UK North Sea Operators Riding High

UK North Sea Operators Riding High
Steady production growth, high prices and capital discipline will deliver 'near-record' cash margins in 2022.

Long-term upstream uncertainty shows no signs of abating, but in the short-term, UK operators are riding high.

That’s according to a recent research note from Wood Mackenzie (WoodMac), which was sent to Rigzone on Wednesday. In the note, Neivan Boroujerdi, a principal analyst for North Sea upstream at WoodMac, said steady production growth, high prices and capital discipline will deliver “near-record” cash margins in 2022.

“Amid the uncertainty, we expect companies to book near-record profits next year,” Boroujerdi stated in the research note.

“The savage cost cuts carried out during previous downturns will combine with strong prices to generate cash flow generation levels last seen before the 2008 financial crash,” he added in the note.

According to a WoodMac chart stretching back to 1974, UK company cash flow hit a record in 2008 at around $25 billion. Cash flows increased this year, breaking a run of two consecutive years of decline, according to the chart, which projects another rise to around the $18 billion mark next year.

Wood Mackenzie expects UK production will grow slightly to 1.6 million barrels of oil equivalent per day in 2022, driven by the recent/upcoming start-ups at Harbour Energy’s Tolmount, NEO Energy’s Finlaggan and Shell’s Arran and Pierce Depressurisation projects. Production will also be boosted by the completion of last year’s maintenance on the Forties Pipeline System, the company noted.

Boroujerdi said UK exploration activity could double in 2022. Up to 10 prospects are set to be drilled, with Shell operating its highest number of UK wells since 2006, WoodMac highlighted. Planned wells will target up to one billion barrels of oil equivalent, with gas accounting for 80 percent of prospective resources, according to the company. Shell’s HP/HT Edinburgh well in the Central Graben is said to be one of the most exciting wells to be drilled in UK waters in decades.

“But scrutiny will persist on exploration’s role in the energy transition,” Boroujerdi said. “The UK Oil and Gas Authority suspended new licensing in 2021. A permanent suspension remains a – albeit unlikely – possibility,” he warned.

The price of Brent crude oil has risen from the low $50s in January 2021 to around the mid-$70s today. The commodity closed above $86 per barrel in October.

WoodMac describes itself as the global research and consultancy business powering the natural resources industry. The company serves the oil and gas, LNG, power and renewables and chemicals sectors, as well as others, according to its website.

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