Member Info for Exploration

A1m1

Understood. Even if I knew what CNRL had spent on P2248, the actual ‘losses’ on the balance sheet would have to accommodate the treatment of tax. You would not even be able to figure out a Licence by Licence loss from the Annual Report.

In practical terms legislation for UKCS provides that farm-ins for exploration programmes are treated for tax purposes as a disposal for nil consideration – the purchasers/farmers-in are able to claim capital allowances on all the qualifying expenditure that they incur on the development.

To further incentivize exploration the Ring Fence Expenditure Supplement extended from 6 to 10 accounting periods, to further support oil and gas companies during the exploration and appraisal stages. In plain English that means companies can allocate all qualifying spend, or ‘sunk costs’ as you call it, for 10 prior years.

The tax regime in UKCS has a ring fence which includes all UK designated areas. So if a corporation incurs a loss, say, West of Shetland, it can deduct it from a gain in the Southern North Sea.

Since UKCS taxation relates to Corporation Tax, it means a corporation can lump all its past costs into a single ‘bin’. But a prudent CFO tracks expenditure by Licence to enable a farmer-in to claim deductible allowances on qualifying expenditure for that Licence.

If a farmer-in drills a well at 100% cost, that company can claim allowances and for Shell, for example the allowance is deducted from revenues from any production inside the ring-fence and reduce their Corporation Tax. If CNRL participates at 30% paying interest then it gets 30% of well cost allowance.

If one of CNRL’s licenses comes up trumps, then the capital losses - for the whole corporation - can be offset against a capital gain or future revenues from production.

I did -

- but still don’t understand your last question about losses which makes no sense at all.

Sorry about that a1m1, but you need to help us understand what your questions are about.

I’d like to help you contribute to this Bulletin Board. Please try to ask clear questions using simple language and maybe we can make some progress.

There you go again a1m1 with your muddled wording.

Correct - the Application Fee is non-refundable and not tax deductible. So 2000 pound loss.

What other ‘losses’ are you referring to?

A1m1 - I just said the cost of a Licence Application is 2000 pounds, so once again you are making simple mistakes.

If you insist on asking questions about the petroleum industry perhaps you should use the commonly accepted language.

As your messiah once said “An ounce of practice is generally worth more than a ton of theory”.

Yes, of course.

Now you are using the correct terminolgy it is easy to answer your queries.

On ‘sunk costs’, these may be transferable to a company wanting to use them as a tax deduction - so bizarrely to simple-minded folk, sunk costs in UKCS have a value, enhanced by the taxation system. A1m1, I’m afraid your lack of understanding of just about everything in the petroleum business leads you to contribute false or misleading information.

A1m1

On sunk costs, I simply do not know how they have been dealt with by CNRL’s accountants.

Sure, you can use your simple-minded approach to ‘sunk costs’ but the UKCS taxation system encourages exploration and development with features such as the ring fence expenditure supplement which has been in force since 2006.

This why a good CFO, such as with CNRL has, is literally worth his weight in gold.

Operator;

You’re half right. OGA recognise two types of Operator.

One is the Designated Operator accountable for administration, routine reporting and compliance with UK’s Petroleum Production Act.

The other is Technical Operator, which conducts operations such as drilling and field development. This is where Shell takes over with their Drilling team, emergency response plans, oil spill plans and so on. Given, their strong position and production in UKCS it makes sense for Shell do do all the work and add the costs to those already incurred by CNRL because these will be deductible from taxes. I think the ring-fence for tax-deductible costs includes the whole UKCS.

So you need to use the correct terminology.

A1m1

On applying for Block 43/11 in 32nd Round, the awards will depend on competition by applicants, which, as you know is scored according to a transparent marking system where results are published when awards are made. Since everyone now understands the importance of infrastructure/timing of drilling 43/11 will not attract a ‘knockout’ bid and OGA has option not to award it or create multi-applicant, ‘forced marriages’ combining the best parts of all applications.

