Oil & Gas UK Economic Report 2015

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

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.

Capital investment excludes E&A capital.