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ACTIVITY SURVEY 2015O
IL & GAS UK
OIL &
GAS UK
ACTIVITY SURVEY 2015
ACTIVITY SURVEY 2015
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Contents
1. Foreword 52. Summary of Findings 7 2.1 Industry Performance in 2014 7 2.2 Oil and Gas Prices 7 2.3 Reserves 7 2.4 DrillingActivity 8 2.5 Production 8 2.6 Capital Investment 9 2.7 OperatingExpenditure 9 2.8 Decommissioning 93. Prices and Markets 104. Fiscal and Regulatory Reform 145. 2014 Performance 156. Business Outlook 20 6.1 Reserves 20 6.2 DrillingActivity 24 6.3 Production 35 6.4 TotalExpenditure 40 6.5 Capital Investment 42 6.6 OperatingExpenditure 44 6.7 Decommissioning 487. SupplyChainPerspective 508. SummaryofKeyStatistics 54
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1. Foreword
Oil & Gas UK’s Activity Survey 2015providesthemostauthoritative,comprehensiveanduptodatepictureofthestate of this vital sector of the UK economy.
If thechallenge facingour industrywassignificantwhenoilwasat$110perbarrel, thescaleof the issuehasgreatlyescalatedwiththeoilpricecollapse.However,whilstthatdrophasexacerbatedtheseriouschallengesthebasinfaces,itisnottherootoftheproblem.
We noted in the 2014 Activity Survey that the UK’s offshore oil and gas basin faced threemajor challenges: high costs,high taxesandanunder-resourced regulator.Whilst someprogresshasbeenmade, thepaceandextentofchangeforallofthemhasnotbeensufficient.
Industryrecognisesthatitscostbaseisunsustainableandhasbeentakingstepstoreduceitscostsandimproveefficiency. However, it will take time for this to achieve a substantial impact and, unfortunately, the cost ofoperatingtheUKContinentalShelf(UKCS)hascontinuedtorisefrom£8.9billionto£9.6billionin2014.Thisreportdemonstratesthatcostreductionsofupto40percentperbarrelofoilequivalentmustbeachievedtosecureasustainablefutureforthisbasin.Thiscanbedonebutonlythroughcombiningmajoreffortoncostreduction,productionimprovementandfreshinvestment.
Wemustgetthebalancerightbetweeninvestmentandcostcontrol.Costcuttingalonewilldiminishthisindustry.Tosurvive,wemustsustaininvestment,whichiswhythisprovinceisinurgentneedofsignificantregulatoryandfiscalreform.
Inadequate stewardship coupledwith an unstable fiscal regime and steepproductiondecline havemade theUKCS,onaunitofproductionbasis,oneoftheleastcompetitiveplacestooperateintheworld.Withoutsustainedinvestment,criticalinfrastructurecoulddisappear,takingwithitimportantNorthSeahubs,effectivelysterilisingareasofthebasinforfurtheroilandgasproduction.
Apermanentshifttoa lowerandsimpler taxregime isnowurgently requiredtoallow investors toshifttheirfocusawayfromfiscalriskandtowardsinvestmentopportunitiesintheUKCS,ofwhichtherestillremainaverysignificantnumber.Successivegovernmentshavebeenalltoowillingtoincreaseheadlinerates,whichnowrangefrom60to80percent.Unlessthoseratesarenowswiftlyandpermanentlyreduced,ourcollectiveeffortstoreducecostsandimprovetheefficiencyofouroperationswillbetonoavail.
ThisreportalsoconclusivelyshowsthatexplorationactivityontheUKCShascollapsed.In2014,just14explorationwellsweredrilled,thelowestnumbersincethebeginningoftheindustryinthe1960s.Weexpectthenumberfor2015tofallevenlower,possiblyintosinglefigures.Appraisaldrillingisalsofallingaway.Theseareexceptionallyworryingleadingindicatorsofwherethisindustrymightbeheading.
Ontheotherhand,capital investment in theUKCSreached£14.8billion in2014.Atfirstglancethisseemstobe good news. However, this risewas primarily a result of cost over-runs on ongoing development projects.Furthermore,halfoftotalcapitalinvestmentlastyearwasspentonjust12fields,allofwhichweresanctionedpriorto2014.Thereisverylittlefreshinvestment.TheUKCSisjustnotgeneratingnewprojects.
BoththeBritishandtheScottishGovernmentshaverecognised,intheirindustrialstrategies,thatthevalueofthisindustryismuchmorethansimplyasourceofproductiontaxes.Ialsohopegovernmentisalerttothedangerthat,withoutimmediateradicalactiontoimprovethetaxregime,hundredsofthousandsofjobssupportedby
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thisindustrywillbeleftinjeopardyandtheUK’senergysecurityandbalanceoftradewouldalsostandtosufferserious damage.
TheUKoffshoreoilandgasindustryisanationalasset.Ourindigenousresourcesholdthepromiseofasuccessfulindustryforyearstocome.However,wefaceexceptionalchallengeand,withoutconcertedeffort,anuncertainfuture.Industryandgovernmentmustnowdowhatisneededtoreducecosts,encourageinvestmentandavoidpremature decline.
MalcolmWebbChiefExecutive,Oil&GasUK
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2. Summary of Findings
Oil & Gas UK’s Activity Survey 2015isbasedonthelatestdatasuppliedtousbyallexplorationandproductioncompaniesoperatingontheUKContinentalShelf(UKCS).
2.1 Industry Performance in 2014
• Deliveredproductionrevenuesof£24.4billion,thelowestsince1998.• Spent£9.6billionoperatingtheUKCS,almost8percenthigherthanin2013.• Invested£14.8billionofcapital,halfofwhichwasspentononly12fields.• Spent£1.1billionontheacquisitionandinterpretationofseismicdataandondrilling14exploration
and18appraisalwells(includingsidetracks).• Spentover£1billionondecommissioningactivity,thehighestannualspendonrecord.• Paid£4.7billioninproductiontaxesinthefiscalyear2013/14,andexpectstopaysubstantiallyless
than£2.8billioninthefiscalyear2014/151,thelowestinover20years.• Experiencedanegativecashflowof£5.3billionin2014,theworstpositionsincethe1970s.• Produced1.42millionbarrelsofoilequivalentperday(boepd),thebestyear-on-yearperformancein
15years,slowingproductiondecline.• Sawunitoperatingcostsriseto£18.50/boe,upfrom£17/boein2013.• Discoveredaround50millionboeofpotentiallycommercial reserves, significantly lower than the
averageofover250millionboeperyearoverthelasttenyears.• Drilled126developmentwells(includingsidetracks),slightlyhigherthanthe120in2013.• Sanctionedthedevelopmentof8newfieldsand28brownfieldopportunities.
2.2 Oil and Gas Prices
• Oilpriceaveraged$99perbarrel(bbl)in2014,althoughtheaveragepriceinquarter4wassignificantlylowerat$76/bblasthepricecrashedto$55/bblbytheendofDecember.
• Gaspricesaveraged50penceperthermin2014(dayaheadprice),26percentlowerthanin2013.
