Plummeting exploration is threatening the future of North Sea oil

Oil price crash and decline in production have led to historical lows in exploratory wells being sunk

Danny Lawson/PA Wire An oil rig in the North Sea
An oil rig in the North Sea

Last year was a new record for investment in the North Sea with some £14.8bn spent on new field developments and further £9.6bn spent on running existing assets.

This has arrested the long-standing decline in production and will help lead to a rise in from 2014’s 1.42m boepd (barrel of oil equivalent per day) over the coming years.

But these seemingly impressive figures, unveiled last week, mask a much darker picture and one which seriously threatens the industry’s long term future.

The industry sustained a negative cash flow of £5.5bn due to some major cost overruns on existing projects and plummeting revenues, as the oil price halved.

More worryingly, the number of exploration wells dropped to a record low of just 14 last year following 2013’s previous record low of 15, and if no action is taken by 2018 investment could be down to £2bn a year, says Oil & Gas UK.

Between eight and 13 exploration wells are forecast for this year as price uncertainty adds to the difficulty explorers have in accessing capital. This is all a far cry from 2008 when 44 wells were drilled.

The seriousness of the situation was summed up last week when Oil & Gas UK unveiled its annual activity report to industry delegates in Newcastle.

Andy Buchanan/PA Wire An oil rig in the North Sea
An oil rig in the North Sea

Adam Davey, Oil & Gas UK economics and market intelligence office, said exploration drilling has fallen to its lowest level since 1965.

He said: “Over the last three years the amount of new reserves recovered have been 150m boe, which is the lowest ever identified in the history of the UKCS.

“In the last few years there has been no new wildcat drilling, no exciting new opportunities identified and that is something we must address. We need to look at more high-risk, high-reward opportunities.”

The United Kingdom Continental Shelf (UKCS) has delivered almost 40bn barrels since production began over 40 years ago and last year’s Wood Review estimated there are between 15bn and 24bn barrels left.

Some 10bn of this is in oil companies plans leaving up to 14bn barrels still to be discovered.

The last find of any significance was in 2008 with the Culzean field (an estimated 100m boe) and this is in stark contrast to the success of the Norwegian industry which discovered one of the basins most impressive ever finds in 2011.

The Johan Sverdrup field will start producing in 2019 and is said to consist of between 1.8 and 2.3bn boe. It borders the UKCS in the north-central North Sea and is close to one of the UK’s largest fields - Brent – which gives its name to the global oil price.

Brent began producing in 1976 and has since delivered over 4bn boe, but with its reserves depleted decommissioning will get under way this year.

Mike Tholen, economics director Oil & Gas UK, believes there is the potential for a similar discovery to be made on the UKCS.

“The lack of exploration is very frustrating as there is still a lot of oil and gas out there. I know of at least one company which believes there is another Johan Sverdrup out there and will begin looking for it in 2016; the challenge is ensuring all is done to encourage this activity,” he said.

Mr Davey went on to say the 2008 financial crisis and the Government 2011 Budget tax raid had caused serious harm to drilling operations.

“Exploration is easy to cut. Just as we were beginning to recover from the financial crisis the industry was knocked by the tax increases in 2011,” he said.

Chris Radburn/PA Wire Chancellor George Osborne
Chancellor George Osborne

In the 2011 Budget George Osborne increased the supplementary charge by 10%, but following some angry representations form the industry the Coalition subsequently introduced a series of field allowances.

These allowances encouraged the spate of investment the industry has witnessed in the last three years, with many developments being on fields which had been known about for some time.

For example the allowance on heavy oil fields has seen Statoil move to exploit the Mariner field, whose reserves have been known about since the 1970s.

The impact of these new start-ups mean that by 2020 over 50% of UKCS oil and gas will come from fields started since 2012.

This recent investment splurge has seen demand outstrip supply leading to a 50% rise in costs and in an environment of falling prices, 25% of fields are now making a loss.

Mr Tholen believes there needs to be a concerted effort to use the most recent surveying technology to remap the basin.

The introduction of 4D seismic technology, which can monitor real-time movement of reserves, has been a major stride forward for the industry.

Mr Tholen believes a new levy on companies bidding for new licences could contribute to a new seismic mapping drive across the basin.

In the Autumn Statement the Government said it was looking to fund further seismic surveys on the UKCS and there is expected to be a further announcement in this month’s Budget.

With exploratory wells costing in the region of £40m each there has been some pressure on the Governemnt to allow companies, who see exploratory wells come up dry, to write this off against tax, as the Norwegians do.

However Mr Tholen believes this will be unlikely to come forward in the Budget as the Government is currently looking at other ways to help the industry.

The Autumn Statement cut the supplementary tax rate from 32% to 30% with the Government saying it was looking at the introduction of a basin-wide investment allowance.

Chief Executive of Oil & Gas UK Malcolm Webb speaking during the Summit
Chief Executive of Oil & Gas UK Malcolm Webb speaking during the Summit

Oil & Gas UK met with the Chancellor last week and there have been reports that the Government may well move on this.

This could lead to the scraping of the current patchwork of field allowances to be replaced by a single investment allowance which could cut tax rates by up to 30%.

At the moment some fields are taxed at 81% - this includes corporation tax of 30%, a supplementary tax of 30 % and a further tax on those fields started before 1992 of 19%.

Mr Tholen believes the new Oil and Gas Authority (OGA), head by Dr Andy Samuels, will press to ensure that seismic date is available to all parties.

Dr Samuels last week released his findings on how he wants to drive forward the policies outlined by the Wood Review to ensure all is done to maximise the recovery of all remaining reserves.

On drilling he said: “There is a significant prize available if drilling efficiency can be improved. Extended reach wells, for example, can considerably improve the recovery and economics of field developments. A key success factor is the ability to drill more technically challenging wells in a tightly controlled, reliable and more cost efficient way.

“There is little doubt that significant potential remains in a wide range of highly petroliferous UKCS basins, both in the more mature areas of the Northern, Central and Southern North Sea, but also across frontier areas and new plays.

“The OGA believes the lack of seismic is a fundamental barrier to exploration in these regions and part of the work of the OGA will be to encourage programmes of seismic acquisition in these areas.”

Outgoing Oil & Gas UK chief executive Malcolm Webb last week sounded a sombre note. He said: “Annual investment in sanctioned projects alone is forecast to decline rapidly and could collapse to £2.5bn by 2018.

“Equally alarming is the three-year (2015-17) outlook for projects yet to get company sanction, in which planned investment has fallen from £8.5bn in last year’s survey to just £3.5bn in current forecasts. The basin is not generating new projects and as a result, there is very little fresh investment.”

But Mr Tholen added: “The oil companies have not given up. The basin is not over yet. There are reserves are out there and we should not give up on the prize.”

Follow Peter McCusker on Twitter @mccusker60

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