Oil & Gas UK Economic Report 2014

Exploration and Appraisal Drilling

As well as a sharp decline in the number of exploration wells drilled over the last couple of years, those that have been drilled have yielded little success. Less than 100 mboe of recoverable oil and gas have been discovered over the last two years (see Figure 22 opposite) and less than half of that is currently deemed commercial. Oil & Gas UK’s mid-case forecast suggests that another six billion boe remain to be discovered on the UKCS, but, if the exploration success rate of the last five years continues, it would take more than 45 years to reach this mid-case figure. It has now been more than five years since the last multi-hundred million boe discovery, indicating that a change in exploration strategy and knowledge is needed to unlock new resources. The Wood Review highlighted exploration as an early priority for the new regulator to supplement work in this area currently being undertaken by PILOT’s Exploration Task Force (see section 5).

Exploration activity failed to recover in 2013 with only 15 wells being drilled. Over the last five years, 2009 to 2013, an average of 20 exploration wells have been drilled each year. This contrasts with the five-year period from 2004 to 2008 when an average of 35 exploration wells were drilled each year (see Figure 21 opposite). There have been two key events that have damaged exploration drilling since 2008. Firstly, the financial crisis led to a significant fall in activity in 2009. As the prices of oil and gas fell rapidly, companies took stock and, understandably, wanted to reduce their risks. In addition, it became far more difficult and expensive for smaller companies to finance exploration wells. There were signs of a recovery in 2010 before the rate of SC levied on production was increased from 20 to 32 per cent in the Budget of 2011. This destroyed a lot of value in exploration prospects and drilling activity has yet to recover, despite an enhancement in the scope and value of the small field allowance.

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ECONOMIC REPORT 2014