2.3 Reserves
• Atotalof10billionboearereportedinthesurveyaspotentiallyrecoverable.• Sanctioned reserves in production or under development have fallen from 6.6 billion boe to
6.3billionboein2015.• Thereareafurther3.7billionboethatcouldpotentiallyattractinvestment,downfrom4billionboe
reported a year ago.• Ofthe3.7billionboeofpotentialinvestmentopportunities,lessthan2billionboearelikelytobe
developedbasedonquarter42014intentions,andwenowexpectafurtherreductioninthisnumber.
1 See OBR Autumn StatementDecember2014atwww.gov.uk/government/publications/autumn-statement-documents
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2.4 DrillingActivity
• Exploration activitywas significantlyworse than expected in 2014,with only 14 of the expected 25wellsactuallydrilled (includingsidetracks).Thiscompareswith15wells in2013and reflectsadownward trend since 2009.
• Inabilitytoaccesscapitalwascitedasthemainreasonforlowexplorationactivity,whichledtothediscoveryofjust50millionboethathasthepotentialtobecommerciallydeveloped.
• Asfewas8to13explorationwellsareforecasttobedrilledin2015astheloweroilpriceaddstoexistingbarriers.
• 18appraisalwellsweredrilled(includingsidetracks),7morethanwereforecastbutasignificantfallfrom the 29 wells drilled in 2013.
• Nomorethan5appraisalwellsareforecastfor2015,afallthatisdrivenbypoorexplorationresultsover the last 4 years.
• 126developmentwells(includingsidetracks)weredrilledin2014,comparedwith120wellsin2013.
2.5 Production
• Productionaveraged1.42millionboepdin2014,1.1percentlessthanin2013,representingthebestyear-on-yearperformancein15years.
• Liquidsproductiondeclinedby2.6percent,butwasoffsettosomeextentbya1.1percentincreaseingasproduction.
• Followingproduction fallsof19percent,14percent,and8percent ineachof the last3years,respectively, the improvement inperformance in2014hasbeendrivenbyan increased focusonproduction efficiency, the impact of new start-ups and no major unplanned shutdowns during the year.
• Despitesteadyproduction,revenuesfelltojustover£24billionfortheyear,thelowestsince1998.• Lookingahead,upto15newfieldscouldbeginproductionin2015,manyofwhichareexpectedin
thefirsthalfoftheyear.Ifthereisnomajorprojectslippage,productioncouldincreasetoaround1.43millionboepdthisyear.
• Theimpactofnewstart-upsissogreatthat,by2019,morethanhalfofUKCSproductionislikelytocomefromfieldsthatstartedproductionsincetheendof2012.
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2.6 CapitalInvestment
• At£14.8billion,capitalinvestmentwashigherthananticipated,largelybecauseofcostover-runsandprojectslippageonsomeofthebiggestinvestments.
• Investment is forecast to fall sharply to £9.5–11.3 billion in 2015, depending on current projectperformanceandtheamountofnewinvestmentthatissanctionedthisyear.
• Feedbackfromoperatorsindicatesthatverylittlenewinvestmentisexpectedtobesanctionedin2015ascompaniesreviewtheirbusinessplansinlightofthefallingoilprice.
• It is expected that new investmentswill amount to less than £3.5 billion over the next 3 years. Lastyear’ssurveyforecastupto£8.5billionwouldbeinvestedoverthesameperiod.
• Annual investment in currently sanctioned projects will decline rapidly and could collapse to £2.5billionby2018oncethewaveofrecentlargeinvestmentsentersproduction.
• Quarter42014datasuggestatotalof£38billionwillbeinvestedincurrentlysanctionedprojectsontheUKCS,thoughsomeofthesemaynowbeatriskofcancellationastherewillbecontinuedpressure on costs and contract rates.
• Afurther£26billionisrequiredtodevelopprojectswitha50percentorgreaterchanceofproceeding,potentiallydelivering2billionboe.Thisrepresentsafallof£9billioncomparedtothepreviousyear.
• Furtherstill,£30billioncouldbeinvestedin1.7billionboeofprojectsthat,atprevailingconditions,arenotsufficientlyattractiveormaturetoproceedtosanction.
• Freshinvestmentwillrelyonsustainedimprovementsinthecostbaseandasignificantimprovementin fiscal terms; without such changes, the impact on the UKCS and the wider supply chain will besevere.
2.7 OperatingExpenditure
• Whilstoperatingexpenditurerosebyalmost8percentto£9.6billionin2014,itisanticipatedtofallin2015asaconsequenceofthecostreductioninitiativescurrentlybeingundertakenbyindustryinreactiontofallingrevenues.
• Unitoperatingcostshaverisentoarecordhighof£18.50/boein2014asaresultofcostincreasesandasmalldeclineinproduction.
• Macro-level cost and efficiency improvements in the order of 20-40 per cent per boe must beachievedtoensureasustainablefuturefortheUKCS.Thiscanbedeliveredthroughacombinationofcostreductionandbrownfieldinvestment.
2.8 Decommissioning
• Just over £1 billion was spent on decommissioning activity, representing almost 4 per cent of totalexpenditure.
• Theannualaverageexpectedspendondecommissioningover thesecondhalfof thedecadehasincreasedto£1.8billionfrom£1.5billion,asaresultofcostescalationandaccelerationofactivity.
• Theimpactoftherecentchangeinoilpricehasyettobefullyfactoredintodecommissioningplansandmayultimatelyleadtofurtheraccelerationindecommissioning.
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3. Prices and Markets
OilMarketsandPrices
Aftermorethanthreeyearsofunusualstabilityintherangeof$100-115perbarrel(bbl),Brentpricescollapseddramatically in the secondhalf of 2014.DatedBrent fell from$110/bbl inmid-year to $55/bbl at the endofDecemberandtradedbelow$50/bblinJanuary2015,thelowestlevelsincethefirstquarterof2009duringthedepths of the world recession.
This slide in crude oil prices began inmid-2014 as the slowdown in demand growth in developing countriesreinforcedtheeffectofthecontinuingexpansionofcrudeoilsupplyinNorthAmerica,leadingtoarapidbuild-upofexcesscommercialstocks.Thedeclineinpriceacceleratedinlate-NovemberwhentheOrganisationofPetroleumExportingCountries(OPEC)declinedtocutitsoutputtorebalancethemarketandabandoneditsearlier,successful, short-term management of supply in an effort to regain market share. This decision represented the mostsignificant shift in Saudi andOPEC strategy formany years and ushered inwhatmay be an awkward periodin 2015 in which the market seeks to establish a new equilibrium without guidance from OPEC over its targetprice.Thepriceelasticityofbothsupplyanddemandinoilmarketsisnotoriouslylow,sothemarketwilltakesometimetorebalance.Already,theprojectedreductioninworldwideupstreamcapitalexpenditureofabout 15 per cent in 2015will slow supply growth in high-cost basins and the fall in end-user priceswill graduallystimulateoildemand.
