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Analysis: Oil and gas firms use winnings from North Sea bets to fund expansion overseas

 

Oil and gas sector watchers may be concerned that Cairn Energy has cut the valuation of the flagship Kraken field off Shetland by $166 million (£127m) but the company’s experience could still encourage others to look closer at the North Sea.

The decision by Cairn and EnQuest to develop Kraken reflected confidence in the potential for new production technology to transform the commercial prospects of the kind of heavy oil finds that were left idle for years.

With production from Kraken running below expectations Cairn now expects to recover around 20 per cent less than originally hoped.

However, as Cairn and its partner EnQuest expect to complete a range of interventions that could increase output from Kraken it may be too soon to conclude the position will not improve.

With no plans to cuts its valuation of Kraken, EnQuest appears to think Cairn may have been overly prudent in its accounting.

Whatever the bean-counters think, Cairn is generating huge amounts of cash from Kraken and the Catcher field off Aberdeen. It brought both onstream in 2017 amid the downturn triggered by the crude price plunge from 2014.

With Brent crude trading at around $67 per barrel Cairn is making around $45/bbl profit on North Sea production.

The company is using the cash generated in the North Sea to fund exploration work in so-called frontier areas in which the potential rewards are high.

Premier Oil, which operates Catcher, has made big profits in the North Sea and a bumper discovery off Mexico in recent months.

The firms are following an approach that involves using cash generated in the North Sea to fund activity further afield, which served oil and gas firms well in the past. It may remain relevant even if some companies appear eager to shift investment from the North Sea to areas in which they see brighter prospects, such as the shale fields of the US.

Source: The Herald

Published: 13-03-2019
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