North Sea oil and gas bounce may be short-lived
The UK oil industry’s trade body is cautious over prospects for the maturing oil province
Scant exploration activity and flat capital expenditure remain concerning for a UK North Sea industry that faces a battle to replace maturing hydrocarbons reserves, despite a projected rise in production this year and progress with some major projects.
The latest Business Outlook from industry body Oil and Gas UK forecast oil and gas production on the UK Continental Shelf (UKCS) would rise by around 5% in 2018 to 620m-640m barrels of oil equivalent (boe), assuming new fields come on stream as planned and existing field operators can maintain efficiency improvements seen since the oil price crash of 2014.
Given the sector downturn and the maturity of the North Sea oil province, companies have done well to boost output from the 517m boe achieved in 2014. However, the report said a failure to boost drilling as the oil price rallies will likely cost the sector dear in coming years.
"The production outlook for the basin is much more uncertain post-2019. The lack of new project approvals and the recent low level of development drilling in the last few years, means it is likely that the UKCS will return to a position of production decline during the early 2020s," the Business Outlook said.
While the number of field approvals scheduled for this year could be six-to-eight times higher than in 2017, the industry is starting from a very low base. Oil and Gas UK says field approvals could total 12-16 in 2018, compared to just two in each of the previous two years and five in 2015.
Many of those approvals stem from exploration started before the downturn. More telling may be that the estimated 10-12 exploratory wells to be drilled in 2018 remains below the 13 or 14 wells drilled annually in the 2014-17 period, while capital expenditure is likely to be little changed at £5.5bn-6bn ($7.7bn-8.5bn) this year, compared to £5.6bn in 2017—it was running at as high as £11.7bn in 2015, before the full impact of the oil price slide had kicked in.
Launching the report, Deirdre Michie, chief executive of Oil & Gas UK, highlighted the North Sea industry's recent bounce as grounds for hope. "Our sector is leaner, more efficient and more optimistic than it has been in recent years and 2018 looks set to be a better year," she said.
And there are reasons for optimism from some parts of the North Sea. Of the 14 wells drilled in 2017, five potentially commercial discoveries were made, adding 350m boe to proven and probable reserves.
Discoveries lift gloom
UK Oil & Gas said it was encouraged by drilling in the vicinity of existing infrastructure in the of the northern North Sea, such as Apache's Beryl field, and Total's Alwyn acreage, as well as BP's Capercaillie discovery in the central North Sea.
"These discoveries have the potential to be developed quickly, while also helping to improve the ongoing economic viability of infrastructure and extending its productive life," the report said. It also noted positive drilling results from wildcat wells in less explored areas such as the Hurricane Energy's Halifax discovery and BP's Achmelvich discoveries in West of Shetland, and Statoil's Verbier find in the outer Moray Firth.
Some sizeable developments have also been given the go-ahead. These include the Penguins project, in which operator Shell and ExxonMobil each have 50% stakes, announced a positive final investment decision in January. The project, which promises to revive production from an area northeast of the Shetland Islands first developed in 2002, has reserves estimated at around 80m boe, and Shell has said it can break even at less than $40 a barrel.
However, the 94 wells—71 development, 14 exploration and nine appraisal wells—spudded on the UKCS in 2017 were the fewest since 1973, back in the early days of North Sea development. The shutdown of the Ineos-owned Fortes pipeline for a period during late December 2017 to repair a crack in an onshore section could have happened anywhere, but also served as a reminder of the potential cost of maintaining ageing North Sea infrastructure. The incident resulted in some 40% of UKCS oil and gas being shut in and contributed to a spike in the oil price.
Supply chain pressure
Michie said companies in many areas of the supply chain were still struggling and the report found evidence that mass lay-offs in the North Sea industry since 2015 were taking their toll on the sector's knowledge base.
Over 300,000 people are estimated to work in, or to support the sector across the UK and more than half of companies surveyed by Oil and Gas UK expected employee numbers to rise in 2018, after a 4% fall in 2017. But it said some firms are reporting difficulties in recruiting people with some types of skills and are stepping up their trainee and apprenticeship schemes in an effort to find solutions.
The downturn has taken its toll on the sector's skills base
The report suggested that up to £25bn of pre-development opportunities were under consideration, containing an estimated 3bn boe of recoverable reserves. Oil and Gas UK said timely progression of these projects was essential to help support the UK supply chain and sustain production into the next decade, but that realising them would be challenging.
"Many will require further appraisal, review of the scope to improve efficiency and reduce costs, and/or deployment of innovative technologies to ensure they are commercially attractive," it said.