Long-datedBrent futuresprices,whichreflectmarketexpectationsandthehedgingactivityofproducersandconsumers, declined by much less than dated Brent in 2014. In the second half of 2014, Brent for deliveryin 2018 fell from $100/bbl to $75/bbl, reflecting the view that lower prices will eventually reduce supplygrowth and stimulate demand, therefore bringing themarket back into balance at prices considerably above $50/bbl.Atthetimeofwriting,inearlyFebruary,the2018Brentfuturespriceshavefoundsupportat$75/bbl. Whilst there are now early signs of a gentle recovery in Brent oil price, it remains to be seen whether thiswill be sustained. It should certainly not be seen as a ‘solution’ to the challenges facing the UK’s offshore oil and gas industry.
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Figure 1: Brent Futures Curves
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GasMarketsandNationalBalancingPointPrices
Thewholesalegasmarketpricefollowedadifferentbutequallydramaticpathin2014.TheannualaveragepriceattheNationalBalancingPoint(NBP)fellfrom68pencepertherm(p/th)in2013to50p/thin2014.However,thisdeclinehadlittletodowiththeslideintheoilprice,atleastuntilthelastfewweeksof2014.Thecollapseinoilpriceswasnotmatchedbythoseofgasand,byJanuary2015,thegapbetweenBrentandNBPprices,expressedinbarrelsofoilequivalent(boe),wasthenarrowestsincethe2009recession.
Figure 2: Dated Brent and National Balancing Point Prices
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The influenceofoilpricesonNBPgasprices is reflected in forwardwinterpricesbecauseof the inclusionofoilpriceswithalaginsomelong-termcontractsincontinentalEurope,andtheneedfortheUKtoattractgasfrom the continent tomeet peakwinter demand. The slide in Brent prices from $110/bbl to $55/bbl in thesecondhalfof2014wasaccompaniedbyadecline in forwardNBPprices fordelivery inwinter2015-16 from 60p/thto48p/th.Ifoilpricesstabiliseat$50-60/bbl,NBPmonthaheadpricesareexpectedtosettleintherangeof40-50p/th,assumingnormalweatherandsupplypatterns.
ThemainreasonbehindthefallinNBPpricesfrom60p/thto35p/thbetweenJanuaryandJunelastyearwasthe extraordinarilywarmweather in thewinter of 2013-14. This left the entire Europeanmarketwith excessstocksattheendofthewinteranddepresseddemandforstorageinjectioninthesummermonths.Theslidein NBPpriceswasallthemoreremarkablebecauseitoccurredagainstabackgroundofpersistentfearsthattherewouldbeaninterruptiontoRussiangassuppliestoEuropearisingfromtheUkraine-RussiacrisisandEuropeanandUSsanctionsagainstRussiafollowingitsannexationofCrimeainMarch.Pricesthenrecoveredaheadofthewinterbutstillreflectedtheeffectsofwarmerthannormaltemperatures.
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Figure 3: Daily National Balancing Point Prices
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2015
Last year was the warmest on record in the UK with an average temperature of 9.90C,comparedtoa30-yearaveragefrom1981to2010of8.80C.Everymonth,exceptAugust,waswarmerthanthelong-termaverage.ThiswastheprincipalfactorbehindthefallintotalUKgasdemandfrom78billioncubicmetres(bcm)in2013toanestimated70bcmin2014,thelowestsince1994,despitetheslightrecovery ingasuseforpowergeneration.ThiscomparestopeakdemandforgasintheUKofmorethan103bcmin2004.DemandforgasinEuropeshowsasimilartrend,fallingbyabouttenpercentin2014andmarketsacrossthecontinentremainedwell-suppliedthroughout the year.
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4. Fiscal and Regulatory Reform In response to the various business challenges posed by amatureUK Continental Shelf (UKCS), a number ofregulatoryandfiscalchangesarerequired.ThisshouldassistwithmaximisingtheUKCS’hydrocarbonpotential,asadvocatedbytherecommendationsoftheUKCS Maximising Recovery Review,undertakenbyanindependentteamledbySirIanWood(theWoodReview)2.Thenecessaryregulatoryandfiscalchangesare:
1)The establishment of a properly resourced, independent and expert regulator, the Oil and GasAuthority(OGA),backedbyprimarylegislationenactedintheInfrastructureAct2015.TheOGAhasbeen tasked with facilitating collaborative behaviour to maximise the realised value of the UKCS’reserves to the economy as a whole. The OGA will also focus on industry priorities and act as acentre of expert knowledge to informwider UK Government policy, building on the government’s Oil and Gas Industrial Strategy launched in March 20133.
2)Wide-ranging reform to the UK’s upstream fiscal regime to ensure it regains international competitivenessandreflectstheopportunitiesofamatureandhigh-costoffshoreenvironment.Thisisbestachievedbyasubstantialreductionintheheadlinerateoftaxaswellasacommitmentfromgovernment that it recognises that rateswill have to continue to fall as the resourceopportunitiesdiminishasthebasinmatures.Furthermore,theremustbeasignificantsimplificationofthecurrentfield allowance incentives through a single, basin-wide incentive that is based on investment size. A commitment to implement an Investment Allowance was given in the Autumn Statement and industry isworkingcloselywithgovernmenttodelivertheAllowanceatBudget2015.
2 The UKCS Maximising Recovery Reviewisavailabletodownloadatwww.woodreview.co.uk3 The Oil and Gas Industrial Strategyisavailabletodownloadatwww.oilandgasuk.co.uk/OilandGasIndustryCouncil.cfm
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5. 2014 Performance
2014wasachallengingyearfortheUKoffshoreoilandgasindustry.ThisreportpredominantlyfocusesontheUKCS’headlineperformance,displayingdatafromthroughoutthebusinesscycle,fromexplorationtodecommissioning,toprovideinsightintorecentperformanceandnear-termtrends.
Toprovidecontext,itisalsousefultoconsidertheeventsofthelast12months.Somehavehadanimmediateimpactonthebusiness,otherswillbesignificantinshapingthefutureofthisindustry.
InFebruary2014,therecommendationsoftheWoodReviewwerepublished.ThereviewhighlightedthebenefitsoftheindustrytotheUKeconomyandbroughtasharpfocusonthechallengesitfacedevenat,whatwerethen,muchhigheroilandgasprices.Itrecommendedafreshtripartitestrategyunitingindustry,HMTreasuryandanew independent government regulator tomaximiseeconomic recovery from theUKCS (MERUK). Therehasbeensignificantprogresssince,withtheformationofanewregulatoryframeworkandtheestablishmentofan arms-lengthregulator,theOGA.
Meanwhile,theUKGovernmentBudgetinMarchlastyearbroughtaboutanindustry-widereviewofoilandgastaxationledbyHMTreasury.Italsosawthebirthofanewfieldallowanceforultra-highpressure,hightemperature(HPHT)fields,which,unlikepreviousallowances,isdesignedtoincentiviseexplorationactivityandthedevelopmentoffield‘clusters’.TheclusterconceptisoneofthefirsttangiblesignsoftheWoodReviewinaction.
Lookingatspecificprojects,thebiggestfielddevelopmentapprovaloftheyearwasannounced inJune,whentheCatcherAreadevelopment,operatedbyPremierOil,wasformallyapprovedbytheDepartmentofEnergy&ClimateChange(DECC).Theproject’sequityholdersannouncedplanstoinvestover£1billiontosecuretotalreservesofaround96millionbarrelsofoilequivalent(boe).
