Independent Oil and Gas plc (IOG), the development and production focused Oil and Gas Company, has signed a Memorandum of Understanding (MOU) regarding the 100% acquisition of a currently disused pipeline in the Southern North Sea (SNS) for a nominal consideration. The pipeline will provide the proposed export route for its Southern North Sea assets. The Company also provides further results of the Skipper appraisal well drilled last year.
Acquisition of SNS Pipeline
The MOU contains exclusivity provisions until 28th February 2017. Discussions regarding the Sale and Purchase Agreement (SPA) are at an advanced stage and all parties are committed to completing this documentation and then concluding the acquisition at the earliest opportunity. The Company will assume operatorship of the pipeline at completion and the liability for future decommissioning.
Under the terms of the SPA, IOG would also acquire the associated onshore reception facilities. IOG plans to use this pipeline as the main export route for all of its SNS gas assets.
Upon acquisition of the pipeline, IOG will undertake an intelligent 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 Company's Blythe hub and Vulcan Satellites hub. This will require the installation of inter-field pipelines and tie-in points as is normal for any gas field development. With 300,000 million cubic feet per day (MMcfd) capacity, the pipeline could also accommodate export of the newly enlarged resources in the Harvey discovery, subject to further appraisal.
This acquisition is of great strategic importance as it 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. By owning the gas assets and the export route 100%, IOG will benefit from clear control over the entire process from field to market. There may also be potential for third parties to use the pipeline in which case IOG would benefit from tariff income. This strategy is fully supported by the Oil and Gas Authority (OGA), is in line with the Maximising Economic Recovery principles and is incorporated in the draft Blythe Field Development Plan submitted to the OGA in December 2016.
By owning the pipeline, the Company will incur no transportation tariffs, thereby further improving the economics of the SNS gas assets. These developments will also benefit from recent stronger UK gas prices. The Company will need to agree and pay processing tariffs to the terminal operator in the normal way. There will be ample ullage through the pipeline and the terminal has capacity to receive in excess of 400 bcf of gas at rates up to 200 MMcfd for more than 20 years. The consideration is for a nominal sum, with IOG agreeing to bear the liabilities for the future decommissioning of the pipeline and reception facilities.
The Company has received further results from the analysis of the oil samples retrieved from the Skipper appraisal well drilled in July/August last year. The oil has a high density of approximately 11 °API, a 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. The Company is undertaking further technical and commercial evaluation, 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 drilled in July/August 2016 was £10 million. As previously announced this has been part financed via loans and deferred payments which are due to be repaid at the end of 2017. The total loans and deferred payments drawn for this purpose was approximately £6.8 million and approximately £3.2 million has been paid in cash or shares. In line with IOG's business plan, the intention is to refinance or repay these loans in parallel with securing development funding for some or all of our SNS gas assets in 2017.
Mark Routh, CEO of IOG, commented:
"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% will enable us to accelerate both the development planning and funding processes."
"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."