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UK warned on exploration decline

The country’s watchdog isn’t happy after just four exploration wells were drilled last year

The head of the UK's oil and gas industry watchdog has urged operators to "use it or lose it" as a report last week revealed that oil and gas exploration in the UK North Sea has fallen to historic lows.

Andy Samuel, chief executive of the Oil and Gas Authority (OGA), urged operators to explore and exploit their North Sea licenses or have them revoked.

The 2018 Economic Report on the sector showed that years of cost control by operators and the supply chain in the wake of the oil price crash meant new North Sea investments should break even at $40-$50/boe. However, operators have been reluctant to try find new hydrocarbon reservoirs.

The report, by trade body Oil & Gas UK (O&GUK), found that just four exploration wells were drilled last year - a decline on the past two previous years and the same number as in 1965 before production even started.

Fears are growing that if exploration and appraisal drilling doesn't at least double in the next year, the basin faces a dramatic decline that could set in as soon as 2021. This is opposed to an ambitious plan backed by the OGA and industry leaders known as "Vision 2035" which has set out hopes that the North Sea will continue to produce oil and gas, generating additional revenues worth over £290bn ($381bn) to the UK economy in the next 20 years.

At a breakfast event in Aberdeen where the report was launch, Samuel said: "We believe the oil price is at a level there is no excuse not to invest. Therefore those who don't want to invest can expect us to be tapping their shoulders and having a 'use it or lose it' conversation, which should be relatively-straight forward given that MER UK [Maximising Economic Recovery] is a legally-binding obligation on operators. But I'd much rather they see the value themselves."

The Oil and Gas Authority's MER UK Strategy came into force on 18 March 2016.

On the up side, 2018 saw an increase in proposed capital projects for the first time in two years. There were six confirmed final investment decisions (FIDs) in the first eight months of the year, an increase on both 2017 and 2016.

At the event, Steve Phimister of Royal Dutch Shell hinted that the operator would commission one more North Sea project this year. Having sold half its UKCS portfolio since 2014 - the bulk to North Sea newcomer, Chrysaor - this year Shell has revealed plans for the Penguins redevelopment project, the Fram gas and condensate field and the BP-operated Alligin field West of Shetland in which Shell is a joint partner. He added that the three sanctioned projects hadn't initially been on the cards for 2018, but they went ahead once the project concepts had been reworked and deals with the supply chain had been agreed.

Further sanctioned projects noted in the report were BPs Vorlich, Nexen's Buzzard Phase II development and Premier Oil and Dana Petroleum's Tolmount, one of the largest southern North Sea gas fields to have been discovered in recent years.

There was concern for the impact cost cutting has had on the supply chain in recent years. Ross Dornan, Market Intelligence Manager for O&GUK and author of the report urged operators and tier 1 service companies to act to avoid "permanently damaging the supply chain", as the report revealed 55 companies in the sector have failed since 2015.

Safety warnings

Samuel added to the warning and begged operators to ease the pressure, saying that safety could be at risk.

"The service sector has had a hard time the last three years. One area that, please, operators and tier ones could help is through equitable payment terms. We hear a lot of complaints in this area," he said.

"Workforce engagement is vital. I am concerned about some of the leading indicators on safety. The workforce are your primary line of defence, please listen to them."

The cost of operating North Sea assets have fallen 30% since 2014, from £9.8bn to £7bn, while 'unit operating costs' (UOCs) have halved in the same period.

The report noted that these efficiencies were "the greatest UOC reductions" compared to comparable basins across the globe. Efficiencies have driven production up 20% over the last five years.

However, the report also highlighted figures that showed the UKCS still remained one of the highest-cost basins in the world.


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