Politicalevents in2014shoneaspotlighton the industryand its importantcontribution to localandnationaleconomiesacrosstheUK,particularlytheleaduptotheScottishReferendumon18September.
Septemberalsomarkedthebeginningoftheoilpricefall,atrendthat isaddressed indetail inthePricesandMarketssectionofthisreport.FromaBrentspotpriceof$100.2/bblatthebeginningofSeptember,theyearendedwithaBrentspotpriceof just$55.3/bbland it fellyet furtherthroughtheearlypartof2015. Industrywasalreadyundertaking initiatives to improve its costefficiency,butwitharoundone thirdofUKCSoilfieldsoperating at a loss as their revenue stream is halved, thesemeasures havebeen accelerated and are rapidlybeingimplemented.
In lateOctober, Shell announced the cessationof production from theBrentAlpha andBravoplatformsas afurthertangiblestepinthegradualdecommissioningofthegiantBrentfield.
On3December,ChancellorGeorgeOsbornedeliveredtheAutumn Statementandannouncedareductionintherateofsupplementarychargeoncorporationtaxfrom32percentto30percent.Inresponsetothefiscalreview,anInvestmentAllowancewasalsoproposedtopotentiallyreplaceallotherexistingfieldallowancesinamovethatwouldgreatlysimplifythefiscalregimeandmakeitlessdistortionary.Whilstindustryhasrespondedpositivelytobothmeasures,asthisreportshows,swiftactionisrequiredtodeliverfurthersignificantchangesintheheadlinetaxrateaswellasrapidimplementationoftheInvestmentAllowance.
TheyearendedwiththeGoldenEagleAreadevelopmentproducingitsfirstoil,signallingthestart-upofafieldwithlargeenoughpotentialtoprovideanewhub.
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Figure4showsindustry’skeyperformancemetricsin2014againstforecastsmade12monthsago.
Figure 4: Key Metrics Scorecard for 2014
ExplorationandAppraisalDrillingin2014
InFebruary2014,basedonoperators’forecasts,Oil&GasUKanticipatedthat36explorationandappraisal(E&A)wellswouldbedrilledwiththemajority(25)beingexploration.Although32E&Awellsweredrilled,thedynamicwasnotasexpected,withmoreappraisalwellsdrilledthanexploration.
Despitehopesofanupturn,explorationdrillingactivity failedtorecoverwith just14explorationwellsdrilled(includingsidetracks)lastyear.Thecurrentrateofexplorationdrillingisthelowestsince1965andurgentactionisrequiredtostimulateactivityinthisareaandgeneratefuturedevelopmentopportunities.Therewereanumberoffactorsthatmeant11wellsfailedtomaterialisein2014,althoughnineofthemarestillplannedbutslippedinto2015orlater.Thekeyconstraintswereinabilitytosecurefinance,lackofaffordablerigsandcostescalation.
Furthermore, exploration drilling continued to yield disappointing results. Whilst half of the wells drilledencounteredhydrocarbons,onlyfourwerereportedassufficientlyattractivetopotentiallybedeveloped.Thesefour discoveries contain combined recoverable reserves of around 50 million boe, which represents a thirdsuccessivepooryearforexplorationvolumesdiscovered,particularlywhencomparedtotheannualaverageofover250millionboeoverthelasttenyears.
Ongoing initiativesto tryand improvethesuccessofexplorationdrilling include:plans to initiatenewseismicdataacquisitionintheUKCS’frontierregions;thecreationofadigitalexplorationmapillustratingnew,previouslyunexploredandnear-fieldopportunities;aconferenceforexplorationspecialiststoshareinformationandbestpractice;andareviewof97wellsinthecentralNorthSea(CNS).Inaddition,theimpactofthefiscalregimeonexplorationisbeingreconsidered,notleastinlightoftheWoodReviewandtherecentlycompletedfiscalreview.
Appraisaldrilling,ontheotherhand,exceededexpectationsin2014.Eighteenwellsweredrilled,sevenmorethanwereforecast.Itishopedthatappraisalactivitywillencouragefurtherresourcestobematured.
Forecast ActualExplorationWells 25 14
Appraisal Wells 11 18
Production(Millionboeperday) 1.4-1.5 1.42
Expenditure(£Billion)• CapitalExpenditure• OperatingExpenditure• ExplorationandAppraisal• Decommissioning
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26.514.89.61.11
UnitOperatingCost(£/boe) 18 18.5
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Productionin2014
Totalproductionin2014was519millionboe(1.42millionboeperday(boepd)).Thisfellwithintheforecastrangeof1.4-1.5millionboepd,representingonlyaslight1.1percentyear-on-yeardecreasecomparedto2013.Thisisapositiveoutcomeasthisisthefirstyearsincepeakproductionin2000thatoutputhasremainedatanalmostconstantlevel,afterthreesuccessiveyearsofdeclineof19percent,14percent,andeightpercent,respectively.2014sawnomajorunplannedoutagesorincidentstodisruptoutput.Animprovementinproductionefficiencyandtheimpactofnewstart-upsalsohelpedlastyear’sperformance.
Figure 5: Production Change from 2013 to 2014
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Netgasproduction(lessthegasproducers’usefortheirownpurposesoffshore)wasupbyaboutonepercentfortheyear,boostedinpartbytheJulietandKewfieldsstart-ups,butalsobyincreasedproductionfromtheJasminefieldthatcameonstreaminlate2013.
Incontrast,liquidsproduction(oilandnaturalgasliquids)fellbyaround2.6percentlastyear.Productionoverthefirsthalfoftheyearshowedaminorincreasecomparedtothesameperiodin2013,butdisappointingdeliveryinthesecondhalfoftheyearresultedinanannualliquidsproductionrateof0.84millionboepd.Thiswaspartlybecauseofthedelayinnewprojectsthatwereinitiallyexpectedtoproducefirstoilinthesecondhalfof2014andpartlyduetoextendedshutdownsonsomeofthebiggestoilproducingfieldsontheUKCS.
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OperatingExpenditurein2014
Thecost tooperateontheUKCS increasedagain in2014toreacharecord£9.6billion, representingariseofalmosteightpercenton2013.Followingincreasesof10percentand15.5percentovertheprevioustwoyears,respectively,companieswerebracedforafurtherrisein2014asthecostsoflabour,rigsandrawmaterialswererisingataratewellabovegeneralinflation.
Thecombinedimpactofasmallproductiondeclineandaggregateoperatingcost increaseledtoarise inunitoperatingcosts(UOCs)from£17/boein2013toalmost£18.50/boein2014.ThelargestproportionofoperatingexpenditurecamefromtheCNS,however,significantoverspendoccurredinthenorthernNorthSea(NNS)whereageingassets,constructionworkattheSullomVoeTerminalandfuelgasshortagesallcontributedtoanincreasedcostbase.