On Extensions these are only granted if supported by reasonable proof that the Operator can fulfill their future commitment - which for 43/11 would have been a firm well to enter the next 4-year period.

A1M1 - err, totally wrong again, this time about operator. CNRL is Operator for all its UKCS licences.

A1

Yes - we all know P2248 has expired. That was last month. But CNRL now has P2424, which are Blocks 42/14 and 42/15 - immediately west of Block 43/11 (which was P2248).

With Spirit out of exploration business and Pegasus West production well scheduled this year, the timing is perfect to create an aligned group encompassing the whole trend with financial backers - possibly private equity. In joint applications there must be a designated operator for the group and CNRL would qualify easily.

But if CNRL didn’t get the acreage back in 32nd Round the potential loss is the application fee of 2000 pounds. OGA accept credit cards - I might even apply for it myself!

P2424 has a small, gas discovery in the Bunter Sandstone in Block 42/15 which is too small to support stand-alone development. However, the pre-salt prospects are attractive in 42/14 - which is next to the 600 bdf Breagh Gas Field and will soon be looking for satellite fields to keep the facilities and pipeline running. Also, 42/14 contains an extension of the Crosgan gas field which was discovered a few years ago. 42/14 and 42/15 already have 3D seismic which is available via OGA at low cost.

Bungle

CNRL’s Block 22/24 is located in a busy part of the UKCS. ENI is operating the Cowallon exploration well after farming into Serica’s share of the licence. The other participants are Nippon and Elinor. (Equinor is the ‘new’ name for Statoil).

Cowallon is being drilled by Ensco 121, which is a big jack-up rig. The programmed schedule for the well is 140 days. The target reservoirs are the Jurassic Pentland Sandstone and the Triassic Skagerrak Sandstone. The geology of this part of the UKCS was overlooked until the 2008 discovery of the 300 mmbbl Culzean Field in Block 22/25. Recent re-juvination of interest was triggered by improvements in seismic technology which enabled mapping beneath and around the numerous salt domes in this part of the North Sea. If Cowallon is a discovery it de-risks the similar Dundonald and Sundrum prospects in 22/19 and will validate the geological concepts in CNRL’s Block 22/24.

The other reason this area is attracting interest is improved drilling and completion technology which enables operations in high pressure/high temperature reservoirs. The HT/HP regime is a result of reservoirs being charged from the deep Central Graben immediately to the east.

Previously oil/gas fields like Everest, Machar, Mungo, etc had been found in shallower reservoirs above the salt domes and caused the CATS pipeline system to Teeside to be built in late 1970s - hence the need today to find more petroleum to keep the infrastructure working at full capacity.

Amtech

We’re all watching ENI’s exploration well 22/19c-7 which is nearing completion on the Rowallan prospect. Spudded 30th December and still operating. Targeting up to 130 mmboe gas.

Rather like P2437, CNRL’s P2428 has similar prospects in Block 22/24 next to BP’s Marnoch field and the ETAP cluster of fields which will need additional gas/condensate to maintain flows to Teeside. The ETAP cluster is up for sale right now, so expect some transactions and farm outs soon.

CNRL’s strategy seems to be working well.

That’s right Remdog

The hydraulic stimulation requires injection of about 50 tons of propant sand via the perforations in about 15 minutes as the fractures propagate several metres into the reservoir.

Imagine shifting 50 tons of sand using a whheelbarrow in the same time, and you can see why the ‘big guns’ are needed to shift that amount as a slurry into the reservoir.

When all equipment is in place it will be an impressive sight.

Polar bear

To be honest, if a1m1 had not provoked a response to his ridiculous posts I would not have responded.

CNRL, driven by their then CEO’s wisdom after decades of experience, could foresee how their core area would develop. In fact, the infrastructure owners are in the driver’s seat now and dictating the pace of drilling. We tend to view Shell as a pure upstream company, but their UKCS upstream business is designed to keep their infrastructure working. Bacton has three pipelines delivering gas and, thanks to UK’s ‘liquid’ gas market and NBP trading hub it’s easy for producers, big or small, to monetise their gas.

