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Almost half of fields heading for loss

Shock report says ‘no sign’ of North Sea upturn

Oil and Gas UkOil exploration in the North Sea remains at an all-time low with no sign of improving, according to a worrying report from the industry’s trade group.

It warns that unless the oil price moves above $30 barrel then almost half of oil fields will be operating at a loss.

Most concerning is the collapse of investment in new projects. The upstream industry is expected to approve less than £1 billion to spend on new projects, compared to a typical £8 billion per year in the last five years.

Oil & Gas UK’s 2016 Activity Survey, published today, reveals that there has been some success in the drive to improve efficiency, reduce operating costs and increase production.

But exploration remains low and it is calling on the Government for urgent reforms of the special taxes paid by the industry to attract investment back into the basin and minimise loss of capacity during the downturn.

Sector-wide action has pushed unit operating costs down by a third from an average of $29.30/barrel of oil equivalent (boe) in 2014 to $20.95/boe in 2015, aided by a 10 per cent rise in oil and gas production – the first in 15 years.

Costs are expected to fall by a further 20% this year to around $17/boe, representing a 42% improvement in just two years.

However, pressures on the sector have grown as the price of oil has plummeted 70% since summer 2014 and the average daily gas price by 20% since last year.

Despite the rise in production to an average of 1.64 million boe per day in 2015, revenues fell by 30% to £18.1 billion.

The trade group warns that if the oil price remains at around $30 for the rest of 2016, nearly half (43%) of all UK Continental Shelf oil fields are likely to be operating at a loss, deterring further exploration and capital investment, and making additional cost improvement imperative.

Deirdre MichieOil & Gas UK’s chief executive, Deirdre Michie (right), said the UKCS is entering a phase of ‘super maturity’.

Whilst success per exploration well drilled in 2015 was the highest for ten years, the rate of exploration for new oil and gas reserves remains at an all-time low. Just 13 exploration and 13 appraisal wells were drilled in 2015 and, as companies restrict capital even further, as few as seven to ten exploration wells and six to nine appraisal wells are forecast to be drilled this year – leading to a further downturn in activity.

Total capital expenditure fell from £14.8bn in 2014 to £11.6bn last year and is expected to fall further this year to about £9bn. This drop in activity is being felt right across the supply chain, which contracted by a quarter in the last year and is expected to fall further in the coming year as current projects near completion, according to Rystad Energy.

The pace of decommissioning is accelerating. Over the last year, the number of fields expected to cease production between 2015 and 2020 has risen by a fifth to over 100. Reserves reported by companies for potential future development have fallen from 10 to 8.8 billion boe, as projects are deemed uncommercial in the current environment.

Ms Michie continued: “The basin has to compete fiercely in the global market to attract price-constrained capital to the UK.  A coherent approach by the industry, regulator and Government will be critical to boost the industry’s competitiveness and its investors’ confidence.

“Together we need to transform the basin into a highly competitive, low tax, high activity province, which is attractive to a variety of operators and sustains and supports the important supply chain based here. It is absolutely crucial that the recently announced Aberdeen City Region Deal and funding for the Oil and Gas Technology Centre, which will help support the industry in the longer term, is accompanied by the right signals in relation to the tax regime.

“The industry currently pays special taxes at a headline rate of 50% (67.5% for fields paying PRT).  A significant permanent reduction in those rates is now urgently needed, a move which would be consistent with HM Treasury’s ‘Driving Investment’ plan for fiscal reform.

“This should be combined with additional measures to help unlock the late-life asset market and encourage exploration by permanently removing the special taxes from all discoveries made over the next five years. Finally, improving the effectiveness of the Investment Allowance would stimulate activity in the short term and attract fresh investment.”

Deirdre Michie concluded: “We have a huge task ahead but the prize is worth fighting for. The UKCS still holds up to 20 billion boe which can continue to provide a secure supply of energy for the country, support hundreds of thousands of jobs, generate several billion pounds in corporate and payroll taxes from the supply chain and stimulate countless technological innovations.”

Oil & Gas UK is hosting a number of events throughout the coming week, where experts will discuss the findings of the Activity Survey in detail. 

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