ItisclearthatarapidchangeintheUKCScostbasebeganinquarter4lastyearandhascontinuedtopickuppaceintheearlypartof2015.Acceleratedbythefallingoilprice,workonmacro-levelcostreductionsontheUKCScommencedattheendof2014andwillundoubtedlybecomemorevisiblethisyear.
Capital Investment in 2014
In early 2014, Oil & Gas UK forecast that capital investmentwould fall from £14.4 billion in 2013 to around £13 billion in 2014 as a number of major projects approached completion and commenced production. However,significantcostover-runsandstart-updelaysonanumberofprojectshavemeantthatcapitalexpenditurelastyearrepresentedanewrecordat£14.8billion.
Therewerecostover-runs inasmallnumberof largedevelopmentstotheextentthatthefivefieldswiththebiggestoverspendsaccountedformorethan£1billionofthe£1.8billionincrease.Conversely,capitalinvestmentwas lower than forecast on30 assets, in part, offsettingbigproject overspendelsewhere, helping to containoverallexpendituregrowth.
Aroundtwo-thirdsofthe£14.8billionwasinvestedinnewfielddevelopmentsandonethirdinbrownfieldprojectstoincreaserecoveryfromexistingfields.Geographically,nearly£6billionofinvestmentwasspreadovermorethan100fieldsintheCNSregionin2014,overhalfofwhichwasonexistingassets.Sixfieldseachattractedmorethan£500millionofinvestmentlastyear,fourofthosearelocatedwestofShetland(WofS).DevelopmentinthisfrontierregionoftheUKCSisreliantonground-breakingtechnologyand,asshowninFigure6,securedalmost£4billionofinvestmentlastyear.
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Figure 6: Capital Investment by Region in 2014
CNS£5.80 billion
NNS£3.75 billion
W of S£3.85 billion
SNS, IS£1.40 billion
Source: Oil & Gas UK
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6. Business Outlook
Given the recent sharp fall inoilprice, companyplansareunder intense internal scrutinyand facesignificantrevision,almostonanongoingbasis,asinvestorsseektoadjusttothenewbusinessenvironment.
ForpreviousActivitySurveys,thedatahavebeencollectedoverquarter4oftheprecedingyearwithlittleneedforupdate.Thisworkedwellwhenthebusinessenvironmentwasstableandtherewasgreatercertaintywhencollatingoperators’plans.However,the2015surveyhasbeencompiledduringaperiodoffargreateruncertaintyduetotherapid fall inoilprice.Mostof thesurveyresponseswerereceived in themiddleofquarter42014whentheBrentpricewasinthe$70-80/bblrange.Assuch,theresultsinthissurveyshouldbetakenasahighwatermark.Wherepossible,thesurveyresultshavebeenmodifiedtoreflectlatestbestestimatesbasedonadatareconciliationprocessundertakeninJanuary2015.
However,thereverberationsofthepricefall,combinedwithasignificantincreaseinglobalcompetitionforcapital,meantheresultsinthissectionofthereportarepresentedwithacknowledgmentthatthereisgreateruncertaintythanever.Companiesarecontinuingtoconstraintheirinvestmentplansfor2015andarepursuingambitiouscostreductionandefficiencyimprovementprogrammes.TheyalsoawaitclarityontheproposedchangestotheUKfiscalregime,whichmayhelpsustainlong-termopportunitiesthatmayotherwisebelostfromcompanyplans.
6.1Reserves
AccordingtocompanybusinessplansprovidedtoOil&GasUKduringquarter42014,upto10billionboeofknownrecoverablereservescouldbeextractedfromtheUKCSoverthenext40years.Ofthe10billionboe,6.3billionaresanctionedreservesfromfieldsthatarealreadyinproductionorunderdevelopmentontheUKCS.Reservesof2.6billionboesitin36potentialnew(greenfield)developmentsthatareyettosecureinvestment. Afurther1.1billionboearereportedinaround100incremental(brownfield)opportunitiesthatcompaniesareconsidering,butagainareyettosecureinvestment.
Figure 7: Build-Up of the Reserves Base
0
2
4
6
8
10
12
Sanctioned @ 1.1. 14 Produced 2 014 201 4 Project Sanction/ increase in reserves Sanctioned @ 1.1. 15 Probable New P5 0 Possible New
Rese
rves
(Bill
ion
boe)
2014 2015
Sanctioned at
01.01.2014Sanctioned
at01.01.2015
>P50Production
-0.52
0.4Incremental
1.6New
1.0New
0.7Incremental
0.22
Projects sanctioned
over 2014 and the increase in
reserves in previously sanctioned
projects
6.3 billion boe
8.3 billion boe
ProbableReserves
Possible Reserves
6.6 billion boe
Source: Oil & Gas UK
page 21
Ayearago,itwasanticipatedthatatotalof9.4billionboehadagreaterthan50percentchanceofbeingrecoveredfromtheUKCS(>P50confidencelevel),6.6billionboeofwhichwerealreadysanctioned.However,theP50outlookhasnowfallento8.3billionboe,6.3billionboeofwhicharesanctioned.Evenwhenaccountingforthe0.52billionboeofproductionin2014,thereisstilla0.6billionboeshortfallinP50reserves.Thisshortfallsitswithinopportunitiesthatwereconsidered‘probable’near-termdevelopments12monthsago(>P50),butarenowonlyconsidered‘possible’developmentsthatareunlikelytoproceedincurrentmarketconditions.
Brownfields
Totalvolumesassociatedwithpotentialbrownfieldprojectshavedecreasedbyaround200millionboeoverthelast12monthsto1.1billionboe.Whilstsomeprojectshaveproceededtosanctionoverthattime,anumberofprojectsarenowseenasunviableagainstthebackdropofthefallingoilprice,highcostsandfiscaluncertainty.Aroundtwothirdsofthesereservesthatstillfeatureincompanyplansarenowconsideredlessthan50percentlikelytoproceed,aconcerningincreasecomparedtolessthanaquarterreportedassuchlastyear.
NewFields
Thesizedistributionofpotentialnewfielddevelopmentshasalsoshiftednoticeablyoverthelast12monthsastheseinvestmentsarebeingre-evaluatedat lowerprices.Thedevelopmentconceptsbehindanumberof largepotentialnewprojectsontheUKCShavebeenre-assessedand,inanumberofcases,theendresulthasbeentodowngradethevolumesofinitiallytargetedreserves.Figure8illustratesthistrend.
Theoverallsampleofnewdevelopmentopportunitieshasfallenfrom43to36.Whilsteightfieldsweresanctionedoverthelastyear,someofthesmallerdevelopmentsdonotfeatureinthe2015sampleastheyarenolongerseenasviableinvestmentsandsohavebeencompletelyremovedfromcompanyplans.Ontheotherhand,therearesomerecentdiscoveriesornewopportunitiesthatfeatureinthesurveyforthefirsttimeastheyhavenowsufficientlymaturedtoappear in operators’ plans.
