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May 29, 2019updated 22 May 2019 4:27pm

Faith in the Forties: an analysis of Ineos’ latest investments in the North Sea

Earlier this year, energy giant Ineos announced a new £500 million investment in its Forties Pipeline System, commonly regarded as the beating heart of UK crude oil conveyance. The move is indicative of growing investor confidence in the North Sea, writes Ross Davies.

By Ross Davies

“More of a Ford Mondeo than a Mercedes”.

This was how Ineos director Tom Crotty likened the state of the Forties Pipeline System (FPS) shortly after his company completed its purchase from BP in October 2017.

It’s hardly a flattering description of what is arguably the most important piece of infrastructure in the UK Continental Shelf (UKCS), which links around 85 oil and gas facilities in the North Sea to the British mainland.

One suspects the remark was also a sly dig at the pipeline’s previous owner’s maintenance efforts. Sure enough, a little over a month after the petrochemicals giant had taken up the reins, it was forced to close the FPS due to the discovery of a hairline crack.

It took Ineos just over three weeks to complete its repairs on the pipeline – long enough to create serious market jitters. Amid the declaration of a force majeure – a legal measure used by suppliers when unforeseeable circumstances render then unable to fulfil a contract – Brent crude prices surged above $65 a barrel for the first time in more than two years.

“When the FPS had to be shut down in December 2017 the knock-on effect was so strong that Scottish GDP figures were adversely affected to a noteworthy extent,” explains Alex Kemp, professor of petroleum economics at the University of Aberdeen.

“A further knock-on effect was to interrupt the substantial associated gas production from the fields.”

Vote of confidence: FPS set to remain a going concern for UK oil and gas transportation

Ineos will be hoping history doesn’t repeat itself any time soon. In February, the group announced plans to sink £500 million into the FPS, with the aim of extending the asset’s life well into the 2040s.  This will include “modernising the environmental systems and implementing the latest technology into its systems,” said Ineos.

The investment is essentially underpinned by Ineos’ faith in the future of North Sea oilfields – in which the FPS stands as its beating heart. The pipeline, which was opened in 1975, is responsible for transporting 40% of the UK’s oil and gas to the mainland, conveying up to 600,000 barrels of oil onshore for daily refining.

The overhaul has been roundly welcomed by industry bodies, including Oil & Gas UK, whose Vision 2035 initiative – co-led with the Oil and Gas Authority – aims for the UKCS to generate £920bn worth of revenue for the UK economy in the next 17 years.

“Investment of this scale in the Forties Pipeline System is a vote of confidence in the future potential of the UK North Sea,” says Mike Tholen, Oil & Gas UK’s upstream policy director.

“The rejuvenation of this critical infrastructure, embedded at the heart of industry for nearly 40 years, strengthens our aim to add another generation of productive life to the basin outlined in Vision 2035.”

Fields of gold: could more investors follow in Ineos’ footsteps?

Kemp, too, describes the move as “welcome news for all current and potential future users of the system.” He believes it could also have a positive impact on other operators weighing up investment in the North Sea.

“The new investment in the FPS gives confidence to investors in fields in the Central North Sea that this vital piece of infrastructure will be available for many years,” he says.

“Many of the recent discoveries in the UKCS are quite small, with the reserves of most being less than 20 million barrels of oil equivalent. Long separate pipelines would generally render these fields uneconomic. The potential production activity from the Central North Sea could extend to 2050.  But this is dependent on key infrastructure being available.”

The modernisation programme “will provide operators with a greater degree of certainty when making investment decisions about the future development plans for their assets,” agrees Tholen.

Ineos’ intentions for the FPS are part of wider £1bn investment package, which also includes ploughing £350m into a new energy plant at Grangemouth, as well as £150m in a 300,000 tonne-per-year vinyl acetate monomer facility in Hull. Sir Jim Radcliffe, the company’s billionaire chief executive – and prominent Brexit supporter – claims the investments are tied to upholding British manufacturing and business at large.

High hopes: operators remain bullish over the North Sea – despite the research

Issues of sovereignty aside, Ineos isn’t the only operator betting that UKCS oil and gas reserves are far from exhausted. Both well-established players and new arrivals in the North Sea want their skin in the game it seems.

Last year was notable for Total’s acquisition of Maersk’s oil and gas division for $7.45bn, while earlier this year, private-equity backed UK oil company Chrysaor announced it had struck a deal to acquire ConocoPhillips’ North Sea assets for £2bn. The deal makes the group the UK’s leading producer, with production expected to leap to 185,000 barrels a day by the end of 2019.

In addition, a combination of higher oil prices – Brent Crude topped $71 a barrel in April – and new fields coming on stream, including Kraken and Mariner, has created an unmistakeable sense of optimism among operators over the future of North Sea production.

However, this bullishness runs counter to some academic studies, with Edinburgh University’s school of geosciences recently claiming the North Sea has entered its final decade. According to researchers, roughly only 10% of the UKCS’s original recoverable oil and gas is still awaiting extraction.

Time will tell if investors will be proven wrong in their sanguinity, but, for now, the likes of Ineos feel they are on to a good thing.

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