A striking comment was made by the head of CNR International at a breakfast briefing in Aberdeen this week.
James Edens, VP and Managing Director at CNR International (UK), said UK North Sea production in 2013 was 1.43MM boe/d—the lowest it had been since 1977. That year, all the production came from just seven fields. Today, in stark contrast, the same level of production comes from 346 fields.
It is a story not limited to the North Sea. Operating costs are increasing. Announcing its Q4 results earlier this week, Seadrill made a similar observation. “The fundamental problem for the oil industry is that the complexity of recovering oil reserves is leading to higher costs,” it said.
Seadrill pointed out that since 2005, 314 additional rigs have entered the market, representing an investment of about US$114 billion, and increasing the fleet by about 53%. But, the firm says, production of oil offshore has in the same period decreased from about 24MM bbl/d to 22.5MM bbl/d.
Citing Norway as an example, it said, since 2003, the number of contracted rigs in Norway has increased by 174%. Over the same time period production has declined by 18%. According to Oil & Gas UK’s Mike Tholen, semisubmersible day rates have almost doubled in the last three years. Jackup rates have risen 60% in the last three years, he said.
Exploration is also getting harder, and more costly as a consequence, as operators move into harsher environments. Despite having established production (eg. Schiehallion, Foinaven), the West of Shetland region of the North Sea is still under-explored. Exploration there has been costly—two of the most expensive wells ever drilled in the North Sea were drilled West of Shetland (Lagavulin and North Uist) in the last 10 years. Yet, Lindsay Wexelstein, lead analyst at Wood Mackenzie, says exploration West of Shetland has not created any value, overall, in that same period.
The exploration prospects firms are targeting are mostly low-risk and in the 10-20MM boe range, and close to existing infrastructure, says Tholen.
Edens, Tholen, and Wexelstein were speaking at Oil & Gas UK’s Activity Survey 2013 business breakfast. The event highlighted issues specific to the North Sea. Operating costs are rising in the basin, with the number of companies with costs above £30/boe having doubled in the past year. At the same time, exploration well drilling reached a record low in 2011, with just 14 wells drilled, and has yet to recover.
While the North Sea is experiencing record investment levels, at £14.4billion in 2013, the low levels of exploration mean there is not a pipeline of new developments. Oil & Gas UK’s activity survey predicted that capital spending is expected to half, from the 2013 high, by 2016-17. Read more: http://www.oedigital.com/component/k2/item/5093-north-sea-slump-warning
Oonagh Werngren, Oil & Gas UK's Operations Director, said there are initiatives underway, through PILOT, the government/industry body, to address some of the issues, and crucially, to increase exploration efforts and aid increased recovery around existing assets, as well as helping to make commercial discoveries already known about, but currently stacked.
“There are 14 different projects the industry could get involved in and deliver significant returns from, but at $100million a well, individual companies are unwilling to take the risk,” she told the breakfast event. “Volumes companies are mostly drilling for focus on 10-20MM boe. We need a new wave of investment in different and new plays to go elephant hunting (fields over 1Billion boe) again.”
The UK is not alone. Operators globally are feeling the pinch. The likes of Shell and has have been announcing reductions in their capex. Read more: http://www.oedigital.com/component/k2/item/5008-oilfield-spending-conundrum
Bank and investment company Investec has described it as a “capex-adjustment period” which has been a long time coming.
For the drilling rig operators, it is not all bad news. “The world needs significantly more rig capacity to recover a barrel of oil than they did only 10 years ago,” says Seadrill. “Over the medium to long term this trend will work in favor of drilling companies.”
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