New drill in exploration sector as firms go in search of less risky opportunities

Published on Sunday June 21 2009

A lack of appropraite financing and major discounting has left the Irish oil exploration sector gasping for air, writes John Reynolds

ALTHOUGH Serica Energy struck oil last week in what was the first oil discovery off the west coast in 30 years (they were drilling for gas near the “bedevilled” Corrib field in the Rockall basin), it will need to be a “slam-dunk discovery” if oil and gas exploration here is to have a more positive future.

Until then, gas exploration firms such as Island Oil & Gas and Providence subsidiary Eirgas, which this week secured an option to buy 40 per cent of the Kinsale Head assets in the Celtic Sea from Petronas, are settling for less risky opportunities and more dependable cashflow in gas storage and trading.

Oil at about $70-a-barrel (compared with its high last year of $147), a squeeze on finances and staggeringly high deepwater drilling costs mean some industry players view Ireland as a high-risk, high- reward location.

Their appetite for gambling on offshore exploration has been dampened and the planning complications at the Corrib gas field could be deterring potential new entrants to the sector, according to Andrew Harwood, an analyst with the industry’s most respected research firm, Wood Mackenzie.

This is perhaps borne out by the fact that Providence Resources was the only other applicant for a licence to explore in the Rockall Basin. “If you had to choose between somewhere that hasn’t previously had such hitches and somewhere that has, like Ireland, then you mightn’t choose Ireland,” he adds.

Smaller exploration budgets are also having an impact. Harwood says: “In northwestern Europe, we’re beginning to see cuts in capital investment, particularly in fields that are already onstream. Companies had aimed to extend the life of existing wells, but now they’re tending not to do so. As that outlook filters through to exploration budgets, they’ll favour areas where they have more certainty than there appears to be in Ireland.”

Budgets have been compounded by the gap that has opened up between the projected costs of developing a field — especially offshore, where operating a rig can cost €500,000 a day — and the potential payoff, which isn’t as great now that the oil price has fallen from its previous high.

“There hasn’t been a slam-dunk discovery of oil or gas for some time, and the one that has been discovered — the Corrib gas field — has been bedevilled,” says Job Langbroek, analyst with Davy stockbrokers.

“It’s widely perceived that the industry made a lot of money a few years ago. But the oil price is down by about two-thirds from its peak, whereas costs might have only fallen by about 25 per cent, so there’s a mismatch there,” he adds.

Any investor or potential new entrant might therefore think twice before they sink a few holes — and perhaps tens of millions of euros — anywhere near our shores, particularly when they could be getting a more lucrative piece of the action by buying shares in our own seasoned players such as Tullow Oil or Dragon Oil, who by comparison have been very successful in finding oil in Africa and Asia.

In the meantime, smaller companies are investigating other ways of monetising their assets. Having previously planned to develop and deplete the Old Head and Skull fields in the Celtic Sea, Dublin-based Island Oil & Gas is currently looking into the possibility of leasing the space to a partner or client who would buy gas cheaply when demand is low, store it there and then sell it during the colder months when demand is high. Providence sees similar opportunities at Kinsale Head nearby.

“The project would provide a steady cash flow, which is very important in the current climate, for perhaps 20 or 30 years. Now that oil prices have dropped from last year’s high, we’re all adjusting to the new regime and measuring everything against that,” says Island’s managing director Paul Griffiths.

Opportunities exist during every downturn, however, and another small exploration company believes it may have found one off the coast of Dublin.

Michael O’Leary — no, not that one — managing director of VP Power, will know later this year whether he has been proved right.

A team of geologists and geophysicists recently spent six weeks conducting a seismic exploration of the Kish basin, where he believes that underground coal gasification (UCG) technology can be deployed to pump gas from a huge billion-tonne coal seam.

Raglan Capital is believed to be raising money for the firm, and O’Leary claims the board’s combined experience means it is well-versed in the highs and lows of the exploration sector.

“The way I see it, the oil price is at around $70 at the moment, up from its low of $38 a barrel. So in that respect it’s risen. It’s forecast to rise further by Christmas, which I would see as helpful.”

He’s also adamant that there is something of an upside to what seems to be a wider downturn in the sector. “We’re finding that the market for equipment such as drilling rigs has collapsed. They’re readily available and the cost of hiring one is considerably lower than it was.”

O’Leary anticipates capital expenditure of about €3m, and his project, the later stages of which may involve Bord Gais, will only be commercially feasible as long as the oil price stays above $35 per barrel.

Although the technology that VP’s project would involve is relatively ancient — Dublin’s old Ringsend gasworks used to heat up coal to produce ‘town gas’ when it was in operation — many countries with large coal deposits, such as China, South Africa and India have recently invested billions in UCG plants, recognising that the technology is cleaner than mining a coal seam and then burning the coal.

Whether that elusive slam-dunk will materialise though, using old or more modern methods, remains to be seen.

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