A little more than 1 year ago the U.K. Chancellor of the Exchequer removed tax relief on exploration and appraisal (E&A) drilling.
This earned him the nickname "Driller Killer" among some U.K. operators (OGJ, Apr. 5, 1993, p. 34).
One year later, E&A drilling in the U.K. has fallen but not as much as was feared--at least not yet.
Figures released by Arthur Andersen & Co., London, show E&A drilling was down 27% in the 12 months following the tax change. This time last year there were predictions that E&A drilling would be slashed in half.
Arthur Andersen said 111 E&A wells were spudded during April 1993-March 1994. This compares with 153 E&A wells spudded in April 1992-March 1993.
Because of maturity of the U.K. continental shelf, some operators last year said E&A drilling levels were falling before the tax reform occurred. Arthur Andersen figures show drilling activity fell 47% from March 1991 to March 1992.
FEWER MEANS BETTER
However, Arthur Andersen says the full effects of abolishing tax relief have not been felt: "We have yet to see how the sector will perform when the government's compensatory gesture of transitional exploration relief expires" (OGJ, June 28, 1993, Newsletter).
Exploration drilling after tax reforms went into effect is calculated to have shown a 39% success rate, "a very respectable rate for the U.K. continental shelf." Before reforms, about 25% of wildcats typically found hydrocarbons.
The analyst expects operators to drill fewer high risk wells in the future, choosing to conduct 3D seismic surveys in favor of rank wildcat drilling.
The trend to quality exploration rather than quantity is borne out by Amerada Hess Ltd., a company with a reputation for successful developments in small U.K. fields and a leading critic of the tax reforms.
REDUCING RISK
"We are trying to reduce the risk of exploration by spending more on assessing risk," said Richard Hardman, Amerada Hess U.K. exploration director. "The tax reforms mean we must look for bigger structures while reducing the risk on smaller prospects."
Reducing risk equates to more 3D seismic surveys. Three years ago Amerada Hess acquired 50,000-60,000 line km of 3D data. This year 100,000 line km of data will be acquired, with the same volume expected in 1995.
"Now, 3D surveying is a lot cheaper than it was," Hardman said. "With multiple stream and multiple source vessels now being used, you don't need many fine days to complete a survey."
Hardman said the real problem following tax reforms was funding exploration. Next year Amerada Hess U.K. plans to drill 15 wells, "half of what we had hoped," based on a $16/bbl oil price.
"We know how many wells we can drill if the price is $16/bbl," Hardman said. "What we don't know is how many we will drill if the price is $13/bbl or even $20/bbl."
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