Tayvis Dunnahoe
Exploration Editor
Under normal market conditions, an exploration editor need not reach too far to find a topic worthy of writing on. These are not normal market conditions.
Since mid-2014, oil prices have tumbled and many of the world's frontier areas are calming from a lack of new activity.
According to a new study by Deloitte LLP, nearly 35%-about 175-of pure-play exploration companies listed worldwide are at high risk of slipping into bankruptcy in 2016. This will be "the year of hard decisions," said Deloitte Vice-Chairman John England in reference to the company's report, "The Crude Downturn for E&Ps: One Situation, Diverse Responses."
While much of the industry works to maintain current production in the event of an upswing in oil prices, many companies are forging ahead with exploration and development. The Norwegian Petroleum Directorate's (NPD) awards in predefined areas (APA) 2015 awarded 56 licenses covering 220,635 sq km in January, which exceeded the 54 licenses awarded last year (OGJ Online, Jan. 25, 2016). Of these, 27 are in the North Sea, 24 in the Norwegian Sea, and 5 in the Barents Sea. Fourteen licenses added acreage to existing production. In all, 43 companies applied for participation in the region. Interest in the 2015 Norwegian APA round as a whole has remained resilient despite low oil prices.
Barents Sea opportunity
The Barents Sea remained steady with four licenses awarded in last year's APA round. The Barents Sea offers frontier exploration potential, combined with a stable regulatory environment and a tax system that is favorable to exploration. There are few other areas which offer this combination of factors, making it an attractive place to invest.
Companies investing in the Barents Sea, especially through organic licensing rounds, will be aware of the long lead times to production, which lessen the impact of low oil prices while they focus on exploration opportunities (OGJ Online, Feb. 1, 2016).
"Investing in the Barents Sea now could help companies exploit any future upturn in oil prices," said Ed Shires, senior consultant at StrategicFit. Because the NPD favors companies with experience in the region, displaying an interest now may be an important step in capturing future opportunities.
Compared to other areas on the Norwegian Continental Shelf, the Barents Sea is an easier area for companies to enter. In more mature areas, established companies often have an advantage due to existing knowledge. The Barents Sea provides a level playing field with less of a learning curve. "For example, in the North Sea there is one exploration well/200 sq km vs. one well/3,000 sq km in the Barents," Shires said.
Other benefits assist smaller companies such as regular licensing rounds and farm-in opportunities with larger operators seeking to relieve their increasingly tightened budgets.
Northern progression
The 23rd round, due in this year's second quarter, focuses on the Barents Sea, with 54 of 57 announced blocks in the area. "Of the 25 companies who applied for production licenses, more than half had two or fewer Barents Sea licenses at the start of 2016," Shires said. Five of these companies had no Barents position at all. With the awards taking place later in 2016, the current interest level shows that regular licensing rounds encourage new investment and new entrants.
As an example, Polish state-owned PGNiG is bolstering their position in the Barents Sea with applications for the 23rd round. According to The Independent Barents Observer, PGNiG recently acquired the Northern Norway office of Danish state-owned DONG to help them focus on the area, and the company gained a license in APA 2015. Having previously explored the North and Norwegian seas, the Barents Sea is part of a progression north.
"The majority of awards in APA 2015 extend partnerships and expand company positions close to their existing footprints," Shires said. The 23rd licensing round will offer new, previously unlicensed areas that should provide some expansion. The region is likely to maintain its momentum as the industry works to rebound.