LONDON, UK -- Scarcity of capital is constraining project activity on the UK shelf, according to industry association Oil & Gas UK. Its latest overview of prospects suggests investments in new and existing fields will fall from around £5 billion ($7.17 billion) last year to £3.5-4.5 billion ($5.02-6.45 billion) this year, potentially dropping to £2.5 billion ($3.58 billion) in 2010.
"We are still following on from the impact of volatile oil prices, as well as the credit situation," says Economics Director Mike Tholen. "Oil prices are back to what we saw in 2004-05. UK gas prices peaked at £1.10/therm ($1.58/therm), and then fell back to the low £0.40s, so again there has been a big swing." All these factors are hitting investor confidence, he adds.
At the same time, Britain's long-term reserves position has grown stronger. Oil & Gas UK identified 109 exploration and appraisal wells (including sidetracks) in 2008, only a minor dip on the total for 2007. Early indications are that they discovered 300-400MMboe of potentially commercial volumes.
The association says the industry is targeting £44 billion ($63.1 billion) of investments in developing a further 9.6 Bboe of UKCS reserves, comprising 6.1 Bboe from existing fields and currently sanctioned projects, and 3.5 Bboe from new field and brownfield developments.
"These plans were put together pretty much in the final quarter of last year," Tholen says. "However, the economics for two-thirds of these investments look pretty uncomfortable even with an oil price of $50/bbl."
In 2002, the industry spent £3.5 billion ($5.02 billion) to extract 1.5 Bboe over time, he points out. Last year, the figure was £4.5 billion ($6.45 billion), but the returns will only be around 6-700 MMboe. "This is due in part to cost inflation, but we must also see costs come out if the pace of UK activity is to be sustained."
Reserves replacement could tail off in the next two years, with the survey showing commitments for only 34 firm exploration and appraisal wells on the UK shelf in 2009, plus another 33 non-firm wells. In 2010, operators have plans at present for only 10 firm E&A wells.
Not all is negative. Tholen says investments on the shelf in recent years slowed the overall production decline to 5% in 2008, and that decline could be held to around 4-5%/year with further annual spending of around £5 billion ($7.17 billion). "We could also see quite a lot of new production from fields West of Shetland five years from now," he claims.
Chief Executive Malcolm Webb says Oil & Gas UK had been in dialogue recently with the UK government over measures to help some of the smaller operators in particular, which he says were responsible for 80% of last year's exploration spending. The two parties are also discussing adopting Norway's model of providing relief on exploration drilling, and on lowering taxes on problematic, high cost fields.