunities in the North Sea.

Newbie Heavyweights

One of these newbies is publicly-traded Endeavour International, which was created via the merger of a shell corporation formed in 2003. The new Houston-based company might best be called an independent spin-off of an independent given the background of the two founders: AAPG member John Seitz (Upcoming APPEX luncheon speaker), formerly the head honcho at Anadarko, and William Transier who reigned over the finances at Ocean Energy, nee Devon, as chief financial officer.

The duo quickly assembled a staff, including former management team members from Anadarko and Ocean Energy, and hit the ground running.

"We felt the new PGS Mega Merge would serve us well," Seitz said, "so we negotiated access to that data set with PGS for a piece of our North Sea New Ventures, which was set up prior to Endeavour."

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Once upon a time the mere mention of an independent staking a claim in an offshore province would have elicited laughter from the E&P community — especially in the environmentally intimidating North Sea.

But that was then, this is now.

It's the usual scenario where the big folks drill the big finds and then move on to begin again elsewhere, leaving the supposedly smaller stuff for others. Depending on who's talking, the North Sea leftovers might include 30 to 50 billion barrels of hydrocarbons waiting to be tapped.

Larger independents such as Apache, Burlington and long-time North Sea player Kerr-McGee are among the names having a current stake in the action.

Given the major discovery at the Brenda Field early this year by Calgary-headquartered Oilexco North Sea Ltd. — which has a 10-person staff — opportunities apparently are rife for even the smallest companies who are chasing new finds using the latest 'n greatest approaches, techno-wise. These include such heavy-duty applications as GX Technology's (GXT) gridded tomography package and the PGS Mega Merge — a regional 3-D data set across producing areas of the North Sea.

In fact, startups are being formed with a sole focus on E&P opportunities in the North Sea.

Newbie Heavyweights

One of these newbies is publicly-traded Endeavour International, which was created via the merger of a shell corporation formed in 2003. The new Houston-based company might best be called an independent spin-off of an independent given the background of the two founders: AAPG member John Seitz (Upcoming APPEX luncheon speaker), formerly the head honcho at Anadarko, and William Transier who reigned over the finances at Ocean Energy, nee Devon, as chief financial officer.

The duo quickly assembled a staff, including former management team members from Anadarko and Ocean Energy, and hit the ground running.

"We felt the new PGS Mega Merge would serve us well," Seitz said, "so we negotiated access to that data set with PGS for a piece of our North Sea New Ventures, which was set up prior to Endeavour."

The company was an active participant in the 22nd UK offshore licensing round, and is now awaiting the results, which are due by early August.

"Depending on how many awards we receive, this would give us the nucleus of an exploration portfolio," Seitz said. "We've identified ready-to-drill prospects as well as leads that require added technical work — typically seismic or geologic analysis — that we can mature into drillable prospects.

"We're also looking for acquisitions, both asset and corporate, that would make sense and establish some cash flow," he added.

Although the Norwegian continental shelf is deemed promising, the barriers to entry for the independents are lower in the UK North Sea, according to Irene Haas, senior vice president institutional research at Sanders Morris Harris, who recently completed a research report on the North Sea and the influx of North American producers.

For instance, there's the fallow fields program administered by the UK Department of Trade and Industry (DTI), which requires operators to relinquish acreage where there's been no activity for four years and none planned for the future.

This opens the door to others to acquire licenses where wells have been drilled and orphaned and where discoveries perhaps have been made, making them attractive to a new licensee for many reasons, including reduced risk.

Smart Moves

Oilexco went after a number of licenses of that ilk in the 20th licensing round in 2002. The company was awarded a license where Conoco had drilled a well in 1990 that tested 2,690 barrels per day.

"This was a delineation well, you might say, from the one drilled by Sun in the next block that tested 3600 barrels a day and a little water," said Rod Christensen, chief geologist at Oilexco. "The oil/water contact was different in the two wells, and we weren't sure if we had a little structural play or something bigger.

