UK output declines, but capex holds steady

Production and investment on the UK shelf are in slow decline, according to the latest activity survey by industry association UK Oil & Gas.

Offshore staff

LONDON -- Production and investment on the UK shelf are in slow decline, according to the latest activity survey by industry association UK Oil & Gas. However, the long-term outlook may not be too bleak, with Britain still capable of generating half its energy needs from its offshore fields in 2020.

Last year, the survey found, fields on the UKCS produced on average 2.4 MMboe/d of oil and gas, down 6% on 2008. “We had hoped for a smaller decline,” said Oil & Gas UK economics director Mike Tholen, “but investment and development were both slower than expected.” The fall in gas output – down 10% – was greater, due to demand being hit by the recession in Britain and industrial cutbacks.

Capital expenditure in 2009 was slightly lower at £4.7 billion ($7.16 billion). “We had feared worse,” Tholen said, “but the recovery in the oil price restored some confidence.”

Oil & Gas UK believes capex may pick up slightly this year, possibly exceeding £5 billion ($7.6 billion). Another positive in 2009 was a 5% drop in operating expenditure, to £6.6 billion ($10 billion), helped by falling prices for drilling services and oilfield equipment.

On the minus side, only eight new fields came onstream throughout the UK shelf last year, down from 17 in 2008, and only six new development projects went forward. The knock-on effect was a 22% slump in development drilling to 130 wells, and that total is only half what was being achieved a decade ago, Tholen said.

There was a similar story in exploration and appraisal drilling, with a total of 66 wells, 40% lower than in 2008. “Exploration is the sector most exposed to market sentiment,” he pointed out, “as [to a large extent] it must be funded by equity.” This year, Oil & Gas UK has identified plans for 43 firm E&A wells, with a further 20 or so to be confirmed. But there may be a rapid tail-off in activity in 2011-12.

According to the survey, the UK central North Sea remains the most favored region for E&A drilling, followed by the Atlantic margin west of Shetland, where numerous discoveries were reported last year. By the latest estimate, there are now 73 potential new field developments on the UK shelf, compared with 56 a year ago, incurring a potential total investment of £32 billion ($48.7 billion). These range in size from just below 5 MMboe to above 100 MMboe recoverable.

The 2010 report also identifies more than 160 potential brownfield development projects with cumulative resources of 2.6 Bboe, of which half would realize less than 6 MMboe of extra production. Associated investments are estimated at £18 billion ($27.4 billion).

Although the UK’s proven reserves base has fallen sharply – down from 6.1 Bboe at the start of last year to 5.25 Bboe at present – the survey does see strong potential for growth in the years ahead. The total of remaining proven, probable, and possible reserves that the industry is working to extract is assessed at 11.1 Bboe, a 2.3 Bboe increase compared with last year’s survey.

Over time, Oil & Gas UK estimates up to 25 Bboe could be recovered from the UKCS, with exploration successes accounting for 5-8.5 Bboe of this figure. It adds that if investment can be sustained at £5 billion/year ($7.6 billion/yr) in today’s money, the shelf could conceivably deliver around 1.5 MMboe/d in 2020 from existing development opportunities, with further potential from current exploration programs.

Problems may arise, however, said Tholen, if costs continue to go up for technically challenging planned projects, i.e. deepwater fields west of Shetland or certain high-pressure/high-temperature fields in the central sector.

Another concern is the mounting cost of decommissioning. The survey puts expenditure in this category at £26 billion ($39.6 billion) by 2040, compared with £10 billion ($15.2 billion) estimated in the 2005 report. According to Tholen, the predicted dates for UK field shutdowns are not being extended. On the other hand, he said “people are thinking harder about whether to continue investing in older facilities.

“There is tax relief on future decommissioning costs, but there are concerns as to whether future governments will honor this. So some people are starting to think about turning off the lights, rather than extending production.” chief executive Malcolm Webb added: “The industry is having to over-securitize decommissioning costs, and this is taking money away from new investments.”


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