THE announcement by BP that investment of £10billion is to be made on four major oil and gas developments in the UKCS is obviously welcome news for all stakeholders.
The two largest in terms of investment costs and future production are the Clair Ridge project and the redevelopment of Schiehallion.
Their scale is so large that they will noticeably affect the behaviour of future oil production not only from the west of Shetland region but for the whole of the UKCS.
The investments confirm the willingness of the industry to proceed with further developments in a region which poses many operational challenges which are reflected in very high costs.
Given the enormous volume of oil in place in the whole Clair field there are grounds for believing that, in due course, with further technological progress, there could be a third or even a fourth phase of its development.
The announcement that low salinity waterflood will be employed in the Clair field and polymer flood technology in the Schiehallion field add weight to this optimistic view of the longer term prospects for oil production from the West of Shetland region.
It is certainly possible that production could extend well beyond 2040.
The longer term prospects for the UKCS involve the complex interaction of several issues.
While field investment is currently at a high level with several large committed projects, there are other prospective projects whose profitability is quite modest and whose viability is endangered by the tax increases announced in the 2011 UK Budget.
The tax system is essentially flat rate (apart from the field allowances) and the increase has substantially reduced the materiality of the returns. In a straight-forward case the reduction is by 24%.
In an era where capital budgets are rationed the result is that many smaller higher cost developments may not pass the investor’s economic hurdle.
There is thus a need for further tax concessions against the Supplementary Charge to foster the development of high cost fields where the materiality of returns is modest.
In the UKCS there has been a long term trend whereby mature assets (and sometimes also exploration acreage) have been sold by major oil companies to medium and smaller companies which specialise in operating mature fields.
There have been several examples of enhanced investment and production resulting from these transactions.
For some time now many mature assets have been offered for sale but transactions have not been executed.
This is a result of the uncertainty over the tax relief for the decommissioning costs which has increased as a result of the decision in the 2011 Budget to deny relief against the increase in the Supplementary Charge.
The hiatus in transactions has in turn had an adverse effect on investment in further development drilling and life of field extensions. Assurances on tax relief for decommissioning costs could increase the volume of desirable transactions and thus investment and production.
The current problems are not all tax-related. Production of both oil and gas has been falling quite steadily for a decade at an annual rate of 6-7%.
One of the reasons for this is the substantial production downtime being experienced in mature fields. Much of this relates to problems emanating from the age of the infrastructure.
Currently, around one-third of the offshore platforms are more than thirty years old.
In recent years much effort has been made in enhancing asset integrity for health and safety reasons, but further investment for production integrity reasons could be very fruitful.
Economic modelling by the present author indicates that over the next 30 years cumulative production could be in the range of 15-23 billion barrels of oil equivalent depending on oil/gas prices and investment hurdles employed.
This range compare with the 40 million barrels of oil equivalent produced to date and fits well with the Department of Energy’s central estimate of the ultimate potential of around 20 billion barrels of oil equivalent.
But the attainment of a further 15-23 billion depends on actions being taken to deal with the problems identified above.
The result would be an industry functioning well after 2040, albeit on a small scale.
But if action is not taken to deal with the problems identified above a quite different scenario could emerge.
In a recent publication entitled Fiscal Responsibility Report the Office of Budget Responsibility postulated that production from the UKCS would continue on a downward trend at 5% per year with the result that by 2040 only another 10 billion barrels of oil equivalent would be produced. This would be a most disappointing outcome and would herald the premature end of the UKCS.
The reduced production rates would hasten the economic demise of the infrastructure, which would in turn reduce the number of viable new developments. The recovery factor could remain modest. But if the actions discussed above are taken the life of the UKCS with all the associated benefits could be extended for many more years.
By Professor Alex Kemp, University of Aberdeen
Recommended for you
