Uncertainty, high costs and low exploration rates are continuing to hamper the North Sea, according to a report published today (10 October).
Business advisory firm Deloitte’s Petroleum Services Group’s report says that exploration rates remain low, deal activity is substantially lower than the same time last year, and just one new field development has been approved.
Derek Henderson, senior partner in Deloitte’s Aberdeen office, suggests the drop in deals may be down to North Sea operators continuing to wait for further clarity about the future of the UK Continental Shelf (UKCS).
In particular, firms are waiting for more detail about the implementation of the Wood Review, including formation of the Oil & Gas Authority – a new regulator for the North Sea - and the outcome of a full review of the North Sea’s taxation regime. Both are due to be detailed in the UK Chancellor’s Autumn Statement on 3 December.
The problems have been mounting for some time, however. Talking at the SPE’s Drilling Automation seminar last week, Andy Leonard, technology consultant to industry body Oil & Gas UK said the industry was not on a sustainable trajectory, due to its high cost base, falling production rates and production efficiency and low exploration rates, all set against a back drop of record spending.
According to Deloitte’s report, four deals were announced offshore UK in Q3 2014. This is slightly down on the five transactions reported in Q2 2014 and substantially lower than the 14 registered during Q3 2013.
One field had been approved on the UKCS in Q3 2014, down on the five reported the previous quarter. However, this was consistent with the same period last year when just one field received development approval.
Some 11 exploration and appraisal wells were drilled during Q3, up on the seven reported in the previous three months. This is consistent with the 11 announced during the same period last year.
Graham Sadler, managing director of Deloitte’s PSG, said that although the number of new wells drilled was higher this quarter compared with the previous three months, the figures have been at a steady low for some time.
He said: “While it’s encouraging to see an increase in the number of new wells drilled this quarter, we are starting from a low base. Until we see the incentives required to encourage further exploration and appraisal activity, drilling could remain muted in the short to medium term.
“During this period of transition, costs have remained high for North Sea firms, access to finance has remained difficult and the price of oil has dropped to as low as US$95 this quarter. This combination of factors continues to make the economics of extraction more difficult for operators.”
Henderson said: “The industry continues to wait and see how the future of the North Sea will take shape. This is a particularly interesting year for the UKCS as it goes through a period of transition. There remains much change on the horizon and, as a result, many companies will be biding their time.
“All eyes will be on the Chancellor’s Autumn Statement, where industry will be looking for measures which support the challenges of operating in this mature basin. Having spoken to a range of investors in the North Sea*, we know that a fiscal regime which is more predictable, with a lower tax burden is key for improving investor confidence. Incentives which will encourage exploration and appraisal activity, as well as new entrants to the region, are also a vital part of the equation.
“Ultimately, the UKCS needs to be internationally competitive if it is to attract the investment it requires to boost its future prospects. We’ve made all of these views clear in our submission to the fiscal consultation. This is the most important Autumn Statement for some time now, as it could be the last chance to get the fiscal regime right.”
Read more: North Sea tax review welcomed
Subscribe