Figure 8: Distribution of Undeveloped Reserves
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Num
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Activity Survey 2014
Activity Survey 2015
Source: Oil & Gas UK
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ComparisonbyRegion
Whilstprojectionsofrecoverablereservesshouldbetreatedwithanevengreaterinherentlevelofuncertaintyat atimeofhighprice volatility, Figure9givesanestimateof thepotentialofeachgeographic regionof theUKCS.TheCNSistheareawiththelargestreservebaseincurrentcompanyplansatalmostfourbillionboe,over 2.5billionboeofwhicharealreadysanctioned.SignificantexplorationpotentialisconsideredtoremainintheCNS,particularlyintheverytechnicallychallengingHPHTplays.
TherelativelyimmatureWofSareaisalsoaregionconsideredtohavegreatpotential,butover95percentofresourceshereareyettocomeonstreamandexplorationplaysarestilllargelyuntested.TheSNSandIrishSea(IS),themostmatureareasoftheUKCS,stillhavethepotentialtodeliverafurtherthreebillionboeovertime, andthatnumbercouldincreaseifunprovenexplorationplaysbecomecommerciallyviableinthefuture.
Figure 9: Reserves and Resources Growth by Region
0
2
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6
8
10
12
W of S NNS CNS SNS, IS, West ofScotland
Rese
rves
/Res
ourc
es (B
illio
n bo
e)
Yet To Find Resources
Potential Additional Resources
Possible Reserves
Probable Reserves
Ongoing Investments
In Production 01.01.2015
Source: Oil & Gas UK, DECC
Changes in the Reserves Base
Figure 10 showshow the reserves base in companyplans consistently grewbetween2009 and 2012, beforefallingineachofthelastthreeyearsasalackofexplorationactivityhascurtailedtherateofnewvolumesbeingdiscovered,leadingtoafallintheoverallreservesportfolio.
Thechangeinsanctionedreservesreportedinthesurveyhasfollowedasimilarpatternasreservematurationthroughtosanctionhasalsosloweddownaftersomebigfieldswereapprovedatthestartofthedecade,manyofwhichwereincentivisedbytargetedfieldallowances.
page 23
Figure 10: Reserves by Probability of Proceeding
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2
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14
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Tota
l Res
erve
s in
Com
pany
Pla
ns (B
illio
n bo
e)
Sanctioned
Probable
Possible
Source: Oil & Gas UK
In2014,519millionboewereextractedfromtheUKCS,butonly160millionboewereprogressedtosanctionand around 50million boe of potentially commercial reserves were discovered through exploration activity. ThecurrentreservesreplacementratiomustimproveiftheUKCSistohavealong-termfuture.BothindustryandgovernmentareawareofthesizeoftheprizeatstakeandthecompetitivepressuresontheUKCSinthecurrentbusinessenvironment.
InvestmentRequired
Theremainingreserveswillrequiresignificantoutlayiftheyaretobedevelopedand,assuch,currentestimatesshowthataround£64billionofcapitalmustbeinvestedtorealisetheP50potentialincurrentcompanyplans.Almost£38billionofthathasalreadybeencommitted,butevensomeofthatinvestmentisbeingre-assessedatatimewhencapitalishighlyconstrainedandpotentialrevenuesarefallingrapidly.
TheUKmustbegloballycompetitiveifitistosafeguardexistingprojectsandattracttheadditional£26billionofinvestmentthatisrequiredtodeveloptheP50reservesincompanyplans.TheneedforthisinvestmentistimesensitiveastheseprojectscanonlyproceedwhilekeypiecesofUKCSinfrastructureremaininplace.Afurther £30billionofinvestmentwillbeneededtodevelopthe‘possible’reservebaseincompanyplans,althoughthereislittlesignofthisoccurringcurrently.
Anaffordablecostbase,acompetitivefiscalregimeandaregulatorthatwillablyfacilitatetheswiftdevelopmentofthesereservesareallessentialfor‘probable’and‘possible’projectstomaturetocertainprojects.ExtractingthesereservesovertimewillnotonlyprovidesecurityofprimaryenergysupplyandbalanceofpaymentsbenefitsfortheUKeconomy,butitwillhelpensurethattheUK’sworld-classsupplychainremainsaproviderofhundredsofthousandsofhighlyskilledandwell-paidjobsthroughoutthecountry.
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6.2DrillingActivity
ExplorationDrilling
Over recent years exploration activity on the UKCS has collapsed. This trend continued in 2014 with just14explorationwells4drilled, reflecting the lowest rateofexplorationdrillingsince1965.Givenuncertaintyofcapitalandaffordablerigavailability,theindicationsarethatthesituationisunlikelytoimprovein2015withonlyeightto13explorationwellsanticipated.
ThistrendisoffundamentalconcerntoallstakeholdersandraisesquestionsabouttheUKCS’sustainability.Itwillrequireconcertedeffortbyallpartiestobothunderstandthedriversthathavedepressedexplorationactivityandassessthefactorsthatcanmosteffectivelyleadtoanimprovementintheoutlook.
Figure 11: Explorati on Well Count and Forecast
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5
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20
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30
35
40
45
50
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Num
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ls Dr
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incl
udin
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detr
acks Exploration Sidetracks
Exploration Wells
Source: Oil & Gas UK, DECC
8-13Wells
4 Throughoutthereportwellnumbersincludegeologicalsidetracksunlessstatedotherwise.Drillingnumbersarecountedbyspuddateunlessstatedotherwise.
page 25
Appraisal Drilling
Anaverageofover50appraisalwellsperyearweredrilledontheUKCSfrom2005to2008,drivenbyasteadygrowthinexplorationactivityovertheprecedingdecade.Appraisalactivityfellthereaftertoanaverageofaround30wellsperannumbetween2009and2013,beforefallingsharplyin2014withjust18appraisalwellsdrilled.Manyoftheserecentwellsweretargetingolddiscoveriesmadeinpreviousdecades.
Atthispoint,theoutlookfor2015isbleakwithjustfiveappraisalwellsforecastfortheyear.Itappearsthatthistrend isdrivenby therelativelypoor rateofexplorationover the last fouryears, leading to fewerdiscoveriesandhencefewerappraisalopportunities.Itisalsothecasethatsmalldiscoveries,typicalofthoseseeninrecentyears,arelessabletobearthecostsofanappraisalwell,furthersuppressingactivity.Appraisaldrillingwillonlypickupwhenitbecomesamoreattractiveoptionbothaswellcostsfallandthepost-taxvalueofthediscoveryisimproved.However,withoutappraisal,manydiscoverieswillfailtomeetinvestmentscreeningcriteriaandwillnot progress to development.
Figure 12: Appraisal Well Count and Forecast
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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Num
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ls Dr
illed
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udin
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detr
acks Appraisal Sidetracks
Appraisal Wells
Source: Oil & Gas UK, DECC
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ConstraintsinExplorationandAppraisalActivity
A rising oil price is conventionally seen as a strong driver of exploration activity and this had been thecase until 2009when therewas a notable disconnect between the two. The aftermath of the financial crisisrestricted access to capital, leaving many companies unable to finance exploration wells even in a timeof high oil price. Whilst there was a short-lived recovery in 2010, the unexpected tax increase in 2011 (a12percentriseinthesupplementarycharge(SC))haltedthatrecovery.This,combinedwiththedifficultyinattractingfinance,hasledtoexplorationontheUKCSfallingtoanall-timelow.