"We purchased 3-D shot by Conoco in 1993, and GXT reprocessed essentially 300 square kilometers," he added. "They threw everything at it they could do, including state-of-the-art pre-stack depth migration, things that companies normally don't do in this Paleocene trend."

The first well in the newly-dubbed "Brenda Field" spudded last December, 150 meters from the Conoco well. It encountered 75 feet of section with 42 feet of sand and was heralded as the biggest discovery in the North Sea since the 2001 discovery of Buzzard Field. Three wells and several sidetracks have now been drilled in the field, which proved to be a stratigraphic accumulation.

This was the company's first-ever offshore experience, and Christensen noted they relied on boutique-type groups in the UK to bring the drilling expertise to the table — and he strongly encourages other independents to do likewise.

"You pay," he said, "but it's smarter to use local expertise. We think Brenda may have 200 million barrels of resources recoverable, and we hope to have first production by October 2005, which is an unusual timetable considering Buzzard was found in 2001 and still isn't producing.

"Little companies can't wait for cash flow," Christensen noted. "We need to start getting return on our investment."

Oilexco took advantage of the DTI's Promote Licenses, which Haas noted are particularly interesting to new entrants. They carry a four-year initial term with a two-year decision point in which to drill or drop the license. The awardee is not the highest bidder. Instead, each interested party presents a work program designed to convince the DTI of its merit via innovative ideas and new play concepts, Haas said.

"As part of the licensing round, we had to convince the British government we were a viable candidate to receive a license," Christensen said. "We brought GXT in because we promised the government we would purchase seismic already shot and reprocess it … we had a list of things we wanted to do with it.

"Because it's more of a work commitment there, if two or three companies want in on a license, the DTI will say you have to share certain percentages, and one will operate," Christensen said. "This can make for strange bedfellows, and sometimes nothing happens as a result.

"We told the DTI we didn't want to be randomly assigned partners," he said, "and we got three different licenses all at 100 percent. I think they understand that if they're going to bring new companies in, they have to have the latitude to find their own partners."

New Kids on the Block

Because independents who are experienced in Promote License activity already understand the North Sea geology and have the know-how to compete for the licenses and drill, they provide an opportunity for newcomers to gain a foothold quickly.

"We acquire licenses to explore where we have identified exploration and development opportunities," said Miles Newman, exploration director at Aberdeen-based Reach Exploration. "We seek partners to assist in exploring these areas, and my view is we can provide accelerated entry into the North Sea for potential new participants with our drill-ready opportunities."

It appears there may be a growing number of new folks coming onto the scene.

"I think I saw 30 new entrants I had never heard of bid on licenses in the 22nd round," Christensen said. "The main areas they're coming from are Canada, the U.S. and the UK."

"I think as opportunities in the Gulf of Mexico diminish, we'll see a series of North American independents transferring their efforts to the North Sea," Seitz said. "If oil prices role back, we'll see more of the majors divesting assets because they're not paying a lot of attention to them."

Sure, there are obstacles to surmount such as weather conditions that demand special equipment, how to quantify abandonment liabilities, etc. Even so it's getting to be an increasingly better deal as time goes by.

"Under the new royalty scheme, you pay no royalty tax on offshore production," Christensen said, "so the only tax you pay is corporate. The UK government has done a lot to enable new oil search to be a lucrative thing for new companies coming in.

"This is probably the best royalty regime in the world," Christensen said.

Indeed, staunch support by an array of governments for North Sea E&P activity is particularly noteworthy given the continuing fierce opposition overall to drilling in most parts of the United States.

"It's safe in the North Sea in the sense of sanctity of the contract and the ease of doing business," Seitz said. "You have regulatory bodies and governments that want new energy supplies to be developed and discovered because it makes economic sense for them.

"That and having a partner to work with in the sense of regulatory bodies and host governments is a great aid to any company," Seitz said. "It's a partnership."

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