Rising investment – and costs – in UKNS

Investment in North Sea oil and gas production has been predicted to top a 30 year high - but cost per barrel has risen five-fold in the past decade, according to analysis by the industry.

Malcolm Webb, chief executive of Oil & Gas UK

Oil & Gas UK, which represents the UK North Sea’s upstream industry, said spending in the North Sea is expected to rise to £13.5billion in 2013 (from £11.4billion in 2012), with £6billion of that on capital projects.

Most of the spending on production was in the central North Sea with the investment in new projects focused on west of Shetland. 

However, at the same time costs were reported to have risen five-fold in the last decade, according to Oil & Gas UK’s 2013 Activity Survey, launched at a breakfast event in Aberdeen Tuesday, February 26.

Mike Tholen, economics director at Oil & Gas UK, said: “The last time investment was as strong as last year was 30 years ago.  But today you get a lot less oil for your pound than you did 10 years ago. Ten years ago you had five times more buying power per pound. Nonetheless, these are big investment figures.”

The concern about rising costs was also raised by Geoff Holmes, chief executive of Talisman Sinopec Energy UK, the new Sinopec/Talisman joint venture.

He said the joint venture was increasing its spending by 25% this year based on growing activity. But he said that increase “might evaporate” if supply and demand issues are not addressed in the short to medium term.

“Requests for rate increases of 15-20% are commonplace,” he said. “As an industry we cannot continue to absorb large cost increases.” He called for a different model of working between operators and contractors – “collaborative performance management”.

On a brighter note, Mr Tholen added that exploration drilling and success rates had been low but should strengthen in 2013 and 2014, with 35 to 40 wells planned for 2013, compared to an average of 21 wells per year in the last four years.

According to the Activity Survey, if all the exploration wells currently planned were drilled over the next three years, the period from 2013 to 2015 will be the most active in the last 15 years. 

However, access to rigs and finance remains an issue for operators, particularly smaller firms.

A turnaround is also expected in the basin’s production figures. UK North Sea production has fallen dramatically over the past two years¬, dropping 30% compared to a fall of just over 6% in 2010.

The drop was partly blamed on issues with asset integrity, measures taken post-Macondo and a slowing in investment. A number of facilities have also been shut in or off station after, including Total’s Elgin platform, which suffered a leak, and Maersk’s Gryphon floating production vessel, after it came off station in a storm.

However, Mr Tholen said production in the basin was expected to return to more than 2mmbo/d by 2017 – “back to where it should be”.

Announcing the results of the survey, Malcolm Webb, Oil & Gas UK’s chief executive, said: “After two disappointing years brought about by tax uncertainty and consequent low investment, the UK continental shelf (UKCS) is now benefitting from record investment in new developments and in existing assets and infrastructure, the strongest for more than three decades.

“The recent introduction of targeted tax allowances to promote the development of a range of difficult projects, coupled with the Government’s ground-breaking commitment to provide certainty on decommissioning tax relief, has prompted global companies and independent businesses alike to take another look at the UK as an investment destination and resulted in a new wave of investment. It is crucial that we sustain this momentum in the years ahead.

“Only 21 exploration wells per year on average were drilled over the last three years. As a result, in 2012 not enough barrels were discovered to replace all those produced. However, again, there is real cause for encouragement as the survey results lead us to forecast 130 exploration wells over the next three years which, alongside the use of new and improved sub surface technology, should result in many more barrels being discovered.”