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Oil Stabilizes On Small Crude Draw

Major Offshore Potential In This Tiny Nation

Introduction

The North Sea has long been in decline. An era in which the British Islands fueled Europe’s oil and gas needs, which has lasted for over a generation, is slowly coming to a close.

But while Scotland (and thus, the UK) has been the base for North Sea oil development, Ireland has largely been left out of the hydrocarbon bonanza. Having never developed its own oil and gas resources, Ireland has been a sort of forgotten step child to its larger neighbor just across the Irish Sea.

However, that could soon change. A recent announcement about the large potential for oil and gas off the coast of Ireland is raising hopes that Ireland’s day may finally arrive. For now, low oil prices will keep rapid development at bay. But when oil prices rebound, with some luck, Ireland may no longer stand in a British shadow in terms of energy development.

Offshore Ireland

Ireland has never been a significant player in the energy world. It faces some challenging exploration conditions, including rough Atlantic waters and drilling depths often between 500 and 2,000 meters.

Offshore Ireland has been a tough nut to crack. There have been over 200 wells drilled around Ireland, but only two of them have yielded commercial discoveries. Royal Dutch Shell (NYSE: RDS.A), with its partners Statoil (NYSE: STO) and Vermilion Energy (NYSE: VET), developed the Corrib gas field, a natural gas project off the northwest coast of Ireland. Even that had an assortment of problems. It ran into a wall of opposition when local communities felt that they were not adequately consulted. Plans for a pipeline and processing plant were highly controversial. The project suffered under years of delays and ballooning costs as a result. The whole episode has left scars on both sides and marred energy development in Ireland for many years.

One of the most exciting plays in Ireland is the Porcupine Basin, off the southwest coast of Ireland. Some wells drilled in the 1980’s and 1990’s demonstrated great potential, with flows of oil and gas. But at that time oil prices were painfully low, and the Porcupine Basin didn’t justify the cost of development. Moreover, at the time, seismic surveying and other exploration technologies were leagues behind where they are now, leaving a lot of potential stuck in the ground.

Interest in the basin perked up in recent years when oil prices surged above $100 per barrel, especially between 2011 and 2014.

ExxonMobil (NYSE: XOM) decided to roll the dice when it drilled the Dunquin deepwater well in July 2013. It had hoped to come across major oil and gas reserves, but alas, it didn’t have the luck of the Irish at the time. On completion of its well, it announced that it had found no commercially recoverable reserves. “It is disappointing that the Dunquin prospect has proved to be water bearing, with no commercially recoverable hydrocarbons,” Kevin Biddle, ExxonMobil’s European exploration director, said at the time. “This project had a higher level of risk and a higher reward, which unfortunately was unsuccessful. This result underlines the uncertain nature of deepwater exploration.” ExxonMobil had several partners in the project – Eni (NYSE: ENI), Repsol (BME: REP), and Providence Resources (LON: PVR). Their $200 million drilling campaign came up empty.

But the search for oil and gas is eternal, and drillers are back at it again.

Kosmos Energy (NYSE: KOS) is an oil exploration company that focuses on the Atlantic basin. It prides itself on taking a “contrarian” approach to oil and gas exploration, going to regions that are often overlooked by some of their larger rivals. It has some offshore assets in Ghana, as well as exploration licenses off the coast of Morocco, Portugal, Senegal, and Mauritania. True to the spirit of this company, it was undeterred by ExxonMobil’s setback. Kosmos sees a huge upside to Irish offshore energy.

Ireland’s oil and gas potential is often painted in a negative light when compared to the once-prolific North Sea. But the North Sea may not be the best point of comparison. Running along the Atlantic, geologically speaking, Ireland may have much more in common with West Africa, where large offshore reserves have been found. And it is there that Kosmos has experience. Kosmos’ claim to fame is finding the massive Jubilee field off the cost of Ghana in 2007, which was subsequently developed by Tullow Oil (LON: TLW).

In 2013 Kosmos decided to farm into the Porcupine Basin off the coast of Ireland. Kosmos holds an 85 percent stake while Europa maintains a 15 percent stake.

Two of its main targets are the FEL 2/13 (Mullen Prospect) and FEL 3/13 (Kiernan Prospect) in the Porcupine. Kosmos and its partner, Europa Oil & Gas (LON: EOG), are hopeful that this area of the “Atlantic Margin” could be just like the Jubilee. 3D seismic surveys completed in 2014 have helped the companies learn about what they have in their midst. The next step is to drill in order to learn more about the acreage and de-risk some of the prospective hydrocarbons. That could come in 2016.

On May 12, Europa announced that the FEL 3/13 could be holding 1.5 billion barrels of oil equivalent. With Europa’s 15 percent stake, that would net the company 225 million barrels of oil equivalent with the balance going to Kosmos. Europa’s share price skyrocketed by more than 42 percent immediately following the announcement.

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Obstacles

There is still a lot of uncertainty over the commercial viability of the Porcupine Basin. But with similar geology with very abundant basins found in West Africa, the Porcupine could one day be a big play.

To get there though, drillers will have to zero in on the most promising acreage, overcome harsh drilling conditions, and prove that there are valuable assets in place. With many of the largest companies staying away for now, the risk will fall on middling drillers like Kosmos.

In the meantime, oil prices will likely keep a lid on Porcupine’s potential. Offshore Ireland is definitely not one of the lowest cost places to produce oil, even more so since it is not a developed region in terms of energy. To realize its potential, oil prices will have to rise.

Conclusion
Ireland has been a stubborn prospect for offshore oil and gas drillers. But, again, it is underexplored, it has not been picked over, and it has shown some signs of promise. We already know that there is a presence of oil and gas, but the extent of which that is commercially viable has yet to be determined.

There is potential for some big reserves. With such a low-level of exploration completed to date, there is a lot of risk, but also an enormous upside for the few players that decide to push forward.





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