So P2437 was a ‘no-brainer’ application and let’s hope it passes Shell’s ‘smell-test by end April. 48/8-2 did find gas in the Leman Sandstone - but subsequently a review of the depth conversion of the seismic showed the well drilled ‘off structure’. This is the main risk - and has always been the case in the Sole Pit Basin.

On other hand, the Shell deadline can be extended. Fingers crossed.

A1m1

On your assertion that petroleum geology is based on fantasy, take another look at the potential bonanza in P2437. The Selene Prospect had a geological chance of success of >40% when relinquished by Centrica 5 years ago. It is surrounded by producing gas fields with reservoirs in the Permian Leman sandstone and deeper Carboniferous sandstones.

The discovery wells in the Barque and Clipper gas fields were drilled in the 1980s and then plugged and abandoned because their flow rates on test were typically around 1 mmscfd. Then Shell took on the licences, and using their extensive experience in hydraulic stimulation from Netherlands, Germany and Poland, they pioneered offshore fracking and tested new wells in Barque and Clipper at over 30 mmscfd. This justified development of both gas fields. Since then, offshore fracking of both Permian and Carboniferous reservoirs has transformed the economics of this part of the North Sea.

Fortunately cores from 48/8-2 are available to evaluate the rock properties and with years of experience, Shell is best qualified to assess if it will work in a new well on the Selene Prospect. As I mentioned yesterday, a successful well in P2437 could be completed as a subsea producer with export via a short pipeline to the Barque platform. Shell has just spent 300 million pounds upgrading their gas terminal at Bacton and need to find and produce more gas from smaller accumulations near their infrastructure.

You can rant as much as you like, but the reality of the petroleum industry is that there is no fantasy involved but rather seismic surveys, drilling, engineering and gas sales to customers. But I grant you this; it is quite easy to find oil and gas, but finding the money to do it is much more difficult. Investors in all industries prefer low risk and short payback times, so nothing new there. So, unlike P2252 which is an exploration venture, P2437 is more attractive as a petroleum venture.

a1m1

Fundamentally, you question the dominance of profit-based economics and associated risks. Bearing in mind your interesting background I can understand and respect your position. You can post numerous questions but will receive no replies.

Why?

The paradox emerging from your posts is that, despite apparently valid reasoning from true premises, it leads you to a self-contradictory or logically unacceptable conclusion where investors continue to back winners - based mainly on geological expertise and insight - because the potential rewards are so big.

Get it?

Smallsmile

It went un-noticed by ‘joe normal’.

Minister was just saying 1) how clever he is and 2) warning Sonatrach he’s got other options for gas supply.

Algeria has boosted capacity of Medgas pipeline to Spain, so less need for the Maghreb pipeline for exports.

Gozo

The ‘all the gas from Tendrara Concession’ story was all over the Moroccan newspapers, TV last week in relation to talks on extending the Algeria supply contract. The minister was making a political point that puts his team in a slightly stronger position when talking to Sonatrach. I guess Sound felt the need to follow the Moroccan press to avoid any confusion amongst PIs - although the wording of the RNS could have been clearer.

Fairdealer20

Despite a1m1’s claim to stick to the discussion, it is really a clash of ideologies. a1m1 fervently believes in his side of the argument along the following lines- “the systems of nature, of which man is a part, tends to be self-balancing, self-adjusting, self-cleansing. Not so with technology. Any intelligent fool can make things bigger, and more complex. It takes a touch of genius — and a lot of courage to move in the opposite direction”.

Not my quotes, but something a1m1 and his supporters are familiar with.

Of course, he’ll deny it - but that would betray his beliefs. Is he brave enough?

crude

This is Rachid Nekkaz, who was disqualified as a presidential candidate because he holds dual Algerian/French citizenship. He now has a plan to secure himself the top job anyway – using his namesake cousin, a car mechanic in Algiers to stand for President.

Rahid even nominated himself in France's presidential elections!