Oil price drop could slash UK project spending

Capex in the UK’s offshore sector totaled $19 billion last year, according to analysts Wood Mackenzie’s annual UK upstream review.

Jan 12th, 2015

Offshore staff

EDINBURGH, UK – Capex in the UK’s offshore sector totaled $19 billion last year, according to analysts Wood Mackenzie’s annual UK upstream review. This kept the UK in the top 10 countries for upstream spending globally.

Almost one-third of the total UK spend – around $6 billion – went toward theMariner, Schiehallion, Laggan, Clair and Golden Eagle developments, the last of which came onstream during the fall.

After years of steep decline, UK production stabilized and could even grow in the short term.

However, the UK continental shelf (UKCS) also experienced rising costs, poor exploration results, and a plunging oil price squeezing already tight project economics.

Erin Moffat, UK upstream senior research analyst for Wood Mackenzie, said: “The high cost environment in the UK meant that project returns were already subject to increased scrutiny during 2014…

“The UK governmentreduced the tax rate by 2% in December 2014, but we expect growing pressure to reduce it further. At an oil price of $60/bbl, 95% of pre-sanction oil and gas reserves in the UK generate less than a 15% return on investment. This has intensified concerns over future UKCS investment as further cuts or delays to projects are likely.

“Alow oil price could also impact producing fields with high operating costs, with the potential for shut-ins. We estimate $3.2 billion of spend associated with pre-sanction projects could be at risk over the next two years as a result of current oil prices. Without this, UK upstream spend in 2016 would be around $10 billion – just over half of 2014 levels.”

Moffat added: “UKCS exploration and appraisal activity continued to fall in 2014, with the number of exploration wells decreasing by 18% to just 23 wells. 2014 drilling was considerably lower than the previous 10-year average of 81 wells per year, due to restricted access to finance for some players, high costs, a stretched service sector, and a focus by some companies on progressing large, capital intensive development projects.

“The current oil price means 2015 will unsurprisingly bring further budget cuts – with exploration spend top of the list.”

01/12/2015

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