North Sea exploration support needed

September 30, 2014

Industry body Oil & Gas UK is calling on the UK Government to offer fiscal support for exploration in the UK North Sea, alongside lower taxes, and simpler field allowances. 

The call, made in the body’s Economic Report 2014, comes as the UK’s oil and gas industry faces rising operating costs, falling production, and a lack of exploration success, with concerns the basin’s aging infrastructure will become uneconomic to run and will have to be removed, further diminishing the potential to maximize recovery on the UK Continental Shelf (UKCS). 

Unit operating costs however are now about 60% higher than they were as recently as 2011, says Oil & Gas UK, and, while the UKCS recoverable potential offshore oil and gas resources are estimated at 15-24 billion boe (barrels of oil equivalent), the recent lack of exploration success and slow rate of bringing discovered resources through to maturity show how difficult it will be to reach the upper end of these ranges, says the body. 

"While investment in capex has reached its highest level in three decades, exploration in the last three years has seen the lowest levels in the UKCS history," said Drew Stevenson, Head of UK energy, utilities, mining, infrastructure transaction services at PricewaterhouseCoopers.

Production on the UKCS has also seen several years of double digit decline, prompting the UK Government to commission a review into the UK industry, led by Wood Group founder and former chairman Sir Ian Wood.  

One of the recommendations was a full review of the UKCS fiscal regime, including taxation, as well as a new regulatory body and a focus on industry and government collaboration. 

Oil & Gas UK’s economics director, Michael Tholen, said:  “We need a lighter tax burden, a simpler and more predictable system of field allowances and fiscal support for exploration. The outcome of the Fiscal Review, expected to be announced in December this year, must be relevant, radical and robust.”

“Significant oil and gas resources still lie offshore (possibly up to 24 billion barrels), but radical fiscal and regulatory reform are urgently needed to maximize the recovery of these resources,” says Oil & Gas UK.  “The industry must also act immediately to address its unsustainably high, and rising, costs.  Oil & Gas UK believes that all three of these tasks are of equal importance and that it is crucial to the future of the industry that all three are successfully delivered.

“Greater collaboration across industry, with and across governments will be critical for success,” added Oil & Gas UK. 

Oil & Gas UK’s chief executive Malcolm Webb (pictured) said: “To support a lasting and sustainable future, today we’re calling for greater collaboration – between governments, between government and industry and within industry itself to face and fight the challenges ahead.

“Full implementation of Sir Ian Wood’s recommendations for regulatory reform, and far-sighted changes to the fiscal regime, are needed in the next 12-18 months to stimulate new investment in exploration and production. Alongside this, the industry must improve its efficiency and reduce its costs as a matter of utmost urgency.”

The report highlights a number of initiatives already underway to boost exploration and production.  The industry is working with government in the joint PILOT program to rejuvenate offshore infrastructure to defer decommissioning, explore possibilities to enhance oil recovery, restore production efficiency and stimulate new technologies and exploration.

Production rates in the first half of 2014 has been encouraging, says Oil & Gas UK. Department of Energy and Climate Change figures currently indicate a 1% increase in production compared with the same period in 2013, as the basin reaps the benefits of strong investment in recent years (£14.4 billion last year and £13 billion in 2014) and the return of a number of significant fields back into production, including Elgin Franklin, Gryphon, and the Penguins Cluster. 

However, Webb added: “The magnitude of the task ahead means that over one trillion pounds of expenditure (in 2013 money) will be required if the recovery of above 20 billion boe is to be achieved. However, the UK has to compete for each and every pound of that investment. If the current trend of rising cost continues, the UKCS will cease to provide a healthy return on investment and we’ll feel the brunt through falling levels of activity.

“Maximizing recovery from the UKCS is the collective responsibility of all those who fund, regulate, tax and operate the offshore oil and gas industry and achieving our full potential will require a tremendous effort on the part of everyone involved.”

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