At $53 a barrel the oil price remains above its long-term average even after last year’s dramatic spike and equally dramatic decline. As a result the smallest pockets of hydrocarbons are still worth exploiting even if this involves drilling in the fields and woods of developed European countries.
An area covered in tarmac set in the middle of the Dutch countryside hardly seems like the most obvious place to look for oil or gas but that is exactly what Aim-listed Northern Petroleum (NOP:AIM) is in the process of doing.
The Ottoland field is one of two projects the group operates toured by Shares as part of a recent analyst and press visit hosted and paid for by Northern Petroleum. Last month the £83 million cap completed a development well on the site which forms part of the Andel III licence.
Despite the progress in the Netherlands, where the group has a full range of production, development and exploration projects, the company’s shares were off 14% at 109p last week on a disappointing well result in Italy’s Po Valley. Shares would see this as a good opportunity to buy the paper given the potential in the rest of the portfolio, all of which is located in the energy hungry and politically stable European Union (EU).
Onshore bias
The company used to be almost entirely focused on onshore projects but in the last few years it has expanded its operations to include offshore assets. In fact much of the recent excitement surrounding the stock, which overall is up more than 50% year to date, has surrounded its acreage in the Sicily channel. This is estimated to have billion barrel potential, a view endorsed when Royal Dutch Shell’s (RDSB) Italian subsidiary took a 55% stake as part of a farm-out deal agreed in December.
Yet for the time being the group’s bias, at least in terms of production, revenues and booked reserves remains in favour of onshore.
Prior to the excursion to Northern’s Dutch acreage, my only previous experience of a working oilfield involved a trip to the giant Uzen facility in Kazakhstan (Shares 17 July 2008). At 304 square kilometres Uzen covers an area larger than Birmingham so unsurprisingly Northern’s assets seemed relatively underwhelming by contrast. After all, being unobtrusive is surely a positive when operating in close proximity to residential properties, particularly when planning permission, can be hard to obtain. As broker Blue Oar Securities observes, this had previously been an obstacle to Northern’s ambitions in the Netherlands: ‘The planning consent process in the Netherlands has been long and frustrating, and this has led to continued delays to the development timetable.’ Northern only got the go-ahead for its development project in the Netherlands earlier this year.
Drilling down
Six of Northern’s onshore assets in the country are close to production and it has a 45% operating interest in each. Four of these are gas projects (Wijk en Aalburg, Brakel, Geesbrug and Grolloo) and two are oil projects (both the aforementioned Ottoland and Papekop). With the exception of Papekop, the six developments form part of a joint venture agreement with NAM (Nederlandse Aardolie Maatschappij, a Shell and Exxon Mobil joint venture).
The group hopes to drill one well on each of the properties – excluding Papekop - pushing daily production from the country up to 2,500 barrels of oil or equivalent a day (boepd) by the final quarter of this year.
As mentioned above the group also has exploration prospects in its Dutch portfolio. The next stop after Ottoland on our tour of its facilities was the exploration well being
drilled at Nieuwendijk (see page 22), which like Ottoland is on the Andel III block.
This is being drilled using a new rig manufactured in the Czech Republic which Northern’s chief executive Derek Musgrove not unfairly suggests looks like ‘something out of NASA. The firm is targeting an estimated 56 million barrels of oil. Following the completion of the well, which is imminent, the rig will be moved to the Tiendeveen site in the Drenthe III licence in the east of the country where it will target a gas prospect of some 67 billion cubic feet (bcf).
UK experience
Despite the frustrations the company has faced in dealing with bureaucratic inertia in Holland, Musgrove still compares his experience favourably with what happens in the UK. ‘People are a bit more sensible over here (in the Netherlands) instead of ranting and raving, they are more receptive.’
Musgrove is speaking from experience, with a number of assets onshore in the UK, mainly based in the Weald basin in Surrey, and he highlights as one of the group’s core strengths the ability to cope with the challenges of drilling onshore in Britain.
The UK’s onshore oil and gas industry is tiny. It only amounts to 1.5% of the UK’s total output with around 37,000 boepd and 36 million cubic feet (mcf) of gas. The Wytch Farm field, owned by BP (BP.), accounts for most of this. An indication of the difficulties involved in operating onshore in the UK can be seen in the loud protests against Europa Oil & Gas’s (EOG:AIM) proposal to carry out appraisal drilling in the Surrey Hills in an area of outstanding natural beauty.
The planning application for the work mentioned above is currently with Surrey County Council and a decision is expected in the near term. It is worth noting previous contentious applications have been approved as government policy has a bias towards such development as being in the national economic interest. This is because of the ongoing decline in production from the North Sea which means the UK is expected to become a net importer of oil in 2010.
West Sussex County Council’s decision to give permission to Northern to drill an exploration well in Markwells Wood on the South Downs is a recent example of the influence of this policy. In addition Europa Oil & Gas, which also has assets in Europe and North Africa, recently won planning permission from Lincolnshire County Council to drill an exploration well at West Whisby on the PEDL150 licence, near Lincoln.
A reflection of both the increased support for and interest in drilling onshore in the UK can be found in the government’s decision to award a record 97 new licences to 54 applicants for onshore oil and gas exploration during last May’s licensing round.Six years ago, only eight licences were granted.
As Mark Abbott, the managing director of Egdon Resources (EDR:AIM), another UK onshore operator, told Shares earlier this year: ‘Indigenous resources are becoming ever more important for security of supply.’ Abbott also points to the fact discoveries can be brought onstream relatively quickly and cheaply. Egdon has had a particularly successful 2009 so far, making a number of acquisitions to broaden the scope and scale of its portfolio and reporting a maiden £133,000 profit with its interim results last month. A 388% leap in the share price this year reflects the good news and leaves the group looking fairly valued for now.
DIFFERENCES BETWEEN ONSHORE AND OFFSHORE OIL & GAS
• Drilling onshore costs a tenth of the £10 million to £20 million needed to drill an offshore exploration well
• Conducting a seismic survey, used to understand what is beneath the surface prior to drilling, is significantly more expensive. To do this offshore costs around $500 to $1,000 a kilometre while onshore costs as much as $5,000 to $10,000 over the same area.
• Offshore operations are conducted from platforms which either float or are fixed to the sea bed.
