Underlying structural issues with the North Sea exploration sector will need to be ironed out before the true impact of the latest licensing round and other recent UK licensing rounds is known, says oil and gas advisory firm Hannon Westwood.
Licenses offered in the latest licensing round were announced 6 November by the UK Government. The headline figures showed that there were 134 licenses covering 252 blocks awarded, in the first tranche of the round, to 81 companies, with a further 94 blocks held back for further environmental assessment before a future award is considered.
The awards have resulted in 10 new well commitments, six of which are firm and should be drilled within the next four years and a further four which are contingent on further work firming up the potential of the identified prospects.
The result of the 28th Round compares with 167 licenses covering 330 blocks, awarded to 80 companies, in the first tranche of awards in the 27th Licensing Round, the most successful round by acreage awarded in the 50 year history of offshore UK exploration.
The result of the 28th Round makes it the fifth most successful in terms of the number of blocks awarded and companies participating, however, in terms of the number of wells committed it is the lowest since the 22nd Round in 2004, when the price of Brent crude was around $40/bbl.
Four of the firm committed wells are in areas that could require high-pressure, high-temperature operations (HPHT), although there are also shallow targets in these blocks similar to the Marconi discovery recently announced by Total and BP.
The committed seismic activity will lead to five new 3D surveys and three new 2D surveys, all of these in frontier areas or areas adjacent to the mature basins where there is little existing coverage, but does not address the challenge of drilling new wells on new seismic data in order to maximize the value of technological advances.
"As a sign of the times, the number of Promote Licenses has almost tripled from the previous round with 83 being awarded, compared with 29 in 2012," says Hannon Westwood. "There are a third of the number of Frontier Licenses awarded, though those that have been are in areas that are particularly virgin."
A Promote License is a low cost entry route for small companies to work up acreage and find a larger financially and operationally capable partner to take over the license for the remaining two years of the initial term.
"Promote Licenses that are converted in this way then normally become subject to a firm well commitment, but in recent times many of these licenses have been relinquished without conversion as funding for exploration and competition for funds in the internationally integrated companies sees production harvest in the UK but exploration activity migrating overseas where the materiality is often seen as greater," says Hannon Westwood.
"The recent declines in the sector have been dramatic and not all have come from the recent fall in oil price," the firm says. "The sector has been struggling with underlying rises in costs and decreasing profitability in the UK for some time, a sector which now has some of the highest costs in the global industry, and this at a time when fewer reserves are being discovered from fewer wells on smaller and riskier exploration prospects. The all-time low number of wells that will be drilled in 2014 is a symptom that all is not right in the sector, particularly when it is compared with Norway where the last two years will have seen record growth in well numbers."
"The coincident announcement of a CEO for the newly created independent industry regulator, the Oil and Gas Authority, is a fulfillment of one of the planks of the recent Wood Review which was established by government to provide a means of Maximizing the Economic Recovery of the UK’s remaining hydrocarbon resources in a cost effective and strategic manner. This regulator starts operations on 1 January 2015 and will, for the first time, have real powers that can be used to boost activity or sanction underperforming license holders. With other initiatives that are being put in place to tackle the underlying weaknesses in the sector highlighted in the Wood Review, such as a full understanding of the potential of the underexplored areas of the continental shelf as well as what remains in the very mature areas, control on costs and a competitive commercial environment, the government believes the efforts made to tackle the issues will ultimately be good for jobs and good for future tax revenues.
"Hannon Westwood believes that historic competitive practices between oil companies in the UK, which are more combative than collaborative are part of the problem. With smaller discoveries requiring export through an aging and costly to maintain infrastructure making development uneconomic there needs to be co-operation to ensure these remaining reserves can be cost effectively captured. The Chancellor’s autumn statement due on 3 December is widely expected to contain fiscal incentives aimed at stimulating hydrocarbon exploration and we are hopeful that this will also entail a simplification of the overly complicated tax regime currently in force. If this comes true then we would expect more wells to be drilled on the newly awarded 28th Round acreage than would appear to be the case from the announced committed work programs would convey."
Hannon Westwood CEO Ian Norbury says: “This result is a great endorsement of the faith that companies still have in the UK, however all parties will have to step up to the plate to ensure that the energy created by the Wood Review can be translated into the enthusiasm to explore. Government as well as the oil companies will all have their part to play in ensuring that the UK can retain its place among the global oil producing nations. The Chancellor’s autumn statement will be key in determining whether the tax regime in the UK, one of the most complicated in the world, can be simplified and used to incentivize and therefore energize the sector. If we get it right then the oil and gas industry will continue to be a long term contributor to the UK economy, supporting thousands of jobs and exporting expertise across the world.”