UKOOA: North Sea Investment Sustained in 2005, but Concerns Exist

Total investment in U.K. offshore oil and gas exploration, new field development and operations continued its year on year upward trend in 2005, rising 15 percent to GBP9.7 billion, the largest of any British industrial sector, according to a report published Tuesday by the UK Offshore Operators Association (UKOOA), the representative organization for U.K. oil and gas producers.

The UKOOA Economic Report 2006, “Energy Now and for the Future,” claims that sustained investment in the U.K. continental shelf (UKCS) could ensure that the U.K. oil and gas industry still meets 60 percent of the U.K.’s hydrocarbon needs in 2020, providing a solid foundation for U.K. security of energy supply.

The U.K. produced 3.2 million barrels of oil equivalent (boe) per day last year. Up to an estimated 27 billion barrels of oil and gas remain to be recovered. The industry, currently the 12th largest oil and gas producer in the world, supports around 380,000 jobs, nearly a quarter (100,000) of these in Scotland. It contributed nearly GBP10 billion in direct taxation to the U.K. Exchequer in 2005 and is on track to pay more than GBP12 billion in 2006.

Operating costs per barrel have increased--in the last 2 years by as much as 20 percent and last year totaled GBP4.7 billion. Coupled with constraints on resources--in particular drilling rigs and skilled personnel where some costs are rising at alarming rates--this threatens to undermine the U.K.’s competitiveness and therefore the ability of the industry to find and extract new oil and gas reserves in the increasingly mature basin, where discoveries are becoming smaller and technically more complex.

The current surge in drilling masks a potentially worrying shift away from exploration and appraisal. The total number of wells drilled in 2005 rose by 30 percent to around 300 and is forecast to rise again in 2006 to 320 wells. Despite this, exploration and appraisal (E&A), drilling has fallen back markedly since January and could drop by 25-30 percent over the course of the year to around 60 wells in total.

“In the current price climate and with constraints on resources, it would appear that companies are understandably taking decisions to switch rigs into development or production work, rather than exploration which carries higher risk,” said UKOOA chief executive Malcolm Webb. “This could be a worrying trend, given that we now need to increase exploration activity in order to find and develop the new oil and gas reserves necessary to sustain the medium- and longer-term future of the basin.”

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