Oil & Gas UK warns about the impact of record low drilling activity

Oil & Gas UK, a representative body for the UK’s offshore industry, on Tuesday warned the sector is at a crossroads as it published its Economic Report 2018. 

Oil & Gas UK highlighted findings which show an improved landscape for the sector, with reduced costs, competitive fiscal terms, improved operational performance and more stable oil and gas prices.

However, Oil & Gas UK Chief Executive Deirdre Michie on Tuesday warned about the impact of record low drilling activity and a potentially damaging supply chain squeeze.

Speaking to an audience of industry leaders, Deirdre Michie said the Economic Report 2018 shows investment conditions remain key to the long-term future of the North Sea.

It comes as the report shows that operating costs have halved and are now being sustained at around $15/boe and production is on track to be 20 percent higher than in 2014. In addition, more major new projects have been sanctioned by exploration and production (E&P) companies so far this year than the last two years combined.

 

Exploration activity lowest since 1965

 

However, this recovery is yet to be felt across the whole of the sector, with the report noting that four exploration wells were spudded in the first eight months of the year – and even with more wells to come, total exploration activity this year is expected to be the lowest since 1965. The capacity of the supply chain has been reduced in recent years, as revenues and margins continue to be squeezed.

By 2021 there could be capacity constraints emerging across the supply chain, as a result of the reductions in recent years and an expected increase in new development activity at home and abroad. The constraints are expected to be felt most across drilling and wells services and within engineering and subsea sectors.

 

Investment conditions key to long-term future

 

Speaking ahead of a report launch to industry leaders in Aberdeen and London on Tuesday, Michie said: “Industry is emerging from one of the most testing downturns in its history. However, the steps that have been taken by industry, government and the regulator have delivered tangible results.

“Despite the improvements seen in recent years, we find ourselves at a crossroads.  Record low drilling activity, coupled with the supply chain squeeze, threaten industry’s ability to effectively service an increase in activity and maximise economic recovery.

“The UK Continental Shelf is a more attractive investment proposition – our challenge now is to take advantage of this.

“We have to drive an increase in activity while continuing to find and implement even more efficient ways of working which support the health of supply chain companies whilst also keeping costs under control.

“It shows that investment conditions remain key to the long-term future of the North Sea industry.

“Choosing the correct direction of travel is critical to securing our ambition for the future, outlined in Vision 2035. The sector deal is a further important step in delivering this vision.

“Essential for security of energy supply, supporting hundreds of thousands of skilled jobs and contributing billions to the economy, this is a vital industry. As our Economic Report shows, with the right stewardship across the industry, it will continue to play a leading role for many decades to come.”

 

Preserving low-cost environment 

 

Commenting on the findings of Oil & Gas UK’s 2018 Economic Report published on Tuesday, Shaun Reynolds, Partner and head of the oil and gas transaction services team at Deloitte in Aberdeen, said: “Whilst production remains strong, which is testament to the resilience of the North Sea operators and supply chain, there is a strong feeling across the industry that we cannot become complacent following an uptick in the oil price. In particular, a key issue persists around the long-term impact of lower levels of exploration and appraisal drilling.”

He added: “It is imperative that we preserve the current low-cost environment, but with aging infrastructure and the possibility of a capacity pinch-point in the next few years, that will be a challenge. The industry should continue to incentivise innovative investment and reward those in the supply chain who work smart to maximize efficiencies and results. This is vital as a number of fields in the United Kingdom Continental Shelf (UKCS) will attempt to progress through the development process in the next few years and, if sanctioned, will be of massive significance to the UKCS and the wider economy, of which oil and gas remains a critical component.”

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