Oil & Gas UK’s 2016 Activity Survey shows that while the industry’s drive to improve efficiency, reduce operating costs and increase production has had marked success, exploration remains at an all-time low with no sign of improving.
Most concerning is the collapse of investment in new projects. This year the upstream industry is expected to approve less than £1 billion to spend on new projects, compared with a typical £8 billion per year in the past five years – sparking fears for the long term future of the industry.
The trade body is calling on the Government for urgent reforms of the special taxes paid by the industry to attract investment back into the basin and minimise loss of capacity during the downturn.
Oil & Gas UK’s latest report on the activities of exploration and production companies operating in the UK Continental Shelf (UKCS) charts the industry’s progress in the pursuit of competitiveness. Sector-wide action has pushed unit operating costs down by a third from an average of $29.30/barrel of oil equivalent (boe) in 2014 to $20.95/boe in 2015, aided by a 10%rise in oil and gas production – the first in 15 years. Costs are expected to fall by a further 20% this year to around $17/boe, representing a 42% improvement in just two years.
However, pressures on the sector have grown as prices have continued to fall; the oil price has fallen by 70% since summer 2014 and the average daily gas price by 20 per cent last year. Despite the rise in production to an average of 1.64 million boe per day in 2015, revenues fell by 30% to £18.1 billion.
If the oil price remains at around $30 for the rest of 2016, nearly half (43 per cent) of all UKCS oil fields are likely to be operating at a loss, deterring further exploration and capital investment, and making additional cost improvement imperative.
Oil & Gas UK’s chief executive, Deirdre Michie, said: “The UKCS is entering a phase of ‘super maturity’. While the industry’s decades of experience provide great depths of knowledge and expertise which can be applied to recover the still significant remaining resource, the report highlights the challenges that the falling oil price poses in our capability to maximise economic recovery of the UK’s offshore oil and gas.”
While success per exploration well drilled in 2015 was the highest for 10 years, the rate of exploration for new oil and gas reserves remains at an all-time low. Just 13 exploration and 13 appraisal wells were drilled in 2015 and, as companies restrict capital even further, as few as seven to 10 exploration wells and six to nine appraisal wells are forecast to be drilled this year – leading to a further downturn in activity.
Previously sanctioned capital investment that was being spent over a period of several years is tailing off. Looking ahead, with depressed production revenues leaving very little to re-invest, less than £1 billion of fresh capital in new projects is expected to be sanctioned this year, compared with an average of £8 billion per year over the past five years.
Total capital expenditure fell from £14.8 billion in 2014 to £11.6 billion last year and is expected to fall further this year to around £9 billion. This drop in activity is being felt right across the supply chain, which contracted by one quarter in the last year and is expected to fall further in the coming year as current projects near completion, according to Rystad Energy. With demand for goods and services falling, ongoing job losses are the personal cost to individuals and families across the UK.
The pace of decommissioning is accelerating. Over the last year, the number of fields expected to cease production between 2015 and 2020 has risen by a fifth to over 100. Reserves reported by companies for potential future development have fallen from 10 to 8.8 billion boe, as projects are deemed uncommercial in the current environment.
Deirdre Michie continued: “The basin has to compete fiercely in the global market to attract price-constrained capital to the UK. A coherent approach by the industry, regulator and Government will be critical to boost the industry’s competitiveness and its investors’ confidence.
“Together we need to transform the basin into a highly competitive, low tax, high activity province, which is attractive to a variety of operators and sustains and supports the important supply chain based here. It is absolutely crucial that the recently announced Aberdeen City Region Deal and funding for the Oil and Gas Technology Centre, which will help support the industry in the longer term, is accompanied by the right signals in relation to the tax regime.
“The industry currently pays special taxes at a headline rate of 50% (67.5% for fields paying PRT). A significant permanent reduction in those rates is now urgently needed, a move which would be consistent with HM Treasury’s ‘Driving Investment’ plan for fiscal reform. This should be combined with additional measures to help unlock the late-life asset market and encourage exploration by permanently removing the special taxes from all discoveries made over the next five years. Finally, improving the effectiveness of the Investment Allowance would stimulate activity in the short term and attract fresh investment.”
Deirdre Michie concluded: “We have a huge task ahead but the prize is worth fighting for. The UKCS still holds up to 20 billion boe which can continue to provide a secure supply of energy for the country, support hundreds of thousands of jobs, generate several billion pounds in corporate and payroll taxes from the supply chain and stimulate countless technological innovations.”