Falling capital efficiency for operators on the UK continental shelf (UKCS) is threatening the area’s global competitiveness for upstream investment, offshore trade association Oil & Gas UK has warned.
According to its Activity Survey 2007 report, cost inflation of 15-20%/year is reducing the efficiency of investment, with companies having to spend more money to maintain production from this mature basin. Four years ago, the industry invested £3.4 billion (2003 money) to develop and deliver 1.3 billion bbl of reserves over time. In 2007, £4.9 billion was invested to deliver just 600 million bbl of oil and gas over time.
Operators spent £12 billion last year to explore, develop, and extract the UK’s oil and gas reserves. The association believes that investment will remain strong over the next 10 years but stressed that it is important that the UKCS remain competitive to secure interest. The high tax regime is of particular concern to operators and needs to be changed.
The survey shows there are opportunities to sustain investment of £29 billion over the next 10 years, said Mike Tholen, OGUK’s economics director. Of that investment, £12 billion is secured, but getting approval for the remaining £17 billion and the development of the associated 2.7 billion bbl of production “will depend on these possible projects competing favorably with those in other basins around the world,” Tholen said.
Companies have also seen their operating costs for existing assets rise steeply in 2007. “The new report shows operating expenditure rose by £500 million in 2007 to £6.2 billion and is expected to rise further to around £6.5 billion in 2008, reflecting a steady but substantial increase in expenditure on asset integrity as well as further inflationary pressure on the UKCS,” OGUK said.
Gas production fell by 5% in 2007 because of natural decline, Norwegian and Dutch gas imports, and mild weather, which dampened demand. Meanwhile, oil production responded to the start-up of 20 new fields in 2007 and over the year, remained static at 1.6 million bbls. OGUK said 15 more fields are scheduled to come on stream in 2008, and overall production is expected to decline at only 4%/year until the end of the decade.
While exploration and appraisal drilling activity rose in 2007 to 111 wells from 70 wells, the increase was largely the result of appraisal drilling instigated by the need to reduce technical and commercial risks in such a high-cost environment. Operators are finding it very expensive to develop small discoveries on the UKCS.
OGUK said, “Exploration drilling in pursuit of new oil and gas reserves increased in 2007 to 34 wells from 29, two thirds of which were drilled near existing fields. Initial indications are that the accompanying 60% increase in spending on exploration and appraisal to £1.3 billion resulted in 13 discoveries totaling 300-400 million bbl of oil and gas. Despite the increase in spending, however, this was less than was discovered in 2006.”