Overall spending on the UK Continental Shelf is expected to fall 3% compared to last year, to £17 billion, as projects continue to struggle, while exploration remains at a record low, according to a new report.
But, new capital investment could potentially rise this year with more than £1 billion of new field developments expected to be sanctioned, according to Oil & Gas UK's Business Outlook Report 2017.
Furthermore, a number of multi-billion-pound investment opportunities are also under consideration for approval in 2018 and 2019. But, the environment still remains very challenging for the supply chain, according to the report.
The report says there has been an intensive two-year drive to improve efficiency, streamline costs and boost productivity. Development costs for newly approved projects have reduced by more than 50% since 2013 and are expected to be lower again in 2017, reflecting costs trends as well as investment constraints.
Average unit operating costs have also improved, by half over two years, from $29.70/bbl to $15.30/bbl, says Oil & Gas UK. This has been helped by a reverse in declining production rates in the basin.
Production is set to rise 5% to 1.73 MMboe/d (630,000 boe/year) in 2016, a second year increase following a 15-year downward trend. The upward trend is expected to continue over the next two years to peak at between 1.8-1.9 MMboe/d by 2018, due due to strong investment in new development up to 2014, seeing 34 new fields into production since 2013, as well as improved productivity on existing fields.
A further 13 to 18 new fields could start producing this year, building on recent success. By 2018, recent start-ups are expected to contribute up to 600,000 boe/d, around one third of UKCS production.
However, the body says that the environment is still challenging, particularly for companies in the supply chain.
Oil & Gas UK CEO Deirdre Michie says, in 2016, UKCS exploration and production companies may collectively see a return to positive cash-flow for the first time since 2013, provided costs are kept under control and commodity prices hold. "However, this is unlikely to translate immediately into reinvestment or increased activity," she says. "The challenges for the basin ahead, particularly for companies in the supply chain, are still considerable."
Oil & Gas UK is asking the UK Treasury to extend an investment allowance to operational activities that are focused on maximizing economic recovery.
The group says that companies have seen an average 30% fall in revenues over the last two years and are turning increasingly to overseas markets to offset the shortfall in domestic activity. Exports of goods and services are expected to be around £12 billion in 2017. Although overseas revenues have fallen by £4 billion in since 2014, reflecting the contraction in global spend, they now account for 43% of supply chain revenues, demonstrating the importance of international markets.
There are indications however that the bottom of the cycle may have been reached and that business may at last begin to stabilize. While $4 billion worth of asset and corporate deals announced since January have been a significant vote of confidence in the basin, Oil & Gas UK believes that more can be done to facilitate the transfer of assets in the basin and so stimulate additional investment. This is why industry is continuing to ask the Treasury to revise the tax treatment of decommissioning liability in support of this.
Deirdre Michie adds: “It is crucial that these projects are progressed efficiently through to development and new ones matured to avoid a potentially significant production decline after 2020 and provide much needed business opportunities for the supply chain.
“The government’s proposals for an Industrial Strategy is therefore a timely intervention. Oil & Gas UK will be working to ensure the oil and gas sector remains at the heart of UK industrial policy and present a business case for a sector deal. We need to ensure the competitiveness of the supply chain and build resilience through diversification and exporting. Such an approach will enable the whole industry to continue contributing to overall UK productivity and economic performance.”
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