Figure 13: Exploration Drilling versus Oil Price
0
20
40
60
80
100
120
140
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Expl
orat
ion
Wel
ls Dr
illed
/Oil
Pric
e ($
/boe
)
Exploration Wells (including Sidetracks)
Oil Price (2014 Money)
Source: Oil & Gas UK, DECC, EIA
Tax Increase
Small Field Allowance Increased
Tax IncreaseSC Introduced
Tax Increase
Financial Crisis - Decoupling of the Relationship between Oil
Price and Drilling
Small Field Allowance Introduced
Minor Tax Reduction
Onapositivenote,thereisnoindicationthatthecollapseinexplorationactivityisdrivenbyalackofprospectivity.However, it isclearthatpost-taxreturnsonexplorationdrilling intheUKare justnotcompetitive.Evenatan oil price of over $100/bbl, theUKCS has struggled to attract funds.Drastic action is required to address thischallenge. The Wood Review suggested a range of non-fiscal measures to encourage exploration, includingimprovedaccesstoseismicdataandamoreflexiblelicensingregime,butitconcludedthatfiscalchangesarealsorequiredtoenhancethepost-taxvalueofexplorationdrillingandtoattractnewsourcesoffinance.Withoutsuchmeasures,itisveryunlikelythateventhelowerrangeofyet-to-find(YTF)estimates,ofaroundtwotothreebillionboereportedbyDECC5,arelikelytobediscovered.
Overthelastyear,companiespostponed17wellsandcancelledafurtherfourthatwereinitiallyscheduledtobedrilledfrom2014to2016.Operationalfactorssuchasaccesstorigs,thecostofdrillingwellsandcompetitionforresourcesareseentobesignificantconstraintsonE&Aactivityinrecentyears.Operatorshaveindicatedthatthesituationwillnotimproveunlesstheseoperationalproblemsareaddressed.Furthermore,asthesurveyshows,fallingoilprice,inabilitytoaccessfinanceandthefiscalenvironmentarealsoseenassignificantbarrierstoactivity.
5Seewww.gov.uk/oil-and-gas-uk-field-data#uk-oil-and-gas-reserves-and-resources
page 27
It also appears thatoperatorsprioritised thedrillingof developmentwells rather thanE&Aactivity last year,reflectingthedrivetomonetiseopportunitiesatatimeofhighoilprices.Asoilpricesfall,E&A becomesevenlessattractiveformanycompaniesasthereislessfreecash,furtherexacerbatingtheproblem.
Figure 14: Constraints on Exploration and Appraisal Drilling in 2014
0 2 4 6 8 10 12
Lack of Funding
Slippage/Re-ordering of Wells
Rig Availability
Cost Escalation
Rig Rates
Fiscal Environment
Awaiting Further Technical Evaluation
Contractual Complexity
Resource Availability
Seismic Processing or Vessel Capacity
Regulatory Requirements
Number of Wells
Greatly Affected
Somewhat Affected
Slightly Affected
Source: Oil & Gas UK
ExplorationandAppraisalActivitybyCompanyandRegion
The survey has examined companies that have chosen to operate E&A wells on the UKCS in recent years, consideringtheminfourcategories:majors,largecompanies,small/mediumcompaniesandutilities.
Of the32E&Awellsdrilledduring2014,12weredrilledby largecompanies,ninebyutilitycompanies, sixbythemajorsandfivebysmalltomediumsizedcompanies.WhilstthissuggeststhatthewholeoftheexplorationcommunityisengagedinE&AactivityontheUKCS,itmaskssomeimportanttrends.
Taking a broader perspective, drilling activity by smaller companies has declined over the last five years andagreaterproportionofwellshavebeendrilledby largercompanies. Inpart, this isdue tosmallercompaniesstruggling to raise capital, as access to finance has becomemore constrained following the financial crisis in2009,andduetogeneralperceptionsoftheUKCS’competitiveness.Meanwhile,largercompaniesthathavebeenless capitally constrained (untilnowat least) have chosen to target someof themore technically challengingopportunitiesontheUKCS,suchasdeepwater,heavyoilandultra-HPHTtargetsthatarebeyondthecommercialreach of smaller investors.
Smaller companiesoften seek to takea commercial interest inwells drilledbyother, often larger, companiesratherthandrillingthewellthemselvesasthemainoperatoronalicence.However,difficultyinaccessingfinancebysuchcompaniesisalsoprovingtobeabarriertothisbusinessmodel,delayingthecommercialconsortiumandslowing down well drilling.
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AlthoughthenumberofE&Awellsdrilledbythemajorshasremainedrelativelystableovertheperiod2010to2014,theproportionofexplorationwellsdrilledbymajorshasdeclinedanditisanticipatedthatsuchcompanieswillonlydrilltwoexplorationwellsin2015.
Figure 15: Explorati on and Appraisal Drilling by Company Size
0
10
20
30
40
50
60
70
2010 2011 2012 2013 2014 2015
Num
ber o
f Wel
ls Dr
illed
incl
udin
g Si
detr
acks
Utility Companies
Small/Medium Companies
Large Companies
Majors
Source: Oil & Gas UK, DECC
page 29
Followingrecenttrends,theCNSwasagainthemostactiveregionforE&Aactivityin2014,whereoverhalfoftheE&Awellsweredrilled.ThisconfirmstheprevailingviewthattheCNSareaisoneofthemostprospectiveregionsoftheUKCS.TheSNSremainedthesecondmostactiveregionwithsixwellsdrilledascompaniestargetednear-fieldopportunities;whereasactivityintheISregiondecreasedtoonlyonewellin2014,afterahighpointofsixwellsin2013.TherearenoE&AwellsplannedintheISregionfor2015.
AlthoughfourappraisalwellsweredrilledintheWofSregionin2014,therewasnocapitaltofundexplorationactivity inthearea.Despiteestimatesthattherecouldbe inexcessoftwobillionboeofYTFresources intheWofSregion,thehighcostsassociatedwithdrillingintheareaandrecentlowersuccessratesmaybecontributingtoadeclineinactivity.
Figure 16: Explorati on and Appraisal Drilling by Region
0
10
20
30
40
50
60
70
2010 2011 2012 2013 2014 2015
Num
ber o
f Wel
ls Dr
illed
incl
udin
g Si
detr
acks
Irish Sea/West of England
W of S
SNS
CNS
NNS
Source: Oil & Gas UK, DECC
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DiscoveriesfromExplorationandAppraisalActivity
Surveyresultsfromoperatorssuggestthatonly55millionboeoftechnicallyrecoverablereserveswerediscoveredin2014,withsevenofthe14explorationwellsdrilledencounteringhydrocarbons.Althougha50percenttechnicalsuccess rate6isinlinewiththeaverageofthelastfiveyears,threeofthesewellsdiscoveredjustfivemillionboeintotal,materiallysmalleraccumulationsthanwereoriginallytargeted.Theotherfourwellsfound50millionboeintotal.Thesecouldbeconsideredcommerciallyviableopportunitiesandultimatelyleadtodevelopmentundertherightcircumstances,givingacommercialsuccessrate7ofjustunder30percent,slightlybelowtheaverageofthelastfiveyears.
