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Oil & Gas UK Activity Survey 2014

22 July 2014

The Oil & Gas UK Activity Survey 2014 highlights the situation the UK upstream sector now finds itself in. It is based on the latest data supplied by all exploration and production companies operating in the UK and provides a uniquely well informed insight into the opportunities and potential of this vital sector of the economy. The key results are summarised below.

Industry Performance in 2013
• Invested a record £14.4 billion of capital, 25 per cent of which was invested in just four fields.
• Spent £1.6 billion drilling 15 exploration and 29 appraisal wells (including sidetracks and encompassing seismic data acquisition and interpretation) and discovered 80 million boe.
• Drilled 120 development wells (including sidetracks), similar to 2012.
• Initiated development of 26 brownfield opportunities, 23 of which were enabled by the Brown Field Allowance.
• Spent £8.9 billion operating on the UK Continental Shelf (UKCS), 15.5 per cent higher than in 2012.
• Produced 1.43 million barrels of oil equivalent per day (boepd), eight per cent less than in 2012.
• Saw unit operating costs rise to £17/barrel of oil equivalent (boe), up from £13.50/boe in 2012.
• Expects to pay £5 billion in production taxes in the fiscal year 2013/14 (down from £6.5 billion in 2012/13). 

Reserves Maturation
• A total of 10.7 billion boe are reported in the survey as being either in production, under development or potentially being considered for investment, compared with 11.4 billion boe in last year’s survey.
• Around 0.4 billion boe have been removed from company investment plans due to increases in costs, poorer reservoir prognosis and the re-appraisal of a number of key developments.
• Proven reserves have decreased significantly from 7.1 billion boe a year ago to 6.6 billion boe in 2014.
• Around 9.4 billion boe of oil and gas reserves are forecast to have a 50 per cent or greater chance of being recovered.

Drilling Activity
• Whilst appraisal activity was slightly better than expected at 29 wells in 2013, exploration continued on its downward trend since 2008, with only 15 wells drilled last year compared with 44 in 2008. This represents a 66 per cent fall over the last five years.
• Of the 5 to 0 exploration and appraisal (E&A) wells forecast to be drilled last year, 20 were postponed and four were cancelled, primarily because of difficulties in securing rigs or an inability to access finance.
• The latest figures indicate that exploration activity discovered just 80 million boe of recoverable reserves in 2013.
• Around £1.6 billion was spent on E&A activity last year, including seismic data acquisition and interpretation.
• Based on operators’ forecasts, it is anticipated that 25 exploration wells and 11 appraisal wells will be drilled in 2014. These plans, however, remain under severe market pressure, not least from any further increase in drilling costs.
• 120 development wells (including sidetracks) were drilled in 2013, a similar number to the last two years.

• In 2013, the UKCS experienced the highest rate of investment for more than three decades at £14.4 billion. This is expected to fall to around £13 billion in 2014 and decline further to around £7 billion by 2016 to 2017, unless the rate of maturing new developments increases.
• In 2013, ten new fields requiring £8 billion of investment and delivering 0.46 billion boe over time were sanctioned and an additional 26 brownfield developments of varying sizes were also approved.
• Currently, a total of £39 billion of investment is approved on the UKCS; £27 billion is on new fields whilst £12 billion will be spent on existing assets.
• There is the potential for another £35 billion (2.7 billion boe) to be invested in projects with a 50 per cent or greater chance of development. However, all of these projects are sensitive to any cost increases, not least from drilling; vessel; and floating, production, storage and offloading (FPSO) costs.
• A further £20 billion (1.3 billion boe) of investment is being considered in projects that currently have a less than 50 per cent chance of proceeding.
• 43 new field developments (2.7 billion boe), ranging in probability of proceeding, are currently being evaluated.
• Just under half (21) of these potential new field developments are less than 20 million boe in size, whilst ten have recoverable reserves in excess of 100 million boe.
• 109 potential incremental projects (1.38 billion boe) are also being evaluated by companies.
• More than half of all investment in 2014 is in receipt of a field allowance, demonstrating the effectiveness of these allowances.
• Further new opportunities, including a number of high pressure high temperature (HPHT) discoveries, need to be rapidly matured to avoid a major decline in activity.
• Whilst the Brown Field Allowance has had a significant positive impact on investment, there is a need to consider how it can be expanded to encourage deployment of enhanced oil recovery (EOR) techniques.

