UK oil production stabilises
12 Jan 2015
After several years of steep decline, UK oil & gas production has stabilised and is expected to grow in the near future, according to Wood Mackenzie.
The analyst’s UK upstream review for 2014 reveals that £12 billion of capital investments were made in the oil & gas sector last year, keeping the UK in the top 10 countries for upstream spend globally.
Wood Mackenzie UK Upstream senior research analyst Erin Moffat said high investment levels in the North Sea were driven by “sustained high levels of activity and high costs including progress on the development of more technically challenging projects”.
At an oil price of $60/barrel, 95% of pre-sanction oil & gas reserves in the UK generate less than a 15% return on investment
Wood Mackenzie’s Erin Moffat
Nearly a third of the total UK spend of around £3.8 billion was associated with just five offshore assets last year: Mariner, Schiehallion, Laggan, Clair and Golden Eagle.
However, Wood Mackenzie’s review also warns that 2014 was a very challenging year for the UK Continental Shelf (UKCS) with rising costs, poor exploration results and falling oil prices squeezing already tight project economics, casting further concern over the outlook for 2015 and beyond.
“The high cost environment in the UK meant that project returns were already subject to increased scrutiny during 2014,” added Moffat.
“The dramatic fall in oil price towards the end of last year only adds to this. The UK Government reduced the tax rate by 2% in December 2014, but we expect growing pressure to reduce it further. At an oil price of $60/barrel, 95% of pre-sanction oil & gas reserves in the UK generate less than a 15% return on investment. This has intensified concerns over future UKCS investment as further cuts or delays to projects are likely. A low oil price could also impact producing fields with high operating costs, with the potential for shut-ins.”
Wood Mackenzie estimates that £2 billion of spend associated with pre-sanction projects could be at risk over the next two years as a result of current oil prices.
“Without this,” added Moffat, “UK Upstream spend in 2016 would be around £6.3 billion - just over half of 2014 levels”.
UKCS exploration and appraisal activity continued to fall in 2014, with the number of exploration wells decreasing by 18% to just 23 wells.
“2014 drilling was considerably lower than the previous ten year average of 81 wells per year, due to restricted access to finance for some players, high costs, a stretched service sector, and a focus by some companies on progressing large, capital intensive development projects,” said Moffat.
“The current oil price means 2015 will unsurprisingly bring further budget cuts – with exploration spend top of the list.”
According to Wood Mackenzie, only four new fields were brought onstream in 2014, with total recoverable reserves of 185 million barrels of oil equivalent (mmboe).
“This is a drop of 54% on the previous year, due to project delays caused by modifications to existing facilities and commissioning issues, the number of new fields to start production was far below the 11 expected at the start of the year,” added Moffat.
“However, the outlook for 2015 is more positive, as we expect 12 new fields will start production, adding around 100,000 barrels of oil equivalent per day (boe/d) in 2015 - around 6% of total UK production.”
