Uchenna Izundu
OGJ International Editor
LONDON, May 31 -- Drilling activity on the UK Continental Shelf may fall by half in 2009 and drop again in 2010 despite the new incentives and tax changes introduced by the Chancellor in April, Deloitte LLP has warned.
The advisory firm said high operating costs and tax burdens are affecting drilling with investment in new and existing fields expected to fall to £3.5-4.5 billion this year and dropping again to £2.5-4 billion in 2010.
The analysis was given at a briefing in Aberdeen in partnership with trade association Oil & Gas UK, which lobbied for major changes in the fiscal regime to improve activity on the UKCS, especially with low oil prices.
"Merger and acquisition activity is expected to rise within the next 12-18 months; however equity will be needed for survival," said Deloitte.
"We are back to being an oil economy," said Andrew Ogram, tax partner at Deloitte. "Oil and gas contributed 28% of corporate tax in 2008-09 and although the tax take from the North Sea is expected to almost halve in 2009-10, it is still predicted to contribute one fifth of corporate tax revenues.
The views about the impact on the UK North Sea are also shared by North Sea consultancy firm Hannon Westwood. Partner Chris Bulley said the firm expected activity to fall as companies rein in unnecessary expenditure and discretionary drilling plans are put on hold. "By the end of first quarter 2009 there were 7 new well spuds and 10 sidetracks compared with 20 and 8, respectively, for the same period of 2008."
The drop in activity this year contrasts significantly with that of 2008 where according to data collected by Hannon Westwood, the UK saw its highest exploration and appraisal drilling since the last peak in 1997. Operators added 841 million boe to reserves from the 18 exploration and 19 appraisal successes last year against 1.08 billion boe produced in the year.
However, the effect of the current downturn is not reflected in 2008 drilling activity because many of the 2008 wells were already contracted to rig companies and drilling budgets allocated.
The Central North Sea proved again to have the largest number of exploration wells and the majority of successes. "The northern North Sea, West of Shetland, and southern North Sea all recorded exploration drilling success, while there was no drilling in 2008 in the East Irish Sea, English Channel, or Southwest Approaches. A multiwell, multioperator drilling programme is, however, scheduled for the East Irish Sea in 2009," said Hannon Westwood.
However, the central and southern North Sea had the most appraisals, with the gas prone latter area having seven successes. Sterling Resources discovered that its Breagh field had an east and west extension, which was confirmed by two wells on Block 42/13.
Hannon Westwood estimates that the 18 successful exploration wells found 488 million boe (an average finding rate of 27.1 million boe/well), while 353 MMboe was found by 20 successful appraisal wells (an average rate of 17.7 MMboe/well).
Finding costs reflect the wide variety of well types, with an overall UKCS average of $2.80/boe for appraisal and $2.30/boe for exploration.
Contact Uchenna Izundu at [email protected].
