Browne’s North Sea idea is more than nostalgic

February 28, 2012

By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Buying into Fairfield Energy, the North Sea-focused UK oil producer, would be a fitting move for John Browne. In the 1980s, when some of Fairfield’s most attractive assets were first being developed, the ex-BP boss was managing the Forties oil field off the coast of Aberdeen. But Browne’s interest in Fairfield, reported by the Sunday Times on Feb. 26, is likely to be more than just nostalgic. Fairfield specialises in mature oil fields that no longer interest the big majors. With oil prices likely to remain high for some time, and opportunities to buy unwanted acreage increasing, the deal has sound commercial appeal.

North Sea oil production is in long-term decline – peak output was in 1999. But there are still plenty of barrels waiting to be extracted. New seismic technologies, advances in horizontal drilling and other so-called ’enhanced oil recovery’ techniques mean even picked-over fields can be cajoled into giving up more of the black stuff. For oil majors, this is often not worth the hassle. With huge new volumes required to boost production significantly, the likes of Shell and BP have bigger fish to fry. But it creates opportunities for smaller players. Both Shell and BP have sold acreage to Fairfield since it was set up in 2005. And BP is still flogging North Sea gas assets it put up for sale last year after the Gulf of Mexico oil spill.

Fairfield and its backers clearly believe that the business model has legs. A planned flotation in 2010 would have valued the whole company at $1.3 billion but investors including Warburg Pincus, the U.S. private equity group, wanting to retain a 60 percent stake. In January last year, Fairfield’s shareholders injected an additional $150 million to help it develop its assets. Since then the group has struck development deals on several properties.

Oil prices have also risen since the IPO was abandoned, so Browne and Riverstone must expect to pay more for a piece of Fairfield than they would have two years ago. The key danger is that they become too confident about the price of the black stuff, and overpay for assets that could prove less accessible than is hoped.

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