Rig capacity may constrain planned surge in UK E&A wells
Well funding another factor as costs rise
Chris Bulley, Hannon Westwood LLP
Last year, drilling activity on the UK continental shelf reached a high not seen since just prior to the oil price crash in 1998. At present, there are 16 rigs engaged in exploration and appraisal (E&A) activity across the UKCS, the highest number since 1997.
With oil prices at all-time highs, the incentive to drill could not be greater, so even small finds of less than 10 MMboe are being considered economically viable, if they are close to production infrastructure. The main constraint on progress is rig availability and cost inflation: even last year the rig market was stretched to accommodate the 70 E&A well spuds.
Looking forward, UKCS consultant Hannon Westwood has identified around 184 planned E&A wells on the UKCS for which the operators are hoping to secure a slot within the next 24 months. Inevitably, some of these wells will not be drilled for different reasons, including a change in view concerning the technical case, partner drag, or lack of access to a rig. Perhaps the main factor will be the lack of available drilling funds.
However, this shortage, combined with the wide range of drillable prospects, also can provide investment opportunities to existing players and newcomers to the UK shelf, thereby sustaining a vibrant farm-in and farm-out market. Of the 184 planned E&A wells, around 70 likely will require third party farm-in funds. Of these, 52 are exploration prospects while 18 are existing discoveries awaiting appraisal.
In terms of licensed acreage, there are now more than 1,400 licensed blocks or part-blocks on the UKCS and 160 companies participating in E&A activity. With ownership ranging from just one property per company to over 150 properties each – in the case of Shell, Exxon and BP – these properties break down into 3,260 individual working interests. Of this number, Hannon Westwood considers 1,255 as currently “non-core” – i.e. they are without support for material funds in the face of an active government-imposed Fallow program that requires either drilling or seismic within any three-year period.
The key issue now is funding and, with typical well costs approaching $40 million per well on average, the implication is that at least $3 billion will be needed this year to complete the projected program. In the recent past, about one-third of E&A wells have required farm-in funding, which suggests that today around $1 billion of planned investment will depend on farm-ins to go forward.
The constant flow of farm-in documents that bombard the market certainly demonstrates activity. However the mass of information can be too much for business development teams to process in a relatively short time. Opportunities may be lost as a result and to curtail this problem, business developers need to become more proactive, more selective, and more efficient.
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Volume 68 Issue 8
August 2008
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