Acreage Portfolio Management

Abstract

Summary The need to manage U.K. North Sea acreage portfolios arises from fragmentation of holdings and complex partnerships. This management has generated friendly rationalization deals motivated by differences in perception of values and aimed at building up heartlands and balancing cash-flow forecasts. The business process includes identifying, evaluating, and negotiating deals. The economist plays a central role within the evaluation team and supports the negotiators. Introduction The U.K. North Sea has seen the emergence of acreage portfolio management in recent years. The resulting deals are made between companies that want to "rationalize" their acreage - i.e., to upgrade the value of their holdings through acquisitions and divestments while maintaining their overall position in the area. These companies often have well-established links within multiple joint-venture partnerships. The deals include conventional farm-ins and farm-outs and straightforward cash sales and purchases. They also include an increasing number of acreage swaps, which are a relatively new type of deal. In the distribution of prospective acreage, most of the cards have been dealt and the many players now have to negotiate among themselves to improve their hands. These negotiations have to recognize the mutuality of interest between the parties to be successful. In this game, there can be many winners, with each player finding his niche eventually. This article presents the situation in the U.K. North Sea and discusses how the deals are made and the role of the petroleum economist in the process. This article will have wider applications as other areas of the world reach maturity and look to the North Sea as a model. Background: Setting the Scene Acreage portfolio management has emerged from the distribution of license blocks among companies. Overview: U.K. North Sea Acreage. In the U.K. continental shelf, licenses are awarded by the U.K. government, mainly on a discretionary basis, in license rounds held at regular intervals. These blocks are smaller than the Dutch or Norwegian blocks. Originally the area of a block was approximately 260 km2 in the far south and 200 km2 in the far north. After subdivision through partial relinquishments and subsequent reissues, however, the average block size is now around 120 km2. This decrease in size has increased the chance that discoveries will extend across block boundaries. At the end of 1990, 668 offshore blocks or subblocks resulting from relinquishments were under license in the North Sea part of the U.K. continental shelf. Another 70 blocks were awarded in the 12th round of licensing in May 1991.