Last week, we reported on the dwindling reserves and resources of the Lancaster field operated by Hurricane, West of Shetlands. The article generated a lot of interest, and we spoke to a number of technical people and investors about it as a follow up. Here are some lessons learned.
A 100% stake development – be careful
Hurricane pushed ahead developing Lancaster as the single – 100% – owner of the licence. It is not the first development running into trouble without partners to question the decisions made.
Located east of the Shetland Islands is the Bentley heavy oil field. It was discovered in 1977 by Amoco, but it was Xcite that tried to develop the accumulation from 2003 to 2017 as the sole owner of the licence. Having produced only 147,000 barrels of oil during a pre-production phase, the company was liquidated in 2017 after it had been unable to refinance $152 million in debt. The company was ultimately sold to Whalsay for $1.
In the US, a group of investors is currently taking class action against Apache, following a dramatic drop in share price as a result of disappointing results of the 100% Apache Alpine High development in Texas. Investors claim that the company reported unrealistically high volumes of hydrocarbons and did not have the infrastructure in place to develop it – even if true, leading to an artificial inflation of Apache’s operation.
Back in the North Sea, the Leadon field developed by Kerr-McGee as the 100% licence holder was supposed to produce for 16 years and recover between 120 and 170 MMboe. Production started in 2001, but instead of a field life well into the 2010’s the operator filed an application for cessation of production in 2004. The field ultimately ceased production in 2006, having produced a total of 18.2 MMboe. Kerr-McGee exited the North Sea in 2005.
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Does the CPR system need review?
“Based on the 2017 Competent Person’s Report, I decided that an investment in Hurricane had a very good chance of success,” said Doug Bryce, a private investor who has recently sold his Hurricane shares at a significant loss. Not having a technical subsurface background himself, it is the CPR that people like Doug and many other investors help to guide their decision to invest. His line of thinking was, “Even in case the development only makes the P90 volumes, it would still be ok.” A fair point, one would argue.
In hindsight, he made a mistake, as it has turned out.
The second CPR that was published last week proved that the trust Doug had put into the initial assessment was misplaced, as the volumes now estimated for the Lancaster field have been reduced from 486 MMboe of 2C Contingent Resources in 2017 to 34.7 MMboe of 2C Contingent Resources in 2021.
Even though we can only speculate which role Hurricane played in producing the numbers presented in the 2017 CPR, the discrepancy between the 2017 and 2021 reports is of such a significance and has had such a detrimental effect on the portfolios of so many investors that it may be time to call for a further decoupling of the client-consultant relationship.
Yes, the Hurricane case may be slightly unique in the sense that the reservoir (fractured basement) is an uncommon one, creating more of a challenge for consultancy firms to estimate reserves and resources, but is it really a complicated reservoir alone that can explain the huge discrepancy between the two reports?
In order to remove even the possibility of interference between the operator and the consultancy firm, it would be much better for these reports to be commissioned through a body that is completely independent from both parties. There is simply too much at stake.
The greater Lancaster area may have a future
Despite all the doom and gloom, there is no doubt that there is oil in fractured basement in the Lancaster field, with around 8 MMboe having been produced so far and 7 MMboe still to be produced without the need to drill another well. Even though these volumes are probably not enough for a standalone development, there may be tie-back points close by such as the Solan field in the south.
In addition, oil was also proven in Lower Cretaceous and Upper Jurassic sands overlying the reservoir. With the oil water contact now being shifted upwards, the proportion of hydrocarbons in these clastic reservoirs has increased significantly.
The 2017 CPR estimated a “best case” of 233 MMboe in place for the Lower Cretaceous and Upper Jurassic reservoirs combined. Hardly any of this resource will be tapped into by the current horizontal producers, leaving an obvious opportunity for further development.
Also, the undeveloped Lincoln discovery (37 MMboe of 2C Contingent resources) and Warwick Crest discovery (51 MMboe of Contingent resources) are still out there to develop in the future.
In conclusion, the story as it has unfolded so far points to the potential dangers of 100% ownership developments, it calls for an overhaul of the client-operator relationship when it comes to producing CPR’s, but it leaves behind a greater Lancaster area that should not be given up on yet.
HENK KOMBRINK
