Oil & Gas UK survey sees small offshore production bounce

By OGJ editors

While oil and gas production from the UK Continental Shelf (UKCS) will recover slightly from its big slump of 2011 this year, the outlook remains darkened by resource maturity and last year’s surprise tax hike, according to an annual survey of operating companies.

The Oil & Gas UK survey estimates average oil and gas production this year at 1.85 million boe/d, compared with 1.82 million boe/d in 2011, when output slumped by 18%. Before then, the average decline in the mature producing province recently had been about 6%/year.

The 2011 production drop resulted from scheduled and unscheduled outages; health, safety, and physical factors; and greatly reduced demand for natural gas, according to Oil & Gas UK.

Malcolm Webb, chief executive of the industry group, noted in a foreword to the survey report that last year’s production decline was accompanied by a collapse in exploration activity and “an acute decline in capital efficiency” as rising costs combine with the need to increase investment to sustain the production base.

“Although headline investment has tripled over the last decade,” he said, “the amount of oil and gas recovered per pound invested has fallen by more than two thirds over the same period, leaving the industry fighting hard to stand still.”

He said the UKCS has the potential to deliver as much as 24 billion boe more oil and gas. Current plans anticipate recovery of 10 billion boe. Survey results indicate proved reserves in existing fields and projects under development at 7.1 billion boe.

The exploration slump

Last year, during the first quarter of which the government changed the tax structure in ways that raised the effective rate on production from some old fields to 81% of profit, operators drilled only 15 exploratory wells, half what they drilled in 2010, Webb noted (OGJ Online, Mar. 25, 2011). It was the lowest level of exploration since the mid-1960s.

Partly because operators have drilling commitments carried over from last year, exploratory and appraisal drilling will rebound to 35-40 wells this year, of which 25 wells will be exploratory.

Respondents to this year’s survey identified 64 new-field projects with varying probability of development. Of them, 9 are west of Shetland, 29 in the central North Sea, 15 in the northern North Sea, and 11 in the southern North Sea and Irish Sea. The projects represent reserves of 3.8 billion boe.

Half the identified new fields have reserves less than 20 million boe. Thirteen potential field developments have reserves exceeding 100 million boe.

The survey indicated potential to develop 1 billion boe from 137 projects in existing fields, down from 2.6 billion boe in 160 projects in last year’s survey.

Brownfield investments representing 400 million boe are noncommercial under the current tax rates, according to the survey.

Capital expenditure on the UKCS will increase to £11.5 billion in 2012, compared with £8.5 billion last year and £6 billion in 2010. The investment increase is dominated by five large projects.

Decommissioning expenditure for existing fields from this year forward is estimated at £28.7 billion (2011 pounds). New investment on probable developments could add £4.3 billion to the projection.

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