Exploration success rates in the UK North Sea grew slightly during the final four years of activity over the period from 2003 to 2012, a new report says.
Appraisal success rates were also up during the last four years, according to Alex Kemp, professor of petroleum economics at Aberdeen University.
Prof Kemp and colleague Linda Stephen also say projected full-cycle returns on investments – from exploration, appraisal and development through to production – on oil and gas discoveries over the past decade “remain worthwhile”, despite them falling in recent years.
In addition, they say investors not benefiting from any tax relief at the time of the exploration and appraisal have had an advantage in terms of returns, compared to those not paying full tax, which has “narrowed considerably” since January 2012.
Geological conditions, the size and cost of new developments and fluctuation oil prices are among factors affecting prospective returns from North Sea exploration, the report says.
It adds: “Full cycle returns to the exploration effort are important in understanding the investment climate and how it is changing.”
The study shows that in the period 2003-2012 the overall exploration success rate was 35.7%, rising to 36.6% in the final four years, while at the appraisal stage success rates were 59.6% and 60.4% respectively.
Overall exploration and appraisal success rates were 21.3% for the 2003-2012 period and 22.1% for 2008-2012, the report says, adding: “These rates do not guarantee commercial success, which depends on the fruits of any subsequent field developments.
“Full cycle returns also depend on the exploration and appraisal costs themselves. At the appraisal stage several wells may be required for each discovery.”
The study found that at oil and gas prices of $90 per barrel and 55p per therm respectively in real terms, adjusting for inflation, and two appraisal wells per discovery, investors not benefiting from tax relief at the time of exploration could expect a rate of return of 20.1% on discoveries in the 2003-2012 period and 16.3% for any finds between 2008 and 2012.
For other investors, the expected rates of return were much lower at 9.7% for exploration in the 2003-2012 period and 7.1% for finds between 2008 and 2012.
The UK government has been aware of the substantial difference in the prospective returns to an explorationist depending on whether he is in a tax-paying position or not,” the report says, adding: “This was highlighted after the increase in the supplementary charge ( tax on North Sea producers) from 20% to 32% in Budget 2011.
“The increase in the interest rate for the ring-fence expenditure supplement from 6% to 10% from January 2012 substantially reduces the difference in prospective returns.”
Energy Minister Fergus Ewing said: “This new analysis…shows that the North Sea remains an attractive investment.”
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