An oil field's second life gives new opportunities
Presenting 3 different angles of the same investment
When approaching a company, one usually looks at its assets and assesses the company’s value based on its portfolio. This time, I chose to take a different angle. What if we focused on a single oil field to decide which company to invest in?
This is not intended to be a deep analysis of the different companies mentioned here—just an intellectual exercise for fun. Feel free to make your own analysis and decide for yourself. Without further ado, let’s talk about the Buchan redevelopment project.
Discovery and Early Appraisal
Discovered in 1974 by BP, the Buchan field was one of the pioneering North Sea discoveries. Exploration in the 1970s involved seismic surveys and appraisal drilling in a structurally complex, tilted fault block. The reservoir—primarily a Devonian sandstone—proved to be a robust hydrocarbon system.
Buchan’s production commenced in May 1981 with the Buchan Alpha floating production vessel. Over its operational life, Buchan Alpha produced around 148 million barrels of sweet, 33° API crude oil and 37 billion cubic feet of associated gas.
Production at Buchan was suspended when the vessel reached its certification limits, leaving the remaining oil underground. Since first oil and by the time production ceased in 2017, only about 29% of the P50 estimated oil in place had been recovered, leaving significant untapped reserves for future redevelopment. The use of modern 3D seismic data and advanced drilling techniques is expected to enhance production from new infill wells across the ~600-meter oil column.
Partners expect that the new technologies can be applied to maximize production from an untouched ~230-meter section of the original oil column. They may be right about the potential value creation through the use of new drilling techniques, as some of the wells drilled into the field were vertical, and the deviated wells used very early directional drilling technologies.
Early appraisal results indicated that there were several prospects across the different blocks that compose the Great Buchan Area. Another discovery in the area that was put into production, Hannay, has been suspended since 2017. However, this field is deemed to have reached the end of its economic life.
In addition to the Buchan field, there are two other confirmed discoveries: the J2 and Verbier oil discoveries, which contain estimated mid-case gross resources of over 40 MMboe. Lastly, there are three drill-ready prospects in the area: Cortina, Wengen, and Verbier Deep. These discoveries and prospects are not interesting by themselves, but they could be economically developed thanks to the infrastructure installed for the redevelopment of the Buchan field.
Reserves and Resources
The Buchan field holds significant potential:
Remaining Reserves: Recent estimates suggest that the field harbors approximately 70 million barrels of oil equivalent (boe) in recoverable reserves. Remarkably, the resource is about 95% oil, which is highly attractive given current market dynamics.
Upside Potential: Besides the primary reservoir, the Greater Buchan Area includes several satellite discoveries (e.g., Verbier, J2) that could add incremental reserves. If these discoveries are successfully integrated into the development plan, the overall recoverable resource could expand significantly with the estimated, combined 40 MMboe. The other 3 prospects are unlikely to be drilled under the current fiscal and regulatory frameworks.
Latest Developments and Recent Events
The Buchan field’s redevelopment is now in a transformative phase, but not without its hurdles:
Redevelopment strategy: Since Jersey Oil and Gas was awarded the license for the Greater Buchan Area (GBA), it has set the stage for a modern redevelopment that includes drilling new wells, installing subsea tie-backs, and deploying a Floating Production Storage and Offloading (FPSO) unit. Jersey concluded that redeploying an existing asset offered the lowest overall cost and carbon footprint compared to a new-build solution. The Western Isles FPSO was chosen as the preferred redevelopment solution around July 2023. This specific FPSO had previously been in operation in another North Sea field, meaning its design already complied with the specifications for operating in the Central North Sea.
Political and fiscal uncertainty: In June 2024, with an early UK general election on the horizon, Buchan’s partners decided to postpone the final investment decision by about a year. The postponement is largely due to uncertainties over fiscal policy, particularly regarding the Energy Profit Levy (EPL) and its impact on project economics.
Regulatory setbacks: In September 2024, NEO Energy, one of the key partners, announced a slowdown in activities following the UK Supreme Court’s “Finch” ruling. This landmark decision mandates that environmental impact assessments must now account for Scope 3 emissions (those from the eventual combustion of the produced hydrocarbons). This has necessitated additional studies and modifications to the field’s redevelopment plan. Environmental guidelines from the UK Department for Energy Security and Net Zero (DESNZ) are also under review, further influencing timelines.
As a result, development is now expected to start in the second quarter of 2026, with first oil delayed to late 2027 or even 2028.
