Oil & Gas UK Economic Report 2015

• The Pitfalls, Peaks and Progress Conference – held for the past two years to share the reasons for exploration success and failure. • The 21st Century Exploration Road Map – to improve geological knowledge of the UKCS. This involves: o An analysis of E&A wells drilled in the Moray Firth and central North Sea (CNS) from 2003 to 2013. The OGA has carried out a systematic review of 97 wells to determine the root cause for drilling failures and successes and is discussing the findings with explorers. A final report will be published later this year. o An in-depth study by the British Geological Survey (BGS) that takes a fresh look at the Palaeozoic reservoirs in the CNS, Orcadian Basin and Irish Sea. This joint industry and government-funded study involves companies sharing regional seismic and deep well data and the BGS holding regular technical meetings with industry participants to ensure transfer of knowledge and ideas. The project will be completed in early 2016 with the publication of digital geological maps and related information. HM Treasury has also taken steps to stimulate exploration. Measures announced in the March and summer 2015 Budgets include: • A reduction in the Supplementary Charge (SC) to 20 per cent and introduction of an Investment Allowance that should assist to improve the post-tax value of exploration. • A commitment to consult with industry on further measures to promote exploration, potentially to be included in Budget 2016. • £20 million of funding to acquire fresh 2D seismic on the Rockall Basin and Mid-North Sea High, currently under way. The government-funded seismic is a potential game changer and epitomises the new tripartite approach between industry, HM Treasury and the OGA. The contract to acquire seismic has been awarded to WesternGeco Ltd. Seismic acquisition started in the summer of 2015, acquiring up to 19,000 kilometres of new data. This will be processed and released freely to industry and academia through Common Data Access (CDA) Limited in early 2016, together with the release of additional data. This new information, in conjunction with the Palaeozoic study, will provide new insight into the UKCS and should help stimulate interest in the 29th Licensing Round, which OGA plans to announce in 2016.

7.5 Capital Investment 17

After seven consecutive years of strong growth peaking at £14.8 billion last year, capital investment is expected to fall sharply in 2015 to £10-11 billion; although cost overruns in major projects, as seen in recent years, could see it exceed £11 billion. The investment outlook over the next three years is dominated by a small number of large developments that received final investment decision before the oil price began to fall in June 2014 and which are still progressing to completion. Investment in just four of those projects – Clair Ridge, Schiehallion, Mariner and Kraken – is expected to account for around one third of total investment this year. Much of the remaining investment comes from a multiplicity of smaller projects that were sanctioned between 2011 and 2013, and are now approaching completion. Given the size of these developments, capital investment is unlikely to fall below £10 billion this year, despite the challenging economic climate. Most of these projects will come on-stream over the next three years and will, in turn, support a gradual improvement in the production outlook. However, capital investment in new opportunities beyond that which is already committed appears to be scarce. The only new field approved since September 2014 is the Edradour-Glenlivet development. It is hoped that the Culzean high-pressure, high-temperature field development will also be sanctioned this year, but at mid-year it was yet to gain final approval. The relatively few new projects coming forward for sanction and development, combined with the completion of current development projects, leads Oil & Gas UK to forecast a rapid fall in investment over the next three years, as shown by Figure 36. Current plans suggest £6-7 billion of new investments could be approved in 2016 and 2017. However, approval of these projects is not assured, and even if they are sanctioned, annual investment may still fall by £2-4 billion per year over the next three years unless further new opportunities are discovered and progressed rapidly. The lack of new projects in development reflects, in part, the decline in exploration over much of the last decade, as outlined earlier. Investors are cautious due to the fact that unit operating costs have doubled over the last five years and there has been a tendency over the past two years towards project delays and capital overspend. During that time, only one major new field development appears to have been delivered without delay and on budget. Figure 37 illustrates the limited number of new field approvals over this year and last, and the importance of securing investment in some large projects over 2016 and 2017.

17 Capital investment excludes E&A capital.

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ECONOMIC REPORT 2015