More pain ahead for UK offshore E&P, survey warns

Offshore staff

LONDON – Exploration offshore the UK remains at an all-time low with no signs of an upturn ahead, according to Oil & Gas UK’s 2016 Activity Survey.

Of greatest concern, the association adds, is the collapse of investment in new UK offshore projects. This year the upstream industry is expected to approve less than £1 billion ($1.41 billion) of total expenditure on new projects, against the more typical £8 billion ($11.3 billion) committed annually during the last five years.

The association has urged the UK government to reform the special taxes paid by the industry in order to attract investment back into the basin and minimize loss of capacity during the current downturn.

Sector-wide action has brought operating costs down by one-third from $29.30/boe in 2014 to $20.95/boe in 2015, the survey found, aided by a 10% increase in Britain’s oil and gas production to 1.64 MMboe/d (the first in 15 years).

This year costs across the UK continental shelf (UKCS) look set to fall by a further 20% to around $17/boe, a 42% improvement in just two years.

However, pressures on the sector have risen as oil and gas prices have declined, with revenue from production last year sliding 30% to £18.1 billion ($25.54 billion).

If the oil price remains at around $30 for the rest of 2016, 43% of all UKCS oil fields will likely operate at a loss, the survey suggested, hindering further exploration and capital investment while making additional cost improvement even more imperative.

Oil & Gas UK chief executive Deirdre Michie said: “The UKCS is entering a phase of ‘super maturity.’ While the industry’s decades of experience provide great depths of knowledge and expertise, which can be applied to recover the still significant remaining resource, the report highlights the challenges that the falling oil price poses in our capability to maximize economic recovery of the UK’s offshore oil and gas.”

During 2015 the success per exploration well drilled in UK waters was the highest for 10 years, but only 13 exploration wells and 13 appraisal wells were drilled in 2015.

In 2016, the association predicts a total of seven to 10 exploration wells and six to nine appraisal wells.

Last year capex across the industry was down to £11.6 billon ($16.37 billion), compared with £14.8 billion ($20.88 billion) in 2014, with the total likely to slip to around £9 billion ($12.7 billion) this year.

At the same time, UK decommissioning activity is accelerating. The number of fields set to cease production between 2015 and 2020 will likely exceed 100, while reserves reported by companies for potential future development have fallen from 10 Bboe to 8.8 Bboe, as more projects are deemed uncommercial.

Michie said: “The basin has to compete fiercely in the global market to attract price-constrained capital to the UK. A coherent approach by the industry, regulator, and government will be critical to boost the industry’s competitiveness and its investors’ confidence.

“Together we need to transform the basin into a highly competitive, low tax, high activity province, which is attractive to a variety of operators and sustains and supports the important supply chain based here. It is absolutely crucial that the recently announced Aberdeen City Region Deal and funding for the Oil and Gas Technology Centre, which will help support the industry in the longer term, is accompanied by the right signals in relation to the tax regime.

“The industry currently pays special taxes at a headline rate of 50% (67.5% for fields paying Petroleum Revenue Tax).  A significant permanent reduction in those rates is now urgently needed, a move which would be consistent with HM Treasury’s ‘Driving Investment’ plan for fiscal reform. This should be combined with additional measures to help unlock the late-life asset market and encourage exploration by permanently removing the special taxes from all discoveries made over the next five years.”

Improving the effectiveness of the Investment Allowance, she added, would stimulate activity in the short term and attract fresh investment.


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