The latest annual North Sea oil and gas industry Activity Survey has highlighted current contradictions in the sector (see chart, below)
On the one hand, the Oil and Gas UK trade association report confirms capital expenditure of around £13 billion in 2014, the second highest year for investment on record with spending likely to remain above £10 billion next year, following a record £14.4 billion in 2013.
But on the other hand, on drilling and exploration, the industry is facing its biggest challenge in 50 years. Only 15 exploration wells were drilled in 2013, according to figures from the Department of Energy (DECC), continuing a steep downward trend since 2008 when 44 exploration wells were drilled. Exploration over the past three years has been at its lowest in the history of the UK Continental Shelf (UKCS) and in 2013 replaced just 80 million barrels.
This is just one of the apparent contradictions in the UKCS today. There is record investment, a quarter of which is accounted for by just four large fields. The production outlook, boosted by the introduction of field tax allowances, looks encouraging, yet the survey finds fewer barrels in production, under development or being considered for investment than last year.
Of the 10.7 billion boe currently in company plans, four billion boe of these have yet to secure investment and proven reserves have fallen sharply from 7.1 billion boe in 2013 to 6.6 billion boe in 2014. Unless the rate of maturing new developments increases, investment is expected to fall from £13 billion in 2014 to around £7 billion by 2016 to 2017.
The report reveals the positive effect tax allowances have had in driving investment on the UKCS. Over half of all capital expenditure in 2014 is in receipt of a field allowance. Of the 26 brownfield projects initiated in 2013, 23 benefit from the Brown Field Allowance. While total investment of £39 billion is currently approved on the UKCS, there is another £35 billion awaiting sanction which could deliver nearly three billion boe. These projects have a greater than 50% chance of proceeding, but being marginal are particularly sensitive to any cost increases.
The report also highlights continued rising costs. Operating expenditure rose by 15.5% to an all-time record of £8.9 billion in 2013 and is anticipated to rise further to around £9.6 billion in 2014. Average unit operating costs have risen to £17 per boe, while the number of fields with an operating cost greater than £30 per boe has doubled in the last year.
Malcolm Webb, Chief Executive, Oil & Gas UK, commented: “Even if currently planned wells proceed, the rate of drilling is still too low to recover even a fraction of the estimated 6-9 billion barrels yet to be found.
“Britain’s waters contain an abundance of oil and gas yet to be found and it is critical we find the means to turn the current state of exploration around. Rig availability and access to capital are the two main barriers noted by our members.”
“This industry is being challenged on a number of fronts. It is crucial to address rising costs and improve our capital efficiency. However, without greatly increased exploration success, more conversion of discoveries into production, a significant improvement in productivity, and a willingness to deploy enhanced oil recovery, we will not realise the full economic potential of our country’s natural resources.
“Sir Ian Wood’s Review, which published its Final Report earlier this week, is therefore a most welcome and timely intervention with its recommendations for new and more dynamic approach to regulation and greater collaboration from the Government, including HM Treasury, and industry.”
“The UK’s offshore oil and gas industry is the country’s largest industrial investor, paying more tax into the Exchequer than any other sector. In order to sustain this sector’s sizeable economic contribution to Britain, it is vital that a competitive environment for investment is sustained.”