Poor weather and high costs have impacted Q1 exploration and appraisal drilling activity on the UK Continental Shelf, according to a report by Deloitte.
The report, which details activity across North West Europe during Q1, was compiled by Deloitte’s Petroleum Services Group (PSG). It found 12 E&A wells were drilled on the UK Continental Shelf (UKCS), an increase of five, compared with Q4 2013, but one lower than the same period last year.
Graham Sadler, managing director of Deloitte’s PSG, said: “It is very likely that what we’re seeing is a result of the continuing higher operating costs and the ongoing challenges of a mature region.”
Deal activity falls
Deal activity—divestments and acquisitions—also slowed, with 10 reported deals in Q1 compared with 19 in the same period last year, and eight deals fewer than in Q4 2013. Farm-ins, where one company takes a stake in another company’s field, remained the most prevalent type of deal, making up 50% of the total for offshore UK.
Sadler said the higher operating costs and mature region challenges “could be having a knock-on effect on deal flow, since sellers might be seeking a higher price than buyers may be willing to pay.”
“When profitable extraction is more challenging for operators, farm-ins are the most popular type of deal. Bringing another company in helps to spread risks and costs within the time frames required. Operators are definitely showing more caution, indicating, again, that incentives from Government may be the only way to make the economics more viable.”
Deloitte said this caution is underlined by the fact that only two gas fields started producing in Q1 and one condensate field was approved for development. All of these received the UK’s small field tax allowance.
“The Government’s support of recommendations made in Sir Ian Wood’s report, “UKCS Maximizing Recovery Review”, along with the fiscal review announced in Chancellor George Osborne’s Budget last month, are positive steps and may lead to measures being put in place to incentivize activity offshore,” said Deloitte.
“However, while the recommendations of the Wood Review are good news for the industry, tax changes confirmed in last month’s Budget could lead to additional costs for North Sea operators. The changes to the way bareboat chartering is taxed applies to companies operating on the UKCS leasing rigs and offshore accommodation. The measure will increase costs and lead to upward pressure on day rates at a time when operating costs are already at an all-time high.”
Subscribe
