Global downturn hits UK drilling and reserves replacement

Economic conditions have impacted UK offshore activity severely, according to analysts Wood Mackenzie.

Offshore staff

EDINBURGH, UK -- Economic conditions have impacted UK offshore activity severely, according to analysts Wood Mackenzie.

Their latest report, “Review of 2009 – UK Upstream Sector,” reveals, for example, that exploration & appraisal drilling on the UK shelf fell 37%, with investment funding in short supply due to the global economic crisis. And continuing uncertainty in the oil price – which started 2009 at $30/bbl and ended at $80/bbl – also caused delays to projects and wells.

Geoff Gillies, Lead UK & Southern Europe Upstream Research Analyst for Wood Mackenzie says the adverse impact was expected. “However, the upside is that we expect exploration and development levels to stabilize in 2010, and pick up from 2011 onwards, he adds.”

Only 140 MMboe of new reserves was brought on stream last year on the UK shelf, the lowest in the sector’s history, and 2009 also brought just eight new fields into production, a nine-year low. And only six new fields secured government approval compared with 12 in 2008.

According to Gillies: “Less confidence in oil and gas prices, combined with the slower response of service sector costs to the drop in oil price, meant that companies reassessed the economics of new projects. Wherever possible, many companies shelved discretionary spend on new projects, choosing instead to honor existing contracts and focus on maintaining and increasing production from existing fields.”

In 2009, the number of companies operating wells on the UKCS fell to 24, down from 43 in 2008, a reverse of the trend of recent years, the analyst claims. “There isn’t a lack of drilling opportunities in the UK,” Gillies says. “Some companies weren’t able to drill even if they wanted to, due to the downturn and subsequent restricted access to capital funding and tightening of capital budgets.”

Fewer operators also led to fewer wells, with 76 E & A wells drilled last year compared with 120 in 2008. Despite the tail-off, the total of newly discovered reserves of 315 MMboe was 70 MMboe higher than in 2008.

Some companies took advantage of the difficult conditions, Gillies claims: “We saw some opportune corporate acquisitions of distressed sellers in the first half of the year and many rig contracts were secured or renegotiated on more favorable terms than were available in previous years.”

In the first part of the year, when the oil price was lower, UKCS assets changed hands at a discount to Wood Mackenzie’s valuation as the premium offers made in recent years dried up. “However,” Gillies adds, “once the oil price began to recover in the latter half of the year and signs of economic recovery emerged, buyers’ and sellers’ expectations narrowed and asset sales increased.

“Development activity levels may take slightly longer to recover, but we do forecast increased capital investment in 2011. A key indicator of confidence in the UK upstream sector and the ability of the smaller players to become involved once again will be the 26th Licensing Round, expected in the first half of 2010.”

01/13/2010

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