Report shows renewed vigour on UK Continental Shelf
22 January 2013
A broader range of tax allowances and a sustained high oil price boosted drilling activity on the UK Continental Shelf (UKCS) by one third in 2012, according to a new report by Deloitte, the business advisory firm. The report documents drilling and licensing activity across North West Europe for the whole of last year.
The report, compiled by Deloitte’s petroleum services group (PSG), shows 65 exploration and appraisal wells were drilled on the UKCS in 2012, marking a 33% increase on last year’s total of 49. This compares to lower drilling activity levels reported in Norway in 2012, down by 19% when compared to the previous year.
A range of other key indicators suggest positive prospects for the sector in 2013, following a range of tax breaks introduced by the UK Government to stimulate activity in the North Sea during 2012.
Last year also saw a surge in deal activity (where oil and gas fields are bought and sold). Across North West Europe, 129 deals were announced, 80 of which took place in the UK. This equates to a 30% increase on the UK’s 2011 deal figure. These were split almost equally between farm-ins – companies taking a stake in another company’s field – and deals to purchase oil and gas fields, at 40% and 43% respectively. This compares to 64% of all deals in 2011 being farm-ins and deals to purchase fields only representing 14%. The fact that companies are buying more fields outright is another indicator of rising investor confidence.
Interest in field development also reached a 10-year high. The Department of Energy and Climate Change (DECC) granted 21 field development approvals, and eight incremental projects – investment in older fields for redevelopment – were sanctioned. Last year was also the fourth consecutive year in which steady growth in field development approvals was reported.
Graham Sadler, managing director of Deloitte’s PSG, said current circumstances were driving confidence in investment on the UKCS.
He said: “After several years of caution and uncertainty, we have a more positive environment, where a number of factors such as tax incentives, high oil price and appetite to invest have combined to make 2012 the most encouraging year for a long time.
“The Government introduced a range of tax reliefs which have sufficient breadth and depth to create an environment in which companies of all sizes and investors have the confidence to take some risk and expand their operations in the North Sea.”
The final quarter of 2012 turned in the strongest performance of the year, according to the Deloitte report. Some 29% of new wells during the year were drilled between October and December. The lowest number of wells was drilled during the first quarter of the year. This trend has been consistent throughout the years as drilling operations are often affected by adverse weather conditions during the winter months.
More than 90% of new field developments in the UK were eligible for tax allowances following the 2012 Budget.
In March 2012, the Chancellor announced an increase in the small field allowance, and introduced a new allowance for large deep-water developments targeting West of Shetland. A further new allowance for shallow water gas field developments was announced by the Government in July 2012.
These allowances are similar to those introduced in 2009 for High Pressure High Temperature (HPHT) and heavy oil projects, designed to encourage riskier high-cost projects.
In September 2012, the UK Government also announced a brown-field allowance, intended to extend the lifespan of existing fields.
Finally, measures announced to provide more certainty on the decommissioning tax relief, when implemented, should allow companies to recover cash previously tied up in financial guarantees for further investment across the UKCS.
Derek Henderson, energy partner for Deloitte in Aberdeen said: “North Sea oil and gas production may have passed its previous zenith, but in the recently announced tax reliefs the UK Government has what appears to be a useful strategy to manage the decline in North Sea’s reserves.
“This creates what every industry sector needs – confidence – and investment in developing new fields and delivering production will benefit from the kind of environment which we are currently experiencing.”
The average Brent oil price for the fourth quarter of 2012 was USD110.44, slightly lower than the average for 2012 which was USD 111.70.