In many ways, today’s operating environment is very different from that which was being experienced when Oil & Gas UK last published its activity forecasts 12 months ago.
In particular, there has been a marked increase in the public recognition given by the Government to the industry’s important contribution to the economy and energy supply.
After a period of low commodity prices in 2009, we now see oil, if not gas, prices rebounding. Significant efforts have been made by companies to keep a handle on the extreme cost inflation seen in the last few years.
However, in other ways, the ever-present challenges of maturity persist, and even grow. After four decades of drilling, the average discovery size is now one-tenth of that seen in the first 10 years of exploration, and wells are not being drilled at the rate which would allow the steady flow of new projects coming onstream required to sustain infrastructure.
Above all, despite producers succeeding in holding down unit operating costs of existing projects, overall costs, including those of potential new projects, are still significantly higher than in other, less mature provinces around the world.
So how do these factors manifest themselves in our new forecasts for exploration, investment and production?
The results of the survey certainly underline the significant barriers we face in securing maximum production, but also offer a taste of the sizeable future opportunity. Proven reserves within existing fields and sanctioned investments declined to 5.25billion barrels at the start of this year, a result of the slowdown in investment over recent years.
These sanctioned projects have already secured £10billion of investment.
However, when probable and possible reserves are considered, the total rises to 11.1billion barrels, an increase of 15% on 2008. These potential new projects demand a staggering £50billion of investment, of which half is required in the next five years if required infrastructure is to be sustained.
If investment can be sustained above £5billion a year, the UKCS could still be delivering 1.5million barrels equivalent of oil&gas per day in 2020, enough to satisfy half of total UK demand. This is of strategic importance to the British economy. Moreover, the Government forecasts that our islands will still rely on oil and gas for 70% of their energy needs in 2020.
The short-term outlook for investment is positive. In 2009, capital spending hit the top end of expectations at £4.7billion, and in 2010, could rise above £5billion.
But we have seen a slowdown in new projects coming onstream in recent years and this capital injection would increase the speed with which new fields are taken from “potential” to “producing” status.
One concern among these positive signs, though, is that it is the mature fields, particularly those subject to petroleum revenue tax, which are struggling to secure additional investment.
It is these fields, with their associated infrastructure, from which production needs to be maintained as the existing platforms and pipelines are required to reach the untapped reserves of the UKCS.
Continuing uncertainty on whether future governments will meet their commitment regarding decommissioning tax relief continues to depress investment in these fields.
Another concern is that while increases in operating costs for existing production have, for the moment, ceased, the technically challenging nature of potential new projects makes them considerably more expensive to develop. The shift in the reserves balance from “sanctioned” barrels towards the more expensive category, probable and possible developments, makes this all the more worrying. Indeed, if a capital development cost cut-off of £10 per barrel is applied, only about half of the 3.3billion barrels of new field reserves would secure investment sanction.
On a positive note, the Government has taken several steps over the last 12 months to help address the difficulties faced in attracting investment.
The introduction of the new Field Allowance in the 2009 Budget and its subsequent extensions in the PBR at the beginning of this year were a welcome acknowledgement from the Government that a marginal reduction in tax rate can create a win-win outcome, driving up investment and production and increasing overall tax returns to the Exchequer, although the precise effect of these measures will take time to work through the system.
Securing all the investments highlighted in the survey, which are so crucial to the UK’s security of energy supply, will demand further action from both industry and Government to produce an effective cost-reduction programme looking at lightening the burden of development and operating costs, production taxes and UK and EU regulatory compliance.
Oil & Gas UK is keen to continue its work with the Government to find the best path to maximise recovery of the UK’s oil and gas reserves.
The full 2010 Activity Survey report is available online at www.oilandgasuk.co.uk
Mike Tholen is economics and commercial director for Oil & Gas UK
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