UK offshore oil and gas – What next?

The low oil price is expected to dramatically impact O&G activity on the UK Continental Shelf (UKCS), according to a Douglas-Westwood DW Monday report.

The report says that, most notably, the number of wells drilled will decrease – particularly E&A wells. In 2014, drilling campaigns were significantly smaller than forecast – only 14 exploratory wells were drilled from an anticipated 25. This is the lowest number since 1970, and, with the current oil price, an increase is highly unlikely. However, production is expected to be maintained over the short to mid-term, bolstered by sanctioned projects. Meantime operators are seeking to control costs – BP and Talisman have recently announced large job cuts and many high CAPEX developments will face delays.

Despite the downturn, the 28th licensing round (November 2014) appears to indicate continued operator interest. The UK Department of Energy & Climate Change (DECC) awarded a total of 134 licenses – fewer than the record 27th round in 2012 – but still demonstrating the ongoing attractiveness of the region. This does not mean that drilling will return to higher levels: the majority of licenses were awarded on the basis of further analysis of seismic data.

Overall, oil companies committed to just five firm wells and four contingent wells. Given the declining oil price and current unattractive fiscal regime, a lack of commitment from oil companies is to be expected. However, the lack of drilling activity still represents a significant concern for the UK industry and encouraging companies into drilling will require careful restructuring of both the fiscal and regulatory framework.

Chancellor George Osborne, in his Autumn Statement, announced plans to revise the fiscal regime and appoint a new regulator. However, given the steep decline in oil price, more needs to be done, particularly on taxation – and Lord John Browne recently suggested cutting through the tax complexity and putting it onto a corporation tax basis. However, much depends on the outcome of the general election – anything but a win for Conservatives may delay much needed reforms and suppress the UKCS O&G industry further.

 

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