In a report to clients, UK Continental Shelf (UKCS) oil and gas consultancy, Hannon Westwood have reviewed Farm-in deals struck during 2006 and 2007 involving commitments to drill wells.

The review combines public information with Hannon Westwood’s unique Well Intelligence data to reveal:

The well farm-in market on the UKCS has expanded rapidly over the last two years as the oil price has increased and the total value and number of asset sales has fallen

Drilling resources on the UKCS have been able to support 50 to 60 new wells each year, though this has now increased to be 70-80 wells as more units for E&A operations became available from late 2007 In 2006 Hannon Westwood recorded 62 deals involving 40 farm-in wells that were committed with total gross well costs estimated at c. $775 million

In 2007 Hannon Westwood recorded 52 farm-in deals involving 26 farm-in wells that were committed with total gross well costs estimated at $550 million

The outstanding drilling result so far from the 2006 farm-ins is Oilexco’s Huntington discovery, where oil was encountered in the Forties and Fulmar intervals and potential reserves are expected to be significant In 2007, notable farm-in successes to date were the appraisal of Breagh, Sterling’s first operated UKCS well; Dana’s Kerloch appraisal well in Block 211/22a; and Oilexco’s Malory Well 22/14a-4, which may be connected to the Huntington Discovery

The number of well commitments generated by farm-ins in 2006 and 2007 represents a significant proportion of the drilled well pool and also a significant fraction of the estimated total value of deals compared to the period 2004 to 2005, when the value of farm-ins only accounted for a small percentage (<10%) of the overall value of all deals

Chris Bulley, a partner in Hannon Westwood, commented, “The trend of 2006-7 drilled farm-in wells shows a marked shift towards lower risk appraisal wells as opposed to exploration wells. So far, in 2008, 12 wells have been committed through farm-in deals. The farm-in market is an important generator of well activity and looks set to remain an important vehicle for companies to achieve growth, as shown by the 50%+ success rate of drilled farm-in wells seen in 2006-7.”

The well farm-in market on the UKCS has expanded rapidly over the last two years as the oil price has increased and the value of asset sales has fallen (by over 50% compared to the 2004-5 period). Drilling resources on the UKCS have been able to support 50 to 60 new wells each year, though this has now increased to be 70-80 wells as more units for E&A operations became available from late 2007. The number of well commitments generated by farm-ins, 40 in 2006 and 26 in 2007, represents a significant proportion of the drilled well pool and also a significant fraction of the estimated total value of deals compared to the period 2004 to 2005, when the value of farm-ins only accounted for a small percentage (<10%) of the overall value of all deals.

In 2004, there were 16 farm-in deals reported, rising to 34 announced in 2005. This review looks at the farm-in deals announced over the last two years (2006 and 2007) to give an overview of any underlying trends. The true barometer of the success of the farm-in / farm-out process is not only the number of new wells drilled but also the reserves discovered. This report also provides a brief synopsis of the wells that have resulted from the farm-in deals, over the same period.

The period 2004/5 saw a big jump in the total estimated value of asset deals compared with previous years, totalling $4,720 million in 2004 and $5,510 million in 2005. The proportion of these deals estimated to be accounted for by the value of farm-ins, however, was very modest, being 1% in 2004 and 6% in 2005. The total value of asset deals dropped by over 50% to be worth an estimated $2,315 million in 2006, and $2,490 million in 2007. At the same time, the farm-in proportion of value is estimated to have risen sharply to 33% in 2006 and 22% in 2007. The jump in oil price and decline in the number of producing assets on the market have fuelled the upward trend in farm-in deals, increasingly seen as the vehicle to achieve company growth via access to potential materiality.

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