Pipeline of UK Offshore Developments Looks Healthy, Says Wood Mackenzie

Wood Mackenzie says the pipeline of new projects and developments likely to go ahead offshore UK is looking healthy. Fifty fields, containing over two billion barrels of oil equivalent, are making significant progress towards development sanction. However, maintaining this pipeline at current levels will require significant exploration success and continued investment in the sector.

Wood Mackenzie’s upstream research team has completed its annual proprietary analysis of the UK’s “probables” portfolio. These are projects included in companies’ development plans, which although not yet sanctioned, Wood Mackenzie believes ultimately will be developed. Ms. Lindsay Wexelstein, Wood Mackenzie’s UK Lead Analyst explains the importance of the portfolio; “Overall, the development of the probables portfolio is key to slowing the decline of UK domestic production and is expected to account for a third of production by 2019. The development of the probable fields in the West of Shetlands are particularly important, as these are expected to account for 15% of UK production by 2022. However, this is not without risk given the particularly challenging nature of some of the large projects planned for development.”

Although Wood Mackenzie concludes that the picture is healthy, it cautions that maintaining this level of probable developments will become increasingly difficult; “While we expect the number of fields progressing towards development sanction to stay high, overall reserves will decline due to the rising number of smaller fields being developed. Although there are a number of other, currently non-commercial discoveries which may progress to development, significant future exploration and appraisal success will be required to maintain activity at current levels,” says Wexelstein.

The key findings of Wood Mackenzie’s analysis are:

* The current probable development portfolio contains the largest number of fields since 1995: 37 projects – comprising 50 separate accumulations. The size of the portfolio is positive for the UK upstream industry and shows that operators are actively moving developments forward. It also reflects continued confidence, although this has been impacted by the increase in Supplementary Charge earlier this year.

* Companies returned to exploration drilling in 2010 and seven of the fields added to Wood Mackenzie’s probable portfolio have been discovered since the beginning of last year. However exploration activity has been lower in 2011 and consequently fewer new discoveries are likely to be added to the portfolio in the next year.

* The oil and gas prices required for fields to make a return of 10% has risen as a result of an increase in development costs and the increase in Supplementary Charge tax.

* In line with the increased size of the portfolio and rising costs, total development spend on these projects is higher than 2010 levels at US$38.2 billion in 2011 terms. Technically challenging projects account for a fifth of the total number of developments. Over half of the total capital expenditure is associated with heavy oil; High Pressure/High Temperature (HP/HT); tight gas fields; and developments in the West of Shetlands.

* As a result, development costs per barrel of oil equivalent (boe) are at an all time high of US$17/boe – driven by the heavy oil capital investment and West of Shetlands developments. A higher oil price and a ramp up in development activity may push costs up further still over the next few years.

* The majors hold over 55% of reserves and will play a key role in driving forward challenging, high cost developments such as Mariner, Bressay and Rosebank. While the majors’ position remains fairly similar to the last portfolio, the number of small companies operating probable developments has increased by 50% on 2009 levels.

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Source: Wood Mackenzie, October 14 , 2011