The UK's North Sea oil industry faces an uncertain future with just one new development project approved so far this year, even as output is likely to remain robust in the short term, lobby group Oil and Gas UK said in a report published Tuesday.
The North Sea oil and gas industry has surprised some observers with its resilience since oil prices began collapsing in 2014. Last year saw the first significant increase in UK crude output since 1999, with a 14% rise to 882,000 b/d, helped by an efficiency drive and past investment in big projects.
However this year only one new development project has been given the go-ahead: the Arundel oil field in the BP-operated Andrew Area. With the possibility of no further approvals in 2016, "this is set to be the worst year in the history of the UK continental shelf for new field approvals," Oil and Gas UK said in its annual economic report. The report forecast overall capital expenditure this year would be GBP9 billion ($11.7 billion), compared with GBP14.8 billion in 2014.
The report paints a picture of near-term resilience that should support production until 2018 and also notes benefits from a weaker sterling currency given that oil revenues are in dollars. New projects are now likely to be 25% cheaper on a like-for-like basis than 12 months ago, it says.
But it also describes obtaining finance for new projects as "extremely difficult" and says exploration activity is at an all-time low, meaning the industry collectively is producing four times more oil and gas than it is discovering on an annual basis.
It also includes a downgrade to the total volume of estimated recoverable oil and gas, to 10 billion-20 billion barrels of oil equivalent, from 22 billion boe in last year's report. The volume of recoverable reserves sanctioned for development has fallen by 8% to 6.3 billion boe.
"The UK continental shelf is in urgent need of fresh investment to boost exploration and drive activity, particularly for the supply chain," Oil and Gas UK chief executive Deirdre Michie said, going on to call for additional government efforts to encourage investment.
COST IMPROVEMENT
On the positive side, the report finds the North Sea industry has slashed operating costs by 45% since oil prices collapsed in mid-2014, not only as a result of lower prices in the global supply chain, but through greater efficiency. Average operating costs for oil and gas production are likely to be $16/boe this year, down from a peak of $29.30/boe in 2014, the report says.
"The scale of cost reduction in the UK continental shelf is more than double the natural upstream operating cost deflation, suggesting that efficiency gains have been key to the improvement in the UK's competitiveness," the report found. When prices fell, "the industry's delivery was impressive and, although some supply chain companies were unable to survive, the flurry of bankruptcies that might have been expected did not materialize."
However, the finances of parts of the North Sea industry remain precarious, with the industry expected to notch up a GBP2.6 billion deficit of free cash flow collectively this year, compared with a GBP4.2 billion deficit last year, meaning debt levels for small companies continue to rise. The report estimates the average rate of return of North Sea extraction companies at just 0.2% in the first quarter of this year, compared with 50% in the first quarter 2011.
