Exploration and production companies in the UK offshore oil and gas sector will need to invest £200 billion in existing operations and new opportunities to sustain the next generation of productive life, according to a recent industry report.
Years of prolonged industry downturn have created a “new reality” for the UK offshore sector that is defined by a “sustained focus on cost and efficiencies with ongoing uncertainty in commodity markets”, according to the Business Outlook 2019 industry performance report published Wednesday by trade association Oil and Gas UK (OGUK).
Against this backdrop, which includes conservative outlook forecasts and ever so cautious investors, cost will remain a major focus for exploration and production companies seeking further business and operational improvements, the report finds: companies are looking to maintain unit operating costs at current levels, with operating expenditure running at around £7-7.5 billion through 2019.
Still, despite stringent cost measures, much of the industry is seeing improved outcomes.
“Our Business Outlook Report 2019 shows that industry’s approach during the downturn is delivering results,” said OGUK Chief Executive Deirdre Michie. “Following 14 years of decline, production has increased by a fifth over the past five years.”
Drilling activity remains at a record-low rate. However, despite the low level of activity, up to 485 million boe have been discovered so far from exploration wells drilled in 2018 – a similar total to discovered volumes in Norway but with 20 fewer wells, according to OGUK.
“Our report finds an industry that’s getting better at what it does, getting smarter in how it does it and is well positioned to deliver attractive returns on investment within this environment, maintaining our global competitiveness. This is the new reality and we need to embrace it,” Michie said
For many, the return to the good times may still be a ways away. Sixty-two percent of contractor companies have an improved outlook for 2019, yet certain areas of the supply chain are still experiencing challenges as industry emerges from one of its most difficult downturns, the report finds.
Michie said parts of the supply chain are still seeing revenues and margins under pressure and cash flow stretched. According to the report, these pressures will likely remain in some areas of the supply chain while others will see revenues stabilize aided by new capital approvals and operational investment.
“If capabilities and resources are to stay anchored here in the UK, there must be a competitive proposition for supply chain companies to invest in too,” Michie said.
More new projects were approved in 2018 than the previous three years combined, unlocking over £3.3 billion of new capital investment and more than 400 million boe of new reserves, the report notes. A similar number is expected in 2019.
“Cost improvements are being sustained and there is building momentum around exploration, with more new opportunities being drilled and the largest two conventional discoveries for a decade made in the second half of 2018,” Michie said.
“With focus on adding a generation of productive life to the basin, our report reveals around £200 billion will need to be spent to find, develop and operate the reserves of the future.”
Momentum is building around exploration activity, with up to 15 exploration wells expected in 2019, including several potentially high-impact prospects.
“In a year in which output from the UK Continental Shelf met around 60 percent of primary UK oil and gas demand, the importance of our hard-fought investment conditions is reinforced - not only for our industry but for the UK economy,” Michie said.
“This is a UK industry which is critical for security of energy supply, at the heart of the move to a lower carbon economy, supports hundreds of thousands of jobs and contributes billions to the economy.
“With the new reality clear and clarity around the future potential, there is all to play for.”