Ithaca Energy


Shining Ithaca
Pessimists say that the North Sea is in decline, but thereÔÇÖs enough oil and gas under there to keep it active for decades. John OÔÇÖHanlon speaks to John Woods, chief development officer of Ithaca Energy (UK) Ltd.
Ithaca Energy is focused on the oil and gas resources of the North Sea, parcelled out in a series of annual licencing rounds by the UK government. The economics are simple, if their application is complex. As oil prices rise, it becomes worthwhile to drill for reserves that arenÔÇÖt a paying prospect when prices are low, and IthacaÔÇÖs team has vast experience in the North Sea. John Woods, chief development officer for Ithaca, knows the oilfields like the back of his hand, having spent 25 years working with large operators and managing some of the most complex developments there, and he now screens potential assets with a view either to acquire them or to purchase an interest.

Generally speaking, he says, the market in Toronto has been much more sympathetic to independent oil companies than the UK market, which is why the holding company is incorporated in Canada. However, Ithaca UK is its only asset. Operationally it is a UK company, with its headquarters in Aberdeen and dual listing on the AIM and the Toronto Stock Exchange. Since it was founded in 2006, it has built up a portfolio of assets, some of which it owns outright but mostly shares with other partners to spread the risk.
These have been acquired through several routes, he explains, including buying into assets operated by larger companies. Smaller operators like Ithaca have benefited from the new Promote licences. ÔÇ£These enable small companies to come in with short-term licences and relatively simple work programmes. We have picked up several of those over the last three or four licencing rounds.ÔÇØ Another boost has been the ÔÇÿfallow acreageÔÇÖ initiative, which has forced the majors to dispose of assets they arenÔÇÖt actively exploiting but which might be attractive to smaller operators.
In December 2007 Ithaca announced that it had agreed to acquire the Beatrice field in the Moray Firth from Talisman for £10 million. This was its first producing field, and it came with three platforms and an onshore storage, transhipment and treatment terminal at Nigg near Inverness.
In conjunction with the nearby Jacky field this is definitely the companyÔÇÖs most important active asset. Jacky was a licence adjacent to the Beatrice oilfield that had earlier been relinquished by another Canadian oil producer, Talisman. ÔÇ£They recognised that it had potential, but it wasnÔÇÖt big enough for them to pursue,ÔÇØ says Woods. ÔÇ£We picked it up in a government licencing round, drilled a well on it, and having confirmed the discovery, we approached Talisman to process the oil on our behalf. However, it proved more effective for us to buy the nearby Beatrice oilfield than for them to make modifications, so thatÔÇÖs what we did, and itÔÇÖs now onstream for us and providing us with cash flow.ÔÇØ
Jacky is delivering 10,000 barrels of oil a day, worth at todayÔÇÖs price around $700,000. But as he says, the development of assets is enormously expensive, and as thereÔÇÖs such a high element of risk, companies typically try to get involved in a number of assets to spread the risk. ÔÇ£Clearly you canÔÇÖt afford to own 100 per cent of a large number of assets, and itÔÇÖs better business to have a small percentage of a larger number than a large percentage of a smaller number. Most operators share assets.ÔÇØ In the case of Jacky, Ithaca owns just over 67 per cent and operates the field, and two minority partners share the equity.
Until the end of May this year the well delivered around 8,800 barrels a day, a lot better than predicted. ÔÇ£It would come out on its own, but we can get it done quicker by pumping it,ÔÇØ explains Woods. ÔÇ£But Jacky is a relatively small discovery with between five and eight million barrels recoverable, so pumping it at those rates will make it start to decline before the end of this year.ÔÇØ Like most oilfields, it has a long ÔÇÿtailÔÇÖ and he expects it to keep going until about 2015. But from IthacaÔÇÖs point of view, Beatrice is close by producing almost 2,000 barrels a day, which basically pays for the facility, Woods says, and Jacky will continue to provide profit on top of that for about five years to come.
Ithaca has other prospects in the Beatrice area that it will be drilling over that period in the hope of replicating the success of Jacky. It also has development projects in other North Sea regions. Its partner Maersk operates the Stella discovery, though Ithaca is in fact the majority partner there with a two-thirds interest, and Ithaca is the operator of the Athena field in the central North Sea, where it anticipates a project to install a floating production, storage and offloading vessel (FPSO) will commence later this year. In addition, it has a 29 per cent interest in the Carna gas field, operated by Venture.
Jacky is totally viable at todayÔÇÖs oil prices, would have been a gold mine at the $144 per barrel level that prevailed last year, but looked less appealing at the $44 per barrel that oil had dropped to at the beginning of 2009. ThatÔÇÖs always been the way in this industry, of course, but never so much as today. However, with a broadening portfolio and prices rising again, Woods thinks the business will be sustainable. ÔÇ£Athena, for example, did not make economic sense earlier this year, but itÔÇÖs close, and if prices continue to rise it will come onstream. Hopefully, in the next three to five years weÔÇÖll all have a larger portfolio in the UK North Sea, and at some point in the future as we see the opportunity, we will probably go overseas as well.ÔÇØ
IthacaÔÇÖs growth strategy was aggressive when credit finance was available but has to be more cautious now because it has to be self-funded, he admits. ÔÇ£The trick is to make sure weÔÇÖre not too far down in the queue when the equity and debt markets do open again. But you have to be ready to jump as soon as the markets open up, because everybody else will. You canÔÇÖt be left behind. Being small and nimble gives us an edge; we have low overheads and are very quick to make decisions.ÔÇØ Add to that the companyÔÇÖs vast store of technical knowledge and Ithaca has a winning hand, Woods says.
One thing that is really helping push matters forward is a more realistic attitude on the part of the service sector, which could command very high margins during the boom times but has more slowly come to recognise that it is in everybodyÔÇÖs interest to keep busy. ÔÇ£We are seeing much more collaboration for the service sector right now, and I think that is what will push projects like Athena forward,ÔÇØ he says. It will perhaps become less prohibitive to get a well drilled or to hire an FPSO, and as a result the UK might see more, not less activity in the North Sea and continue to enjoy licence and tax revenues for a little longer than it might have expected.