Companies involved
There are three license holders and a relevant stakeholder that could be of interest. Hence, investors looking to capitalize on the Buchan redevelopment have several avenues beyond just the license partners.
NEO Energy (50%)
As the operator and majority stakeholder, NEO Energy leads the technical and strategic development of Buchan. Their decisions will heavily influence the project’s timeline and technical execution. However, since it is not a listed company, it may not be of interest to public market investors. We will comment more on NEO Energy when commenting about another partner.
Jersey Oil & Gas (20%)
The GBA license is the only assets owned by Jersey. Having farmed down their exposure, they are now positioned to benefit significantly from any upside in production or reserves. Jersey was awarded sole ownership of the P2498 license in 2019. Jersey later farmed out a 50% stake and operatorship of the project to NEO Energy, followed by a 30% non-operated interest to Serica Energy. The latest balance sheet and cash flow statement are displayed below, showing that the company had £13 million in cash and deposits, which could sustain operations for more than two years at the current level of expenditure.
While Jersey sits on the bench, waiting for NEO and Serica to decide when and how to proceed with the project, it might reduce administrative expenses and extend its liquidity. However, this is oil & gas in the UK, where greed often overrides rationality. As a result, Jersey’s net cash position may lead it to explore other avenues, such as participating in new licensing rounds or using its cash for M&A. I see this as the major risk.
In fact, its Board of Directors includes some interesting profiles, with the Chairman also serving as a NED at Repsol Sinopec Resources UK Limited, which holds several licenses in the same area as Buchan and *could* divest some of its interests given the current situation in the UK. This remains highly speculative given Jersey’s liquidity, lack of inflows, and relatively small size, but who knows?
In my opinion, the most likely scenario is that the company will enter a suspension mode, waiting for Buchan’s second first oil. Any further delay to the Buchan redevelopment project will increase the likelihood of a placement.
Update 03/03/2025: Jersey has published a corporate update with several interesting points:
The project goes on with the Western Isles FPSO as the preferred option.
The project delays are confirmed and partners are awaiting for guidance issued by OPRED regarding the Scope 3 emissions in the EIA. The $20 million earn-outs are contingent on the FDP approval, which requires the preparation of the EIA.
Jersey confirms its’s evaluating a number of potential UK producing asset acquisitions, so they won’t sit and wait until Buchan development is completed.
Corporate costs have been reduced by approximately 50% to £1.5 million in 2025. This usually is not compatible with active M&A activities, which involve several consultants and experts.
Serica Energy (30%)
Serica’s entry into Buchan was completed in early 2024 for a cash payment of approximately $7.5 million (adjusted from an original figure of around $6.8 million), with additional contingent payments tied to future development milestones. We already wrote about the company last June. Since then, it has suffered several operational setbacks and continues to look for M&A opportunities.
Serica Energy: tradition meets modernity
I have recently started a position in Serica Energy (LON:SQZ) and I wanted to share here why I think it is bound to deliver positive surprises in 2024 and beyond. This post will not focus on the assets, which are not the main reason why I’ve bought some shares, but other aspects that are more appealing to me.
A brief update: If you have read the article above, you should have seen that I expected Serica’s new leadership to be more proactive regarding M&A. I thought Mercuria had assembled a deal-making team suited to quickly begin acquiring other companies in the North Sea region, but even the announced sales of Sval Energy and NEO Energy by HitecVision (oh, what a coincidence!) have not progressed in the last eight months. HitecVision made significant changes to its Board and Executive team last November, and to be honest, I don’t know how to interpret this in relation to the sale process. Nevertheless, I was too optimistic in that post about the pace of any M&A operation, and on top of this, operational issues have dragged the share price down.
Serica’s main problem has been the operational and integrity issues of the Triton FPSO, which it acquired as part of the Mercuria deal. Any shareholder is exposed to potential future headaches caused by Triton, making it a risk on its own. However, the addition of Buchan to the portfolio will diversify the asset base and reduce Triton's weight in overall production. As a result, Buchan will be a great complement to the company.
Let’s not forget that Serica is actively pursuing more M&A. Previously, they stated that their focus was outside the UK, but the strategy has changed in recent months. With the UK segment of the North Sea back on the menu, two interesting opportunities stand out—Neo Energy, as mentioned in the write-up, and Harbour’s divestments. Harbour has put its stakes in 5 licences (Armada, Everest, Lomond, Catcher and Tolmount) in the UK up for sale. Serica could bid for these opportunities, but other contenders, such as Ithaca (which merged its business with ENI UK in October), are also likely to be interested.
