UK offshore oil industry faces biggest challenge in 50 years

Oil & Gas UK has published its Activity Survey 2014, highlighting the contradictions currently at play in the UK offshore oil and gas sector.

The industry trade body’s annual report on oil and gas exploration, production and investment activities forecasts 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.

The report also points to better than expected production last year. New developments and an increased focus on production efficiency saw an average of 1.43 million barrels of oil equivalent per day (boepd) produced in 2013, eight per cent lower than in 2012 but a significant improvement on the average yearly decline of 15 per cent experienced between 2010 and 2012.

Production is expected to pick up further in 2014 and, with 25 new fields expected to come on-stream over the next two years, production is projected to rise gradually to around 1.7 million boepd by 2018. By then, however, 40 per cent of production will come from new field developments, underlining the continued importance of finding new reserves and bringing them into production.

In contrast, with 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 & Climate Change (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.

Oil & Gas UK chief executive, Malcolm Webb, reflects widespread concern on exploration: “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 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 per cent 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 per cent 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 said: “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.”

Malcolm Webb concludes: “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.”

The Oil & Gas UK Activity Survey 2014 is based on the latest data supplied by all exploration and production companies operating in the UK. This provides a uniquely well informed insight into the opportunities and potential of this vital sector of the economy.

See the report here.