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Row breaks out between North Sea partners as Cairn downgrades Enquest's Kraken field

In barrel terms, Cairn cut off around 6.8mln from the field’s crude endowment
oil rig
Kraken started production in 2017

A dispute has broken out between Cairn Energy PLC (LON:CNE) and EnQuest PLC (LON:ENQ) over the value of a newly opened field in the North Sea.

The two companies are joint owners and partners in the Kraken heavy oil field, located in the east Shetland basin, but they don’t agree on the amount of oil reserves that lie there.

Cairn is the minority stakeholder in Kraken, with a 29.5% interest, and with its annual results told investors that a reserves downgrade at Kraken had led an impairment of some US$166mln.

In barrel terms, Cairn cut off around 6.8mln from the field’s crude endowment.

As a response, Kraken operator EnQuest separately issued a statement disputing Cairn’s view of the field’s reserves.

EnQuest instead told its investors that its estimate of reserves remains “materially unchanged”.

Nonetheless, in Tuesday morning’s dealings, EnQuest shares slumped about 10% lower to 16.67p, whereas Cairn’s price was down 3.95% at 168.6p.

UBS analyst Amy Wong, in a note, said Cairn’s move to impair the field's reserves was “not surprising given the cuts to Kraken production forecasts over the last 12 months.”

Divergent forecasts for future production

EnQuest, in its statement, noted that the partners “utilise different technical approaches to Kraken production forecasting in preparing their reserve profiles”.

For context, Kraken struggled somewhat (against previous expectations) during 2018, with output rates impeded by problems with the field's floating production vessel, weather disruptions, and higher than expected volumes of water flowing with the crude.

So, while the co-owners may perhaps be able to agree on the ultimate volume of oil in the ground beneath Kraken they (or their auditors) have different opinions over how much will be recovered in the future and thus come up with different reserve numbers.

EnQuest, which owns 70% of Kraken and reports its 2018 results on 21 March, today said it does not recognise any impairment charge related to the Kraken asset.

In 2018, Kraken produced an average of 30,300 barrels of oil per day.

Last month, EnQuest told investors that it is forecasting Kraken’s production for 2019 will be between 30,000 and 35,000 bopd.

Investors will presumably now have to watch the performance of the Kraken field closely over the coming year and see which (if any) partner chooses to course correct.

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