UK oil chief issues ‘crisis’ warning over decline in North Sea oil exploration

oil rigThe chief executive of the UK Oil and Gas trade association has warned that the UK is facing a ‘crisis’ over the decline in North Sea oil exploration.

Commenting on Wood Mackenzie’s annual review of UK upstream oil and gas, which followed on the heels of data released by the Department of Energy (DECC) on drilling activity in the UK Continental Shelf, Malcolm Webb said:

 “Both the Wood Mackenzie review and the latest DECC figures clearly illustrate the parlous state of exploration on the UKCS.  We are just not drilling enough wells in UK offshore waters and those that we are drilling are not finding enough oil and gas.  

“This worrying trend has been growing for some time.  It started in 2011 with a 50% drop in the number of exploration wells drilled, which has since failed to recover.  Our members tell us that drilling rig availability and the ability of smaller companies to secure equity capital are major hurdles.

“In any event, it is clear that we now face a crisis which demands urgent concerted action by DECC, HMT and the industry, if we are to maximise economic recovery of our offshore oil and gas resource and sustain future production. “

Published jointly in Edinburgh and Houston, Texas,  Wood Mackenzie’s annual UK upstream oil and gas review concludes that 2013 was a mixed year for the industry. Capital investment continued to increase, however, this was set against the backdrop of project delays, production underperformance and poor exploration success.

Wood Mackenzie says there are promising new fields due onstream and an increase in UK focused deals expected in 2014.  The year ahead could prove to be pivotal with an improvement in exploration success and production performance crucial to ensuring the longevity of the sector.

Lindsay Wexelstein, Head of UK Upstream Research at Wood Mackenzie, explained: “Last year, capital investment reached the highest level in real terms since the mid-1970s. We anticipate £21.3 billion will be spent on capital investment across 2013 and 2014.

“However, spiralling costs did put pressure on project economics and caused some developments, such as Bressay and Rosebank, to be put on hold.

“High levels of activity and stretched resources have also led to project delays and only 13 new fields were brought onstream in 2013, which was lower than the 21 expected at the start of the year.” 

Webb added: “The paradox is that the UK continues to record annual levels of capital investment at over £13 billion. On the one hand we have seen tremendously strong development activity from a small number of large, highly robust projects plus a greater number of smaller ones, only made commercial by targeted reductions in unsustainably high tax rates, ranging from 62% to 81%. 

“Meanwhile, production from existing fields has fallen significantly and the total number of exploration wells has dropped to just 15 in 2013, according to the latest DECC data.

“We are simply not putting enough reserves into the hopper for future development.  Unless we do something about exploration now, we face a risk of a collapse in capital spend in a few years’ time and hence lower future production.   

“There are substantial volumes of oil and gas still to recover from the UK continental shelf but action must be taken now to avoid billions of barrels being left in the ground.”

In November, Sir Ian Wood set out his prescription for the industry in his interim report to the Secretary of State for Energy, Maximising Economic Recovery for the UK. This proposes a new and strongly resourced oil and gas regulator – based in Aberdeen and working in co-operation with the Treasury and the industry towards the shared goal of maximising economic recovery of the substantial remaining UK oil and gas resource.  

Final recommendations due this Spring from the Wood Review could ultimately change how the industry is regulated and the Scottish independence referendum could lead to the division of the UK’s North Sea assets

Oil & Gas UK is the leading representative organisation for the UK offshore oil and gas industry with more than 400 production companies and contractors as members.

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