Wood Mackenzie reviews Europe’s upstream sector in 2014

Wood Mackenzie’s European upstream research team have assessed the most significant events of 2014 impacting Continental & Mediterranean Europe’s (all of Europe excluding UK and Norway) oil and gas sector, including the Ukraine Crisis and the collapse of global oil prices, identifying the key areas to watch this year.

James Webb, Manager for Continental & Mediterranean Europe upstream research at Wood Mackenzie says: “In 2014 the region’s upstream sector was impacted by a number of high profile events. The Ukraine crisis and cancellation of the South Stream pipeline revived fears over the security of Russian gas transit to Europe. The year was also challenging for unconventional gas in Europe, with the sector marred by company exits and poor drilling results. The biggest story of 2014 by far, was the collapse of Brent oil price from over US$100 a barrel ($/bbl) in August to under $60 in December.

“Looking ahead to 2015, upstream activity will undoubtedly be influenced by oil prices, and we expect a direct impact on exploration and development budgets – with discretionary spend most at risk. However, with several licensing rounds and high-profile exploration wells expected, it is likely to be another exciting year for the region.”

Wood Mackenzie’s latest upstream analysis highlights some of Continental & Mediterranean Europe’s (covers all of Europe excluding UK and Norway) key upstream activity in 2014 and what it signals for the year ahead:

• Investment and development spend – The region saw US$6.9 billion of investment in upstream development in 2014 – very much in line with recent years. Denmark accounted for the highest level of investment with on-going spend at Hejre and the South Arne Phase III project. Elsewhere, high spend continued at Total’s Tempa Rossa development in Italy, while OMV Petrom continued to invest in the redevelopment of assets onshore Romania. In total, 16 new fields were brought onstream. Development spend is expected to decrease drastically in 2015 in response to the drop in oil price, with an estimated expenditure of US$5.8 billion.

• Production – The region produced almost 3 million barrels of oil equivalent per day (mmboe/d) in 2014. Wood Mackenzie expects the region to continue to produce over a billion barrels a year until the end of 2017. Despite modest growth in liquid production last year, overall volumes fell by 7.5% from 2013 because of a 10% drop in gas production. The Netherlands accounted for much of the gas decline as 2014 saw lower production caps being implemented at the country’s Groningen gas field. Additional cuts to Groningen will impact production in 2015, but will be somewhat offset by the first volumes from Shell’s Corrib project in Ireland which is due to come onstream.

• Exploration and appraisal – A total of 93 E&A wells were spudded in 2014, with the highest level of activity in the Netherlands (28 wells). Operators in the Netherlands are now finishing a period of evaluation and review, and Wood Mackenzie forecast  exploration activity will  pick up in the country over the next few years.  However, the decrease in global oil prices is likely to have an impact on exploration budgets in 2015, with some operators already delaying drilling until 2016. Unconventional exploration across the region will continue to decline in 2015 following a number of high profile company exits from Poland such as Eni, Marathon and Total, as well as  disappointing well results last year. Key regional hotspots are likely to emerge in 2015, with high impact conventional exploration in the Black Sea, and Eastern Mediterranean, as well as  Denmark’s first shale well expected to be spudded by Total in early 2015.

• Licensing – In 2014 just 85 licences were awarded in the region – a dramatic decrease from previous years. However, a significant amount of exciting acreage opened up following the launch of three offshore licensing rounds in Croatia, Denmark, and Greece. Additionally, Montenegro closed its first offshore licensing round last year.  Licensing activity in the region is expected to remain steady throughout 2015 – with winning bidders from these rounds expected to be announced later this year. Details of the 2015 Atlantic Margin Oil and Gas Exploration Licensing Round in Ireland are also expected to be released, with a closing date of September 2015.

• Mergers & acquisitions – Despite fewer deals, it was a record year for M&A spend in the region, totalling US$7.3 billion, and 1.4 billion barrels of oil equivalent traded.  Much of this spend was LetterOne’s acquisition of German E&P company, RWE Dea. Elsewhere, Tullow Oil and Chevron both sold assets in the Netherlands, with the latter exiting the country. The main determinant of M&A in 2015 is likely to be the oil price. Although the return of volatility can result in conservatism in the M&A markets, a period of low oil prices could present growth opportunities for companies in the region.

Source: Wood Mackenzie