High costs and regulatory and fiscal uncertainties could have caused a drop in exploration and deal activity on the UK Continental Shelf (UKCS), according to business advisory firm Deloitte.
The firm’s Petroleum Services Group (PSG) says operators were adopting a “wait and see” approach, as they await potential changes to the industry resulting from the Wood Review and a recently announced review of the North Sea’s fiscal regime.
Deloitte said there were just seven exploration and appraisal (E&A) were drilled on the UKCS in Q2, significantly lower than the 12 wells drilled in Q1 and the 17 drilled in Q2 2013.
There were also fewer deals completed in Q2, compared with Q1, with just five UKCS deals announced, down from the 10 in Q1, and 12 in Q2 2013. There were no farm-ins reported at all in the last three months, Deloitte added.
Deloitte’s report followed an announcement by Chevron that it was cutting staff in Aberdeen, its UKCS operations centre. The firm, which last year delayed its West of Shetland Rosebank project to improve the project’s economics, said, following a “periodic organizational review,” it expects to cut about 225 jobs, to include contractors, employees, and expatriates. Despite record spending levels on the UKCS, with BP investing in Clair Ridge and Quad 204, Maersk developing Culzean, Total expanding its Elgin Franklin hub, Nexen developing Golden Eagle, EnQuest developing Kraken and Statoil progressing the Mariner development, among others, there have been projects shelved.
Derek Henderson, senior partner in Deloitte’s Aberdeen office, said that the North Sea industry has been grappling with rising operating costs, which was having an impact on activity and investment decisions, particularly given the maturity of the region.
The UK’s oil and gas industry is also waiting for the implementation of recommendations made in Sir Ian Wood’s UKCS Maximising Recovery Review, which included among its propositions the introduction of a new regulator – the Oil and Gas Authority.
Combined with the review of the North Sea’s fiscal regime, which was announced in last March’s UK Budget, Henderson says oil and gas firms may be adopting a “wait and see” approach until there was a better understanding of all the these changes and their impact.
“There were many recommendations made in Sir Ian Wood’s final report, and it’s likely that the industry could be pausing until it has a better understanding of the impact of these, and the effect on the long term future of the North Sea, before making any big investment decisions,” Henderson says.
But, rising costs are far from isolated to the UKCS. On a global scale, a drop in deepwater spending has been a cause for concern for some time, with drilling firms citing a “short term” drop in the demand, but affirming the long term fundamentals for deepwater drilling.
More recently, geoscience firms have reported uncertainty in demand for seismic.
However, the North Sea particularly is known for its high operating costs. More than half of the platforms in the basin are operating behind their original design life and some fields produce more water than oil.
Henderson added: “It’s no secret that the costs facing oil and gas firms on the UKCS have been a significant issue for some time now. Understandably, it tends to be more expensive to operate in mature fields where oil is much more difficult to recover. Research suggests it’s now almost five times more expensive to extract a barrel of oil from the North Sea than it was in 2001.
“The drop we’ve seen in the number of farm-ins could indicate that companies are holding off before committing to longer term exploration investments. Asset transactions, involving producing fields, remain at more consistent levels, which suggests companies are more confident in these types of deals, which can offer a quicker and less risky return.
“Notwithstanding this, there are a large number of assets on sale. However, vendors tend to be larger players, and as buyers are often smaller operators, with limited budget, this is creating an expectation gap in prices. Until there is movement on that front, deal activity is likely to remain muted.”
The industry has been calling for the fiscal regime on the UKCS to be addressed, with the view it has become far too complex and cumbersome. After a tax hike in 2011, a raft of field allowances was announced, adding more complexity.
A recent Deloitte poll of the industry, which looked at the issues facing the UKCS and how the fiscal regime could be used to address these, indicated that oil and gas firms felt the overall level of tax most needed to be addressed (46%).
This was followed by a more predictable and internationally competitive tax regime, which scored 27% and 15% respectively. In addition, only 23% of respondents said they thought the current regime encouraged new entrants into the basin.
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