Following a year of challenges and changes, IOG is now well on the path to completing its landmark pipeline recommissioning project and creating a new SNS gas production hub
From debt restructuring and a hostile takeover bid, to appraisal wells and a farm-out deal with a Warren Buffett-backed partner, Independent Oil and Gas (IOG) has seen many of the struggles and successes that a mid-size independent could expect to encounter – and all in the last 12 months. Now fully funded, the company and its partners are setting about the business of realising a long-planned development strategy for a suite of southern North Sea (SNS) gas fields.
Speaking with Wireline in January 2020, and following months of investment roadshows, CEO Andrew Hockey is emphatic as to the AIM-listed company’s direction: “We aim to be a mid-cap gas producer that uses our refurbished infrastructure to bring indigenous gas to market.” Its route to accomplishing this lies chiefly in the Thames Pipeline, a 24-inch concrete-coated pipeline which connects the now shut-in Thames field to the Bacton Gas Terminal on the coast of Norfolk. Bought for £1, IOG plans to use 60km of the westward portion of the pipeline to export gas from a cluster of SNS fields that make up its core project.
However, as the first company in the UK to embark on a full-scale pipeline “re-commissioning” project, the route has not always been straightforward. Hockey adds: “The portfolio was put together with the intent of re-using the pipeline and before anyone would believe us, we had to demonstrate it worked – so that’s exactly what we did. Then people started to realise that our ideas actually make good economic sense.”
Consequently, much of IOG’s effort over the past few years has been taken up with proving that concept is viable, as well as securing the assets, expertise and funding to realise its ambitions. With this groundwork now complete, the next 18 months will mark a wholly new stage of life for the company. “Before pipeline testing we were just a bunch of people with an idea that was great in principle, but unfunded in practice. The big breakthrough last year was to become a company with a fully funded idea on its way to being turned into reality,” he reflects.
“The portfolio was put together with the intent of re-using the pipeline and before anyone would believe us, we had to demonstrate it worked – so that’s exactly what we did.”
Quite a year
IOG’s core portfolio represents around 420 billion cubic feet (bcf) of gross 2P and 2C gas reserves – roughly 72 million barrels of oil equivalent (boe) – and is comprised of the Vulcan satellites hub, Blythe hub and the Goddard discovery, the latter of which was added to expand the project in early 2019. Split 50:50 between operator IOG and its new partner CalEnergy Resources, the development will net each a total of 210 bcf.
Following a two-phase development plan, IOG is targeting peak annual gross production rates of around 140 million cubic feet per day (24,000 boepd) across the six fields, delivered to shore via the recommissioned pipeline. Gas will then pass through the refurbished Thames Reception Facilities at Bacton, undergo processing and cleaning at the Perenco-operated portion of the site, before it is injected into the National Transmission System and sold into the market.
Alongside its core assets, IOG is also appraising additional incremental opportunities at the nearby Harvey, Abbeydale and Redwell discoveries, all of which could be tied back to the Thames infrastructure if they are deemed viable.
Hockey believes that the company’s position as of the end of 2019 distinguishes it from its peer group. “Almost uniquely among our peers we are fully funded to deliver our project,” he notes. Even now, IOG is made up of less than 30 staff, although there are plans to gradually expand the team as operations require. That position is of course no accident – but it is testament to the experience IOG has managed to draw on during a challenging and transformative period.
“We’ve had a quite a year,” he adds. “Although it was incredibly hectic and stressful, it was also very rewarding because we met every challenge that was put in front of us. That said, we are only looking ahead now to ensure we deliver similar success in the next phase.”
Having secured multiple licences since its inception in 2011, the company still held 100% of these interests until mid-2019. “We had a very clear view with the board that the strategy would be to farm down 50% for a development carry and get the bulk of the project financed that way, and do the rest with the bond,” he says. Yet, following the collapse of London Capital & Finance and its energy-financing unit London Oil & Gas early last year, IOG was pushed to settle its outstanding debt with the latter’s administrators.
