Looking to provide an export route for its Southern North Sea assets, Independent Oil and Gas (IOG) is in discussions to buy a currently disused pipeline.
The company said on Monday it has signed a memorandum of understanding for the 100% acquisition of a currently disused pipeline in the Southern North Sea. The company has also provided further results of the Skipper appraisal well, stating that oil qualities are likely to be challenging.
The memorandum of understanding for the SNS pipeline contains exclusivity provisions until February 28, 2017. IOG added that discussions regarding the sale and purchase agreement (SPA) are at an advanced stage and that the company would assume operatorship of the pipeline at completion and the liability for future decommissioning.
Under the terms of the agreement, IOG would also acquire the onshore reception facilities.
Upon acquisition of the pipeline, IOG will undertake a pigging inspection to ensure the pipeline’s integrity for safe re-use. The company then intends to re-commission it to enable evacuation of the gas from both the Blythe hub and Vulcan Satellites hub.
The company believes that, with 300,000 million cubic feet per day capacity, the pipeline could also accommodate export of the newly enlarged resources in the Harvey discovery, subject to further appraisal.
This acquisition provides an export route for the company’s SNS gas development portfolio which IOG has acquired at low cost, mainly due to concerns over the ability to export the gas. Ownership and recommissioning of this pipeline will solve this issue, providing a direct export route for the company’s gas assets into the UK market.
There may also be potential for third parties to use the pipeline in which case IOG would benefit from tariff income. This strategy, fully supported by the Oil and Gas Authority (OGA), is in line with the Maximizing Economic Recovery principles and is incorporated in the draft Blythe Field Development Plan submitted to the OGA in December 2016.
The company will need to agree and pay processing tariffs to the terminal operator. There will be ample ullage through the pipeline, and the terminal can receive more than 400 bcf of gas at rates up to 200 MMcfd for more than 20 years.
Mark Routh, CEO of IOG, said: “This pipeline will be the cornerstone of our Southern North Sea portfolio which, subject to remediation, will enable us to deliver our approximately 0.5 trillion cubic feet of gas resources to the UK market.
“During a period of relatively low gas prices, we have bought, at very attractive prices, quality assets which were considered effectively stranded. Subject to completion of the acquisition, full ownership and control of the export route creates significant value for the company, especially given the recovery in UK gas prices. Owning our gas portfolio and export infrastructure 100 percent will enable us to accelerate both the development planning and funding processes.”
Skipper oil ‘challenging’
IOG received further results from the analysis of the oil samples retrieved from the Skipper appraisal well drilled in the summer of last year.
According to the company, the oil has a high density of approximately 11 API, high viscosity, and a high Total Acid Number. However, the Skipper oil is mobile in the very high permeability reservoir and is also mobile at ambient conditions thanks to its very low wax content.
Further technical and commercial evaluation is being done, in particular, building a reservoir model to simulate the oil’s mobility in the reservoir. If a field development plan can be designed to enable the economic extraction of oil from the Skipper field, the oil properties will present a challenge for refining and marketability. Depending on where and when the oil is sold, the company anticipates the crude would trade at a significant discount to the prevailing quoted Brent oil price.
The total cost of the Skipper appraisal well was £10 million ($12.1 million at current rates). This was financed in part via loans and deferred payments which are due to be repaid at the end of 2017. The total loans and deferred payments were approximately £6.8 million, and approximately £3.2 million was paid in cash or shares. The intention is to refinance or repay these loans in parallel with securing development funding for some or all of IOG’s SNS gas assets in 2017.
Regarding Skipper, Routh added: “The update on the Skipper crude quality has confirmed the earlier results and has provided us with some new data. The oil qualities are likely to be challenging, however, given the oil’s mobility in the reservoir, we continue to explore the potential extraction and marketing options to deliver value from the asset.”