The UK's oil producers group Oil & Gas UK cut Wednesday its forecasts for oil and gas production this year amid signs that declining output from mature fields and outages in the North Sea continue to outpace the impact of new projects and rising investment.
The UK's oil and gas production is expected to contract by up to 22% this year to between 1.2-1.4 million b/d of oil equivalent, compared to output of 1.53 million boe/d in 2012, the offshore operators association said in an annual report.
In February, Oil & Gas UK had predicted that the UK's output would fall to average between 1.45-1.5 million boe/d this year, following a 14% output reduction in 2012 and a record 19% slump in 2011.
The UK is currently producing around 1.4 million boe/d, according to the latest data from the end of May, and there are 15 fields with combined reserves of 470 million boe expected to come on stream this year, the industry body said.
But neither the new projects nor the return to production of Total's Elgin and Franklin gas condensate fields will stem the UK's sliding production volumes, it concluded.
Over the previous decade, the UK's mature North Sea has seen decline rates average around 9% a year but a recent spate of outages and maintenance shutdowns offshore have exacerbated normal field declines.
Production efficiency rates from the North Sea have taken a tumble in recent years, due to a number of unplanned field shut-ins related to safety issues at the North Sea's 40-year-old infrastructure.
Production efficiency, the ratio of actual production to nameplate capacity, fell to 63% in 2011, and sank further to about 60% in 2012 despite robust oil prices and record offshore spending, the producers group said.
"The recent decline has resulted from deteriorating reliability, with extended maintenance shutdowns, compounded by several major production outages," Oil & Gas UK said in an annual economic report.
Looking further ahead, Oil & Gas UK said it expects production levels to remain little changed in 2014 before staging a brief recovery and "potentially" rising towards 2 million boe/d in 2017.
INVESTMENT RISING
The UK's oil production has been falling from a peak of close to 2.82 million b/d in 1999 when the country's net exports were 972,000 b/d.
The UK became a net importer of oil in 2006 and of gas in 2004 but has benefited from the oil price stimulus on upstream activity in recent years despite rising industry costs.
Fueled by higher oil prices, total capital upstream investment in the UK increased to GBP11.4 billion ($17.9 billion) last year, reflecting a number of new fields in deepwater to the west of Shetland and heavy oil projects in the central North Sea.
UK Oil & Gas estimated that capital investment in the North Sea could rise to around GBP13.5 billion in 2013, the association said, adding however that the production efficiency of existing assets remains in "worrying decline."
On drilling, the producer body said exploration and appraisal drilling increased overall in 2012, with 24 explorations, up from 14 in 2011, and 19 appraisals compared to 16 in 2011.
"Exploration drilling activity, averaged over the past four years, has been the lowest for a decade, with 2011 being notably low. This can partly be blamed on the economic crisis and limited access to finance for smaller exploration companies," Oil & Gas UK said.
Oil & Gas UK said in February that UK offshore oil and gas investment had risen to its highest level in 30 years, thanks to changes in the tax regime introduced over the past four years.
The latest report also follows a study in March which concluded that business confidence among the UK's offshore oil and gas contractors was steadily increasing.
COST GROWTH
But rising costs remain a key challenge for new developments, Oil & Gas UK said, estimating that the total cost of operating on the UK continental shelf rose by 10% in 2012 to GBP7.7 billion.
This year, a further 10% cost increase is expected with total operating expenditure reaching GBP8.5 billion, Oil & Gas UK said.
Unit operating costs continued to rise last year to an average of GBP13.50 ($21.50) per barrel as production continued to fall and spending on asset integrity and rejuvenation increased, the body said. A number of North Sea fields, however, now cost more than GBP40/boe to operate, it said.
With almost 42 billion boe recovered from the UK continental shelf to date, further recovery is forecast to be in the range of 15 billion to 24 billion boe, the body predicted.
To achieve the top end of the estimate, total expenditure of up to GBP1,000 billion in 2012 money will be required over the remaining life of the UK shelf, Oil & Gas UK estimated.
"This is because of the need for further extensive exploration and the fact that unit costs of development and operation are now approaching GBP30/boe as reserves become more difficult to extract," Oil & Gas UK said.
In June, the UK government launched an independent review into the UK's offshore oil and gas industry to garner policy recommendations to deal with the challenges of extending the productive life of the North Sea.
Although set to side-step recommendations on offshore tax policy, the review will look at ways to reduce offshore production outages, extend the life and use of existing infrastructure, streamline the licensing regime and improve collaboration across the industry.
