Oil & Gas UK 2016 Activity Survey: Impressive improvements no match for oil price headwinds

In another time, the performance of the UKCS over the last year would be a cause for celebration. As reported in today’s Oil & Gas UK 2016 Activity Survey (click here), oil and gas production from the North Sea increased by 9.7% in 2015 from 2014 levels, representing the first production increase seen since the turn of the century.

UKCS Liquids and Gas Production, Source: OGA, Oil & Gas UK

This has been achieved on the back of investing £100bn (£60bn capex, £40bn opex) in the basin over the last five years, which has also delivered an increase in production efficiency (annual production/production potential) from 60% in 2012 to over 70% in 2015 and seen operating costs reduced from $29.30/bbl in 2014 to an estimated $17/bbl in 2016.

All this has been impressive but in the current $30/bbl oil price environment, over 40% of existing UKCS fields are operating at a loss. If these fields were to be shut down, they would not only represent a loss of production for the basin, but also a significant reduction in the availability of the export infrastructure relied upon by many more fields.With the loss making fields likely to be older, fixed structures, we expect that their closure would result in the removal of a disproportionately large part of existing infrastructure.

Percentage of UKCS fields operating at a loss Source: Oil & Gas UK

With expenditure peaking at £14.8bn in 2014, it is unlikely that the hard won improvements over the last few years can be sustained. Less than £10bn is expected to be invested in 2016, with the majority of this going to existing sanctioned developments and less than £1bn expected to be directed to new development. Meanwhile, exploration activity has been dropping in the basin since before the oil price began declining and points to a future lack of projects to fill the pipeline.

Number of exploration wells per year Source: Oil & Gas UK, OGA

The industry has made substantial progress in reducing costs and improving efficiency and will need to work collaboratively to continue to do so. The report believes this will not be sufficient to secure the future of the basin however and has called on the government to provide a lifeline through permanent lower tax rates combined with improvements in the Investment Allowance. We question if these measures will be sufficient to stimulate investment and would look for wider commercial and fiscal incentives focused on exploration/ development such as has been successful in Norway to help boost activity.