Operators gearing up to sanction two of the largest undeveloped discoveries in UK

Following the extensions of licences for two of the largest undeveloped discoveries off the UK, operators of these two projects are laying the groundwork for their final investment decisions next year. This comes as the UK government is planning to introduce a windfall tax on oil and gas producers, but also to incentivise investments.

As reported a couple of months ago, Siccar Point Energy and its partner Shell received a two-year extension of licences containing the controversial Cambo field development.

Now, the UK authorities have also granted Equinor an extension for the Rosebank licences located West of Shetland as the Norwegian company is working to mature the project towards financial sanctioning, which was previously delayed.

A spokesperson for Equinor confirmed to Offshore Energy on Wednesday that the licence extension for the Rosebank project was confirmed by the North Sea Transition Authority (NSTA) on Tuesday for two years. This means that the licences have been extended until 31 May 2024.

The potentially recoverable volumes at Rosebank are expected to be more than 300 million barrels.

The previous three-year extension for Rosebank licences – P1026, P1191, and P1272 – was secured in June 2019. Following this extension, Equinor set a new timeline for the project development with plans to make the final investment decision (FID) by May 2022. The company intended to use this time to reduce the costs for the project through learning from its other portfolio assets, such as Johan Castberg in Norway and Bay du Nord in Canada.

However, May came and went but the Norwegian company did not sanction the Rosebank project.

When asked about Equinor’s latest plans related to the Rosebank FID, the spokesperson said: “We continue to mature the project together with partners towards FID, planned in 2023.”

This timeline has also recently been confirmed by Ithaca Energy, owned by Israeli Delek Group, following its announcement about taking over Siccar Point Energy, which holds interest in the Cambo as well as in the Rosebank project. Ithaca said in April that the FID for both of these projects is expected next year.

Alan Bruce, CEO of Ithaca Energy, said at the time that the development of the Cambo and Rosebank fields is a huge opportunity to not only help secure the UK’s energy future for at least another quarter of a century but also to create thousands of direct and indirect jobs in the process.

Meanwhile, as part of Equinor’s work to mature the Rosebank project, Altera Infrastructure is conducting a front-end engineering design (or FEED) work for the redeployment of the Petrojarl Knarr FPSO unit on the Rosebank field following the contract award in February 2022. The FPSO was constructed to allow for electrification to be provided from shore, which would reduce operational CO2 emissions.

The vessel has been working on the Shell-operated Knarr field off Norway since 2015 and it was scheduled to cease production at the beginning of May after which decommissioning activities were expected to start. Shell secured consent from the Norwegian authorities to remove the vessel and seabed structures from the field back in March 2022.

The vessel has a production capacity of 63,000 barrels of oil equivalent per day and a storage capacity of 800,000 barrels.

When it comes to Cambo, the project was granted a two-year licence extension at the end of March 2022. While the extension did not change Shell’s previously announced decision to exit the Siccar Point-operated project amid public backlash over its development in the context of the energy transition, Shell did note it would allow time to evaluate all potential future options for the project.

As Siccar Point, the operator of Cambo, is now being taken over by Ithaca Energy, the Israeli-owned company Ithaca will be taking over the operatorship of the project once this transaction has been completed, which is expected by the end of June. As explained by Ithaca, Cambo and Rosebank represent an opportunity for the company to develop fields that will contribute significantly to the UK’s energy security.

The Cambo field is anticipated to deliver up to 170 million barrels of oil equivalent during its 25-year operational life and would also provide a further 53.5 billion cubic feet of gas.

Just last week, the UK government announced its plans to introduce a windfall tax for the oil and gas producers as part of its efforts to alleviate the cost-of-living crisis in the country. The government is also building into the new levy a new investment allowance, which is meant to incentivise them.

As a result, for every pound a company invests, it will get back 90 per cent in tax relief. “So, the more a company invests, the less tax they will pay,” UK Chancellor of the Exchequer, Rishi Sunak, explained.

According to a recent report from Fitch Ratings, an American credit rating agency, Ithaca Energy will be the most affected by the levy among Fitch-rated companies as its entire oil and gas portfolio operates in the UK North Sea. The proposed levy (on an annualised basis) could equate to 15 to 20 per cent of Fitch-adjusted 2022 EBITDA (excluding the mitigating impact of the investment allowance).

The ratings agency said that Ithaca benefits from its strong cash position and low leverage profile, supported by the high price environment incorporated in the agency’s oil and gas price assumptions for 2022 and 2023.

“This boosts financial headroom, which will help absorb the new tax. We expect the overall medium-term impact of the levy to be tempered by the investment allowance mechanism, even if the company’s FFO net leverage increased in the medium term if the tax is collected until 2025, in line with the sunset clause, and assuming some moderation in oil and gas prices. This forecast assumes a cash outflow of over USD 1 billion related to Ithaca’s announced acquisition of Siccar Point, yet to be finalised,” the ratings agency explained.

David Crawford, Ithaca CFO, said recently during the company’s 1Q 2022 presentation that the levy incentivises those who are prepared to invest in developments, “which is something Ithaca is prepared to do.”

Ithaca CEO Alan Bruce added: “From a broader perspective our position would be that, while we fully understand the cost-of-living crisis and the impact that’s having on people, the stability of the fiscal regime is important. It’s a long cycle business and, from our perspective, having specificity on various triggers in terms of this mechanism and stability in the fiscal regime would be what we would advocate for.”