Operating Expenditure
• Operating expenditure rose to £8.9 billion in 2013, £0.5 billion higher than anticipated. This is the highest annual expenditure in real terms in the life of the UKCS.
• Operating costs are anticipated to rise further to around £9.6 billion in 2014, with asset integrity and maintenance, production efficiency1, general productivity and cost pressures being contributory factors.
• Average unit operating costs (UOCs) have now risen to £17/boe and the number of fields with a UOC greater than £30/boe has doubled over the last 12 months. This trend is unsustainable.
• To stem the rise in UOCs, industry must do more to boost production and control the growth in costs.
• Based on current metrics, an increasing number of assets will be unviable in the event of any prolonged fall in oil and gas prices.

• Production averaged at 1.43 million boepd in 2013 (eight per cent lower than 2012, with oil and gas down nine per cent and six per cent, respectively). This was better than anticipated at the end of the first half of the year, and may reflect some early results from work to improve production efficiency as part of the government-industry task force PILOT.
• Over the last three years, production has declined 38 per cent, but with the combination of new field start-ups and fields coming back on-stream, it is expected to begin to pick up in 2014.
• Whilst production efficiency has fallen from an average of around 80 per cent to 60 per cent over the last decade, it is expected to improve in 2014.
• As a result, operators are more positive about their asset performance, with more than 80 per cent predicting production will improve in 2014, compared with less than 50 per cent anticipating such a trend in 2013.
• Looking ahead, 25 fields are expected to start production in the next two years bringing combined reserves of 1.3 billion boe on-stream. By 2018, 40 per cent of production will come from new field developments; this emphasises the need to continually mature opportunities following exploration.

• Total decommissioning expenditure is expected to be at £40.6 billion (2013money) by 2040, of which £37 billion is for currently sanctioned installations and the additional £3.6 billion to decommission developments that are yet to be approved.

Oil and Gas Prices
• The oil price averaged at $109/barrel in 2013, similar to 2012.
• The gas price averaged at 68 pence/therm in 2013 (day ahead price), which is 13 per cent higher than in 2012.

Malcolm Webb, Chief Executive of Oil & Gas UK, said in a foreward to the survey:

“Our industry can only continue to compete globally if we have a strong home market for oilfield goods and services, serving a healthy offshore business here in the UK. This future is now at risk. Without greatly improved exploration success, a significant improvement in productivity, and the urgent implementation of a new and more dynamic approach to regulation and taxation, this potential will not be properly realised.

“The Oil & Gas UK Activity Survey 2014 shows the challenges we face. Whilst there are over ten billion barrels of oil equivalent (boe) currently in company plans, four billion boe of these have yet to secure investment. Improving recovery from existing fields and an active exploration programme to find new resources has the potential to add at least another ten billion boe, but none of this will be easy.

“The UKCS still holds significant potential – but only if the business conditions for investment in exploration, appraisal and development are right. Exploration is facing its biggest challenge in 50 years. Exploration slumped in 2011 and has yet to recover. Taken together, the last three years have seen the lowest rate of exploration activity in the history of the UKCS. This year, 25 exploration wells are planned, which still falls far below the 44 drilled just six years ago, and even if all the wells proceed, the rate of drilling is too low to recover even a fraction of the potential resources.

“There are other challenges too. Many of our existing assets are working hard to improve productivity. Despite an eight per cent fall in production, operating expenditure in 2013 rose by 15.5 per cent to an all-time record of £8.9 billion. Average unit operating costs have risen sharply to £17/boe and the number of fields with an operating cost greater than £30/boe has doubled in the last year.

“In 2013, capital investment reached an impressive £14.4 billion and, thanks to a number of large projects now underway, investment is likely to remain above £10 billion until 2015. However, on current projection, overall investment by 2016 to 2017 will fall to half that of 2013. Whilst there are still good projects out there, more are needed.

“The stream of new field allowances introduced over the last few years have been helpful in enabling investment on various types of development that would otherwise be stranded by current high UKCS tax rates. However, the overall fiscal regime for the UKCS is increasingly seen to be overly complex, burdensome and uncompetitive – and hence in need of a major overhaul.

“Given this troubling picture, Sir Ian Wood’s Review is, to say the least, a timely intervention. Sir Ian proposes the creation of a new, appropriately resourced, arm’s length regulator and recommends that industry, the Department of Energy & Climate Change and HM Treasury adopt a tripartite approach to Maximising Economic Recovery on a new collaborative basis across the UKCS. He also sets out his ideas on the strategies which we should now adopt.

"There is very strong support across industry for this new paradigm. Given this, and trusting that government is also minded to embrace this fundamental change in approach, there can be real grounds to believe the decline of recent years will be arrested and we will again enjoy sustainable growth in investment, jobs and production.

“But let us not fool ourselves, this will not be achieved without much hard work and dedication to radical change and sustained improvement, which will be required of us all, in both the industry and government – and there is no time to lose. We need to implement these changes without delay. The clock is ticking.”

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