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Irish Independent: Gas hunt strategy sees Island make waves in Irish offshore

EXTRACT: These deals are all about lowering risk, something which is particularly necessary in the western offshore, where Island also has some interesting acreage. In the Rockall Basin, the company is looking at a prospect analogous to the Corrib gas field – and if this proves up, Island will simply have to tap in to the infrastructure being built at huge cost by Shell and its partners.

Published: Jul 12, 2007

INTERVIEW OF THE WEEK: Island Oil and Gas chief executive Paul Griffiths

The firm’s simple business plan has won strong backing from investors

ANYONE who thought that the investor appetite for the Irish offshore had been killed by past failures should take a look at Island. By the end of this year the company will have gone through a 90m budget for drilling in the Irish offshore, a huge outlay for a small company.

It is a tribute to the persuasive skills of chief executive Paul Griffiths, a man who has spent his entire career in the oil industry and who has an abiding passion for the Irish offshore, that he was able to raise such this type of finance.

Last year, he secured investments worth GBP22m (32m) in London for exploration in the notoriously difficult Irish offshore, selling investors a business plan which looks so simple you wonder why nobody has done it before.

The answer to this is that someone did, or at least tried. Ramco bet on Seven Heads and lost. It had over-estimated the size of the reservoir and was forced to buy in additional gas to meet its contractual obligations. A risky business, then, even if there have been significant advances in exploration technology.

“It’s all part of a plan to build a viable natural gas business in the Celtic Sea,” he explains.

Demand for such a business is already there and, if successful, Island will be doing the country a big favour.

We do not even have a proper strategic gas reserve, other than the six to seven billion cubic feet of gas held for Bord Gais by Marathon in part of its Kinsale Head reservoir, enough to meet demand for a matter of days rather than weeks, let alone months.

The beauty of the Griffiths model is that because all of the production infrastructure is already in place at the Kinsale Head field, any gas found in the small fields targeted by Island can be developed quickly.

“Both of these prospects are close to the Kinsale platform and will generate cash quickly – between 12 and 18 months,” he explains, adding that he believes his fields will generate gas before Corrib gets up and running.

Gas and cash. “The fields will have the potential to generate about 2m a year gross revenue, but our operating costs are low and we have no debt – and our tax position is neutral at present,” he explains.

One of the first steps in building this gas business was to prove its capability as an offshore operator. Griffiths explains that this happened quickly, with well 48/23-3, its first well as operator. This was more of an appraisal of a known find than an outright exploration project, so it was no great surprise when it tested gas at a very respectable 13.2m cu ft of gas per day, comparable with results seen in the gas-producing region of the North Sea. This well has been suspended as a potential gas producer pending further assessment.

This was followed in July last year with its first exploration well, drilled on block 49/23 on a structure callled the Old Head of Kinsale. This, Griffiths says, was the first successful gas exploration well in the Celtic Sea for 16 years, encountering a gross gas column of some 100 ft. It too was suspended for further evaluation and this year Island returned to the structure to drill another first, a sidetracked well that tested gas at the huge rate of 47m cu ft of gas a day. Estimates suggest this find may contain up to 120bn cu ft of gas, similar in size to the Seven Heads field.

He believes these results validated Island’s stated low-risk strategy of exploring for and appraising gas prospects around existing infrastructure which, if successful, could be developed quickly through sub-sea lines tied back to the existing infrastructure at Seven Heads or Kinsale.

It may sound odd that this success did not come the way of those brave enough to drill the region in the 1970s and 1980s. Apart from Marathon’s Kinsale field, which Griffiths says was found with the first ever well drilled offshore Ireland, companies like Esso, Total, Chevron and BP sank hundreds of millions into the Irish offshore but got nothing in return. Seven Heads alone cost Esso over $100m in drill costs, and that was 30 years ago.

What has changed is not only the price of gas and oil, but advances in seismic technology and in the understanding of how reservoirs in the Irish offshore work, developments which have helped lower the risk attached to exploration in the region.

Island is not alone and it has struck up alliances with two of its fellow explorers in the Irish offshore.

First, it reached an agreement with Providence on the sharing of a drill rig and a common strategic study on the potential joint development of the companies’ Celtic Sea oil assets. The study will focus on the potential use of a floating production system to tap in to the small oil fields on each company’s acreage. This was followed by Providence taking a small 1.5pc stake in Island, though Griffiths did not reciprocate as he “had enough risk exposure to the Irish offshore”.

After the Providence deal, Island announced a co-operation agreement with EnCore Oil covering the future development of their assets here and in the UK.

These deals are all about lowering risk, something which is particularly necessary in the western offshore, where Island also has some interesting acreage. In the Rockall Basin, the company is looking at a prospect analogous to the Corrib gas field – and if this proves up, Island will simply have to tap in to the infrastructure being built at huge cost by Shell and its partners.

It is also examining the production potential of the old BP find, the Connemara oil field and has held exploratory discussions with potential suppliers of floating production facilities who might be interested in taking an equity stake in any development.

There are other interests, in Holland and Morocco, but the basic Island story is an Irish one. No surprise, then, that he welcomed the hint from the International Energy Agency to our new energy minister that the licence terms should not be made any more restrictive.

He points to Norway as an example. Here, a country where the odds of finding something are far better, the government guarantees to refund 75pc of your drilling costs if you fail to find anything. Generous it certainly is, but it has delivered huge dividends for the Norwegians. Mr Griffiths is just trying to achieve something similar for Ireland.

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