Going back to Buchan, Serica’s diversified asset base and experience in managing redevelopment projects offer significantly lower downside risk compared to Jersey if the project doesn’t progress. Their involvement in Buchan adds significant reserve potential, but it remains just one part of their broader portfolio. Serica will still need to carry Jersey through the development phase, which adds some pressure to the balance sheet. However, if Triton’s issues are finally resolved, the company’s other assets should be sufficient to sustain the current dividend.
Hermana Holding ASA (OSL: HERMA)
For those preferring an indirect approach, Hermana offers exposure to Buchan’s redevelopment through the selected FPSO. Hermana owns a $0.5/bbl royalty over the Western Isles FPSO. This model provides a steady, cash-flow-driven return linked to production volumes with minimal direct field development risks.
Hermana Holding ASA was created as a dedicated vehicle to hold Magnora ASA’s legacy royalty business—primarily the income streams from FPSO agreements and other oil and gas-related contracts. This separation not only enhanced transparency and allowed investors to target a pure play on royalty revenues but also enabled Magnora to focus its resources and strategy on its core renewable energy projects. Magnora retained a 30% stake in Hermana, ensuring continued alignment between the two entities. The spin-off was completed in June 2024.
As part of those legacy contracts, Hermana recently announced that it will receive a total payment of $8.6 million from Shell through its former parent company, Magnora. Interestingly, Hermana also received NOK 409 million in losses carried forward based on the relative fair value of the business transferred, ensuring the company will pay almost no taxes for many years.
The $8.6 million receivable will be paid in two equal installments of $4.3 million each and is expected to be fully settled in 2025. Hermana has a lean balance sheet with NOK 16.6 million (USD 1.5 million) in cash and no debt. Operational expenses are modest (NOK 8 million or USD 0.8 million) while management searches for additional royalties. The company trades at a market capitalization of just NOK 153 million (USD 13.5 million). Hence, Hermana may soon have an enterprise value of just NOK 38 million (USD 3.4 million). In less than three years, Hermana could start receiving annual revenues substantially higher than its current EV after receiving the payments from Shell. The wait may seem long, but it should reward patience.
However, there are still risks in any potential investment in Hermana compared to Serica. Hermana’s future is almost entirely linked to the redeployment of the Western Isles FPSO, so any delay will affect the timing of revenue. Nevertheless, this FPSO can be used for projects other than Buchan. In the unlikely event that the redevelopment is canceled (given that Serica’s farm-in occurred after the start of the UK’s regulatory and fiscal uncertainty), the FPSO could be offered to other projects in the North Sea or beyond. This may come with an even longer deployment timespan that could require a placement, but the company will not face a life-or-death situation. Thus, its risk profile is lower than Jersey’s, where a cancellation of Buchan’s redevelopment would be a major blow to the company. As a result, Hermana can be seen as a safer option.
One cannot forget who Hermana’s parent company and largest shareholder is. Magnora has a strong history of returning capital to its shareholders through a combination of regular dividend payments, extraordinary capital distributions, and share buybacks. If Hermana follows in its footsteps, shareholders should expect substantial returns once the royalty from the Western Isles FPSO begins to flow.
Conclusion
All three alternatives mentioned above would increase the exposure to the UK to any investor. That comes with pros (very low valuations and some reasonable dividend yields) and cons (taxes or regulations may go even worse for the o&g industry).
A brief summary of the three companies mentioned here will be:
Jersey: High-risk, high-reward. It’s an all-in bet on Buchan.
Serica: Low-risk, low-reward. Buchan will help reduce exposure to Triton, but the impact will be limited. The dividend is attractive.
Hermana: Low-risk, high-reward. No direct exposure to oil prices and a solid balance sheet.
The main risks remain centered on regulatory changes—particularly concerning environmental impact assessments and fiscal policy shifts under the new government—which could further delay the project and impact overall economics.
In summary, while Buchan’s redevelopment presents challenges, its substantial reserves and modern redevelopment potential make it a noteworthy asset in the complex UK North Sea oil and gas landscape. I have presented investors with three different ways to gain exposure to this project, and it is up to them to decide which best fits their risk appetite.
Disclaimer 1: the author owns shares of some of the companies mentioned in the text, which they may sell at any moment. This post has been prepared only for informative purposes. This is not investment advice.
Disclaimer 2: the photo of the Western Isles FPSO used in this article was published by Mikolaj Meller on LinkedIn