This also necessitated defending the company from a potential hostile takeover by rival Rockrose Energy. “In our opinion there was never really any offer for the equity, they were more interested in buying the debt from the administrators and using that to get control of the company,” Hockey posits. This defence effort came just as IOG was preparing to raise £19 million in new equity from City backers, shareholders and management in April, which it did successfully.
The proceeds were partly to fund the company through the selection process for a suitable farm-down partner, and specifically one that was able to fund its share of investment from its own balance sheet rather than by raising additional debt. CalEnergy Resources – a unit of Berkshire Hathaway, the conglomerate run by magnate Warren Buffett – emerged as a strong contender early on. “They were interested in increasing their position in the SNS so they were a logical party to bring into our competitive process,” Hockey explains. “They didn’t want to overpay for production, they were looking for a near-term production portfolio like this that they could invest in and that they could see healthy returns from in a reasonable time-frame, as well as lower-risk upside potential.”
In a deal announced in late July, CalEnergy agreed to farm into 50% of IOG’s core project, committing to £40 million up front on completion and two development carries of £60 million and £65 million on Phase 1 and 2, respectively. The deal also includes an Area of Mutual Interest (AMI) agreement, whereby the two companies will work together 50:50 on any future developments around the Thames pipeline infrastructure, as well as options on future development opportunities and Licensing Rounds.
The agreement also left operatorship with IOG, offering another distinct advantage, and in Hockey’s view “a real testament to the team that is in place here.”
The rest of the project funding was raised via a €100 million bond issued on the Nordic bond market in September last year. The partners then approved a final investment decision in late October, signing off work schedules for 2020 at the same time and setting the project towards first gas targeted in July 2021.
In addition to securing external partners, Hockey says IOG has put a lot of effort into strengthening its management team and board over the last twelve months, picking experienced board members from engineering, finance, subsurface and commercial backgrounds. It has also recruited several management team members with proven backgrounds in SNS gas development, all of which has helped add credibility to its plans.
“Transformational is a bit cliched, but it was transformational because we turned the whole thing around and IOG is a completely different company now in terms of capital structure, shareholder base, the team – it’s all completely different from what it was even just a year ago.”
Preparing a pipeline
Work is now underway to prepare the facilities and infrastructure to support the two phases of development across the core portfolio. As of January, Hockey says the team are working with contractors under effective heads of terms for the design of two platforms – one each at Southwark and Blythe – with EPC and construction slated to begin early in the year, pending FDP approval.
As with other recent SNS projects, these will be normally unmanned installations (NUI), with minimal production and processing facilities. Tiebacks include a 7km link from the Southwark platform to the Thames Pipeline, planned to be laid this summer, and a 24km line from Blythe to Thames laid in the autumn. A subsea wellhead at Elgood will also be tied back to the Blythe platform via another 10km line. Further tiebacks between the Thames infrastructure and the Nailsworth, Elland and Goddard fields will then be laid in phase two.
IOG will also be building an internal drilling team to manage its 12-well campaign, with five wells planned for phase one and seven in phase two. Open-water drilling is planned to begin early in 2021 at Elgood, before moving to Southwark-1, which will be the first well brought into production. This will be followed by a well at Blythe and the simultaneous hook-up of Elgood to the Blythe platform, before the drilling team move back to Southwark for the final two wells, with completion expected in early 2022.
Meanwhile, extensive refurbishment work will take place on the Thames Reception Facilities at Bacton Gas Terminal. Of the £280 million in capital committed to the Phase 1, onshore work here will account for around 10%. Nevertheless, this appears to deliver significant value; even with the cost of refurbishment, Hockey says the pipeline “saved us £100 million up front in CAPEX and over £100 million in terms of life of field OPEX that we don’t have to spend on transport tariffs to other people. It is fundamental to the overall economics of all these fields.”
