The UK offers still significant opportunity for offshore oil and gas development but companies are finding it increasingly difficult to turn new reserves into economic production, according to industry body Oil & Gas UK.
The organization has published its annual forecast of offshore oil and gas exploration and development activity in the UK, based on a survey of the spending plans of over 70 companies.
It reveals that the number of offshore oil and gas projects currently under consideration for development has risen sharply over the last 12 months, pointing to the still substantial potential of this mature province. However, the survey shows that reserves being developed or in production have declined, as possible new projects fail to meet companies' economic criteria. This highlights continuing concern about the UK's ability to attract the necessary investment to maximize the recovery of its oil and gas resources.
Oil & Gas UK believes that up to 25 billion barrels remain to be won from the UKCS. Business plans developed over the latter half of 2009 have identified up to 11 billion barrels of oil and gas in new and existing projects, a 15 percent increase over 2008 and requiring total capital expenditure of £60 billion. Provided this investment can be secured, the industry could still be delivering 1.5 million barrels of oil and gas per day in 2020, enough to satisfy half of total UK demand.
The industry faces two challenges in this. Firstly, time is not on its side: if the infrastructure needed to maximize recovery is to be preserved, £25 billion capital spend must be delivered within the next five years.
Secondly, the UK's proven reserves in existing and sanctioned projects currently stand at 5.25 billion barrels, down from 6 billion barrels in the last survey, while those classed as 'probable' or 'possible' which have not yet attracted investment approval, increased by 60 percent to around 6 billion barrels. How long the UK continues to operate as a significant oil and gas province will depend, crucially, on its ability to convert its discoveries into 'proven' reserves while at the same time ensuring a healthy crop of possible new developments are brought into company plans through steady exploration.
Mike Tholen, Oil & Gas UK's economics director and author of the report, said, "The increase in the number of new UK oil and gas developments under consideration is, on the one hand, encouraging. It confirms our belief that the province, whilst mature, has decades still to flourish. This is a high technology industry and companies have developed and continue to deploy the best and most advanced technology to unlock the UK's oil and gas resources. However, even that is not proving enough, illustrated by the production decline and falling investment seen over recent years. Things are made no easier by the fall in wholesale gas prices which have halved over the last year."
The UK produced 2.48 million barrels of oil and gas a day in 2009, down 6 percent on 2008 and reflecting the 20% slowdown in capital expenditure since 2006. However, Oil & Gas UK believes investment could pick up in 2010, even rising above £5 billion from £4.7 billion in 2009.
2009 saw a fall in the total number of UK wells drilled: development wells were 22 percent down on 2008 at a total of 130 wells, while exploration and appraisal drilling fell by 40 percent to 65 wells. Development approvals also slumped with only six new fields seeking government sanction last year (12 in 2008) and three incremental projects in existing fields (10 in 2008).
There were 73 potential new field developments reported in this year’s survey, compared with 56 a year ago; however, the 17 fields new to this year’s survey are on average 20% more expensive on a cost per barrel basis, reflecting the technically and commercially challenging nature of today’s opportunities. These new fields are in all areas of the UKCS but with the majority being in the central North Sea and to the west of Shetland.
The industry can help the UK as it emerges from the current recession, contributing £7 billion in production taxes (equal to 20% of total UK corporation taxes) and supporting employment of around 450,000 people across the UK (approximately 45% of them in Scotland). It remains the UK’s largest industrial investor, spending a total of £12.3 billion in exploration, development and production operations.
Malcolm Webb, Oil & Gas UK’s chief executive, said: “Securing all the investments identified by our survey will demand action from industry to reduce costs and improve efficiency and from Government to lower production taxes and lighten UK and EU regulatory burden.
“As recently noted by several government ministers, the UK’s oil and gas industry is a huge asset to this country. It not only makes a major contribution to the economy but can also help secure energy supplies for decades to come. The Government has taken several welcome steps over the last eighteen months in reducing the rate of tax on various types of new fields; we now need to work together to extend that process to encompass other new and existing fields and positively encourage investment in this vital UK energy industry.”
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