North Sea to experience lower levels of activity over the next year

Paul Boughton

Drilling and deal activity on the UK Continental Shelf (UKCS) will remain at ‘a steady low’ for at least the next year, suggests a new report from business advisory firm Deloitte. 

Poor weather and high costs have already had an impact on the amount of exploration and appraisal (E&A) work conducted by operators in the region during the first quarter.

The report, which details activity across North West Europe over the first three months of 2014 and was compiled by Deloitte’s Petroleum Services Group (PSG), found a total of 12 E&A wells were drilled on the UK Continental Shelf (UKCS). Although that represents an increase of five wells compared with Q4 2013, it is a decrease of one well on the same period last year.

There were also fewer deals completed compared with the same period last year, with 10 reported this quarter compared with 19 a year ago. This is also eight deals fewer than in the final quarter of 2013. Farm-ins, where one company takes a stake in another company’s field, remained the most prevalent type of deal, making up 50% of the total for offshore UK.

Graham Sadler, managing director of Deloitte’s PSG, said the drop in deals could be due to a gap in price expectations between vendors and buyers, and explained that significant challenges remained in the region.

He said: “It is very likely that what we’re seeing is a result of the continuing higher operating costs and the ongoing challenges of a mature region. These could be having a knock-on effect on deal flow, since sellers might be seeking a higher price than buyers may be willing to pay.

“When profitable extraction is more challenging for operators, farm-ins are the most popular type of deal. Bringing another company in helps to spread risks and costs within the time frames required. Operators are definitely showing more caution, indicating, again, that incentives from Government may be the only way to make the economics more viable.” 

This caution is underlined by the fact that only two gas fields started producing this quarter and one condensate field was approved for development. All of these received the small field allowance.

The Government’s support of recommendations made in Sir Ian Wood’s report, ‘UKCS Maximising Recovery Review’, along with the fiscal review announced in Chancellor George Osborne’s Budget last month, are positive steps and may lead to measures being put in place to incentivise activity offshore.

However, while the recommendations of the Wood Review are good news for the industry, tax changes confirmed in last month’s Budget could lead to additional costs for North Sea operators. The changes to the way bareboat chartering is taxed applies to companies operating on the UKCS leasing rigs and offshore accommodation. The measure will increase costs and lead to upward pressure on day rates at a time when operating costs are already at an all-time high. 

Derek Henderson, office senior partner for Deloitte in Aberdeen, said the tax was a blow for industry, especially as there had been some evidence of a slight decline in rig rates during Q1 2014. He said: "There are positive steps being taken to encourage more activity and investment in the North Sea over the longer term, not least the recommendations in Sir Ian Wood’s Review. The tax to bareboat chartering has caused some real concerns, however. While it doesn’t affect operators directly, many expect that the cost will be passed on to them and could discourage drilling.

“The sector is in for a long haul back to anything like the performance of the peak years and, while there are sound measures being brought in to encourage activity, we’ll need to see a concerted effort from Government and industry to restore confidence in the sector in the short term and to ensure maximum recovery from the UKCS in the long term.”

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