He cites September 2018 as the point at which he believes the rest of the industry began to take a proper interest in the pipeline’s potential. Following asset integrity surveys, the team conducted a full operational test of the pipeline, pressurising to 150 bar for a full 24 hours. “That showed it can cope with a flow of 550 million cf/d, which is way over what we need,” he explains. “Our portfolio only needs to use about 40% of that for the core project at its peak production level. It’s a real asset.”
Hockey also credits regulatory support from the Oil and Gas Authority (OGA), particularly when it came to completing the numerous tasks around acquiring the pipeline – reassuring given the department’s focus on ‘the right assets in the right hands.’ “This really is MER in action,” he affirms.
He also believes that ownership of the pipeline and assets sets IOG apart as an investment proposition: “I think it’s pretty much a unique position, the ownership of infrastructure that we have. We don’t have to go to the majors to get our gas to market…and once you’ve got the core project up and running, it delivers really good returns.” Indeed, following first gas in July 2021, IOG projects it can begin generating free cash by October.
Beyond the financial advantages, the re-use of the infrastructure has implications for the carbon intensity of IOG’s gas production as well. As sustainability and environmental disclosure becomes a greater issue for investors and regulators, the company hopes that its indigenous production, minimal facilities and refurbished pipeline will set it apart from its peers. Adds Hockey: “When we were out on the bond roadshow, we were repeatedly asked about our approach to ESG and to our carbon footprint and we are able to respond with confidence. We’re now doing further work to try to demonstrate how this should be an exceptionally low-carbon-footprint project in the North Sea context.”
“We are actively looking around us for other potential hubs in the area. We would prefer to stick to UK gas at the moment, but there are opportunities to create others.”
Hub for the future
Additional tie-backs – be they to IOG-CalEnergy ventures or other SNS-focused producers – could make the infrastructure even more lucrative, providing what he calls a “strategic platform” for new business. “Operators in [the SNS] now are tending to be smaller,” Hockey adds. “There are a lot of new operators coming in and picking up gas opportunities in licensing rounds that we think potentially could come through our infrastructure, potentially through M&A or through tariffing.”
IOG also has other incremental opportunities to consider. A recent appraisal well at Harvey delivered “mixed” results; while the gas volumes demonstrated at the specific well location were deemed sub-commercial, the well data has enabled the company to define the remainder of the Harvey structure at an initial mid-case estimate of 40 bcf, and has assisted new mapping of the nearby Redwell discovery (formerly Wherry), indicating mid-case recoverable resource volumes “in the region of 100 bcf” equivalent. The data is now with CalEnergy, with a farm-in decision anticipated by late February.
The two AMI partners have also co-operated on applications for additional licences in the OGA’s recent 32nd Round, announcements for which are expected in Q2 2020.
Looking further afield, Hockey is confident that IOG’s model can be replicated to create other gas hubs. “We are actively looking around us for other potential hubs in the area. We would prefer to stick to UK gas at the moment, but there are opportunities to create others. They might look a bit different, but the hub concept doesn’t have to be the same each time – the key is to remain focused on building up the returns,” he explains.
Progress over the next 18 months will, of course, be critical in terms of IOG’s future development and growth plans. Hockey acknowledges that it could be a potential takeover target, and the attempt by rival Rockrose last year proves there is some appetite for its assets and infrastructure. Nevertheless, he says the team’s day-to-day job will remain building the business and focusing on its strategic platform. “We can give this dedicated management focus, without getting distracted on other things.” he notes.
IOG’s emphasis on the importance of indigenous North Sea gas and its focus on predictable returns with minimal cost and carbon implications are encouraging – and very much aligned with the aims of both Roadmap 2035 and the OGA. Its successful progress since 2011 also proves that a small, talented group is capable of delivering innovative projects that previous generations of North Sea E&P players may not have considered. Despite the trials of a challenging year, Hockey and the team are confident that IOG has plenty more opportunities in the recommissioned pipeline.