Oil & Gas UK Economic Report 2014

However, although the activity and success of exploration drilling has been disappointing recently, the amount of investment in the first stages of the business cycle has remained high. In 2012, expenditure on seismic surveying and E&A drilling was at £1.7 billion, its highest since 1991. It fell only slightly to £1.6 billion in 2013. This increase reflects the substantial rise in the cost per UKCS exploration well, to around £70 million in 2013 (see Figure 24) after averaging £20 million over the ten previous years. The increased cost per exploration well drilled is due to a number of inter-related reasons: • Resources have become more expensive – costs associated with drilling have increased significantly in recent years. Jack-up and semi-submersible rig rates are

around 60 per cent and 90-100 per cent more expensive, respectively, than they were two years ago. • More technically difficult wells are being drilled – the easier targets have been drilled on the UKCS, so a higher proportion of wells are aimed at high pressure high temperature, heavy oil and deep water reservoirs. These are often riskier, take longer to drill and require more expensive equipment. • Economies of scale are being lost – over time, well drilling campaigns are becoming progressively shorter as opportunities on the UKCS become fewer and smaller. Synergies are lost as more companies are now pursuing opportunities and have to compete with one another for skills and resources. Rig clubs are being considered as an option to regain value arising from scale.

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Figure 24: Drilling Cost per Exploration Well

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20 Drilling Cost per Exploration Well (£ Million - 2013 Money)

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: DECC, Oil & Gas UK

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ECONOMIC REPORT 2014