Apache Bets On North Sea, Odds Appear Favorable

With about 165 exploration targets on its radar in the North Sea’s Forties and Beryl fields, Apache Corp. (NYSE: APA) could increase production and add reserves with 4-D seismic, increased water injection technology and solid infrastructure at its side.

The Houston-based company delivered an update on its North Sea assets to investors Nov. 17, just more than a week after reporting exploration success in the region and Egypt bumped up international production by 21%.

Additional production growth opportunities exist given recent discoveries and even more prospects in the region. But how much value it creates will depend on commodity prices, which remained depressed amid continued global oversupply. Apache said it will only invest in projects with competitive rates of return.

“We can either sustain or grow our reserves, production and free cash flow at high rates of return, depending on how much capital we ultimately allocate there,” Apache CEO John Christmann IV said. “We will be able to achieve this because we have high-quality assets coupled with an infrastructure advantage, a cost advantage and a very large exploratory and development inventory.”

The North Sea provides balance to Apache’s portfolio, he added. And the Forties and Beryl fields play a major role in how the company will be able to sustain or grow production in the years to come. The rate for 134 targets drilled in the Forties Field since 2003 was 75%, while the success rate for nine wells drilled in the Beryl Field this year was 89%, the company said.

Forties Field: Since acquiring the field from BP in 2003 for $630 million, Apache has doled out more than $2 billion on infrastructure and just as much on drilling and workovers. The company’s work in the field, which included drilling roughly 14 development wells annually, has reversed its declining trend—enough so to push back the field’s decommissioning date to at least 2030.

“At the time of the acquisition it contained 144 million barrels of oil. Since that time, we have produced 235 million barrels of oil and still have 97 million barrels of oil on our books,” said Cory Loegering, vice president and managing director for the North Sea. “Based on 5 billion barrels in place, this equates to an increased recovery factor of 3.8% and there is significant room to drive this higher.”

Apache has identified 84 targets that have not yet been tested. Additional seismic work and increased water injection could increase that number, he added, later noting that percentage point of additional recovery could yield about 50 million barrels of oil. To date, more than 2.6 billion barrels of oil has been recovered in the Forties Field.

“Forties is a world-class example of the benefits of utilizing 4-D time-lapsed seismic. By monitoring the movement of fluids in the stratigraphically complex reservoir over time, our geoscientists have been able to identify and target bypassed accumulations of oil,” Loegering said.

Beryl Field: A string of recent drilling successes in the Beryl area has also bolstered Apache’s confidence in the North Sea. The company is improving the field it acquired from ExxonMobil in 2012 for $1.44 billion, having invested about $300 million in infrastructure upgrades to support growing production in what Loegering described as a structurally complex field with multiple fields and several pay stacked targets.

“As in the Forties Field the application of current day seismic technology has been key to our success,” he added, noting Apache acquired in 2013 broadband seismic for the area. “Having a single uniform survey over the entire area helps to unravel the structural complexity of the field. But the biggest benefit of the Beryl Field is the improved structural imaging,” which de-risks prospects and better position wells.

However, production has been flat. Apache reported Beryl 3Q production was about 26,000 boe/d. But that could change, considering new 3-D seismic shed light on drilling targets. So far, 21 targets have been drilled and 81 remain. Upside potential is now between 350 to 600 net million barrels of oil equivalent (MMboe,) he said.

More Prospects: Hopes are high for the Jurassic-age Storr and Kinord prospects as well as the Callater discovery, where Apache said it logged more than 1,500 ft of net pay in three fault blocks. Reserves as estimated at between 25 and 50 MMboe. Production is set for 2017.

Plans included testing the 8-21 MMboe Storre prospect in mid-2016. “Storr is a relatively low-risk prospect with 100 percent rate of return,” Loegering said before turning to Kinord, which has a reserve potential of between 12 and 42 MMboe. “This is a very large prospect that is expected to be very oily with a stacked pay potential that offers multiple opportunities.”

Additional opportunities could like in the Tertiary play where Apache is testing injectite geometries with the Titan prospect following success at the nearby Corona discovery. The company said that Eocene-aged sedimentary injectites form complex stratigraphic traps.

In all, Apache’s North Sea resource potential is about 574 to 1,054 MMboe.

How much of that gets developed and produced remains to be seen. Apache did not share 2016 production and capex guidance. That information is expected to be delivered along with news of fourth-quarter 2015 earnings.

But Apache is counting on its North Sea assets—along with its assets in Egypt—to generate operating and free cash flow while supplementing its investment in North America, where lower commodity prices have prompted operators to slow down drilling.

“We believe that our international regions, and the North Sea in particular, have significant upside potential that will create value for Apache shareholders beyond its near-term free-cash-flow-generation potential,” Christmann said.

Velda Addison can be reached at vaddison@hartenergy.com.