Itshouldbenoted,though,thatthesenumbersaresubjecttofurtherrevisionasopportunitiesareappraised.However,byanymeasure,2014isunlikelytobearemarkableyearforhydrocarbondiscoveries.Itappearsthatless than150millionboe in totalhavebeendiscoveredover the last threeyears, the lowest in thehistoryof the UKCS.
Figure 17: Recoverable Reserves and Associated Success Rates
0%
10%
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2010 2011 2012 2013 2014
Succ
ess R
ate
Reco
vera
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Rese
rves
(Mill
ion
boe)
Total Recoverable Reserves
Technical Success Rate
Commercial Success Rate
Source: Oil & Gas UK, Wood Mackenzie
6Technicalsuccess–encounteringhydrocarbonsthatmayormaynotattractcommercialdevelopment.7Commercialsuccess–encounteringhydrocarbonsthatstandareasonablechanceofdevelopment.
page 31
The size of the average exploration target8 in 2014 was just over 30 million boe, the lowest seen over the last five years. Whilst a small number of wells targeted accumulations of over 50 million boe, with one of 100millionboe,themajorityofexplorationwellsdrilledtargetedaccumulationsoflessthan20millionboe.Thissuggeststhatexplorationin2014wasfocusedaroundnear-fieldopportunitiesusingexistinginfrastructurefor their development.
Figure 18: Average Size of Reserves Targeted
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2010 2011 2012 2013 2014
Aver
age
Targ
et S
ize (M
illio
n bo
e)
Source: Oil & Gas UK
SincethelastUKCSdiscoveryofmorethan100millionboe(Culzeanin2008),therehavebeenrelativelyfewwellsdrilledtargetingtruewildcatopportunitiesexpectedtobegreaterthan100millionboe.Ofthosethathavebeendrilled,mosthavebeendrywells.Eveninwellsthatdidencounteroilandgas,thevolumesdiscoveredhavebeenmateriallysmallerthananticipated,withlittleprospectofbeingcommerciallydeveloped. ItisaninevitableconclusionthatthecurrentrateofexplorationwillnotdeliverthepotentialresourcesfromtheUKCS.Evennow,explorationisconstrainedbytheimminentdecommissioningofcriticalinfrastructurethatwillpermanentlydamagetheabilitytorecovertheUK’sremainingoilandgasresources.
8Explorationtargettakenasthemeansuccessvolume(millionboe).
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ExplorationandAppraisalDrillingExpenditure
Justover£1.1billionwasspentonE&Aandseismicactivityin2014,comparedwith£1.6billionin2013.Expenditureonexplorationdrillingdecreasedfrom£780millionin2013to£610millionin2014,whileexpenditureonappraisaldrillingdeclinedfrom£630millionto£440million.Operators’expenditureonacquiringseismicdatadecreasedto£95millionin2014from£150millionin2013.Justover£40millionofthiswasspentonnewseismicacquisitions,while £55 million was spent on seismic purchase and reprocessing. Operators forecast that they will spend £130milliononseismicacquisitionandinterpretationin2015,around£50millionofwhichisplannedtobespentonnewbroadbandseismicacquisitions.
In2014,theaveragecostperexplorationwellwasjustunder£44million.Althoughthisislowerthanthepeakaveragecostof£52millionin2013,explorationdrillingcostshaverisensharplyinrecentyearsfromanaverageof£23millionperwellfrom2007to2010toanaverageof£44millionfrom2011to2014.Thehighcostperwellin2013wasduetothenumberoftechnicallychallengingHPHTwellsintheCNSregion,whicharemorecomplexandthereforeexpensivetodrill.
Figure 19: Average Cost per Exploration Well Drilled
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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Aver
age
Cost
per
Exp
lora
tion
Wel
l (£
Mill
ion)
Source: Oil & Gas UK, DECC
Althoughtheaveragecostperwelldrilledhasrisenoverthepastthreeyears,thecostoffindingcommerciallyrecoverable reserves on the UKCS has increased far more significantly. The yearly average cost of findingcommercial recoverable reserves has risen from £4/boe from 2009 to 2011 to £22/boe from 2012 to 2014. Thefindingcostisaveryvolatilemetricandcanbeskewedbyonebigdiscoverywithinoneyear.Theriseoverthelastthreeyearshasbeencausedmorebyafundamentallackofexplorationsuccessratherthanexcessivegrowthinexplorationspend.
page 33
Development Drilling
In2014,atotalof126developmentwellsweredrilledontheUKCS.Whilstthisshowsaslightincreaseofsixwellsonthetotal for2013(120wells),developmentdrillinghasbeenona long-termdownwardtrendoverthe lastdecadeandisnowlessthanhalfofwhatitwasatitspeakof298wellsin1998.Thistrendmirrorsthedeclineinproductionoverrecentyears.Astheoilpricehasfallenoverthelastsixmonthsandthepaceofinvestmentfalters,theconcernisthatdevelopmentdrillingmaydeclinefurtherandcontinuetodrivedownproductionontheUKCS.
Lookingat thetotalnumberofwells (exploration,appraisalanddevelopment)drilledoverthe last fouryears,thereappearstohavebeenaceilingonactivityofaround175wellsperannum.ItisapparentthatrigcapacitynowexceedsthedemandfordrillingontheUKCSinthecurrentbusinessenvironment,andwhilstrigratesareadjusting to the fall in demand, there is a concern that drilling rigswill either be stackedor leave theUKCS,permanentlydestroyingdomesticdrillingcapability.
Figure 20: Drilling Activity by Well Type
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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Num
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illed
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detr
acks
Exploration Wells
Appraisal Wells
Development Wells
Source: DECC
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MobileDrillingRigMarket
Thenumberofsemi-submersibledrillingrigsdeployedintheUKfellto18rigsinJanuary2015.Whilethenumberofjack-updrillingrigsremainedrelativelystableover2014(19jack-upsonaverageovertheyear),afallisanticipatedthis year in response to reduced demand.
Figure 21: Number of Rigs on the UK Continental Shelf
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Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15
Num
ber o
f Rig
s
Semi-Submersible Rigs
Jack-Up Rigs
Source: North Sea Reporter
Inresponsetomarketpressure,thedailyrigrateforsemi-submersiblesstartedtodeclinein2014,indicatingachangeinthemarketfollowingthreeyearsofincreasingdailyrates.Whilstthedailyratesforjack-uprigsappearedtoincreasein2014,itisexpectedthatthedemandforjack-uprigswillreduce,drivingdowndayratesthisyear.
Figure 22: Daily Rig Rates Based on Reported Contract Awards for Mobile Units
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(Tho
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Day)
Semi-Submersible Rigs
Jack-Up Rigs
Source: North Sea Reporter
page 35
6.3Production
The UKCS produced 1.42 million boepd (519 million boe) in 2014, representing just a 1.1 per cent year-on-yearfall.ThisisthesmallestdeclinesinceUKproductionpeakedin2000,givingthestrongestindicationtodatethattheproblemsleadingtopreviouspoorperformancearefinallybeingovercome.Investmentinnewproductionandimprovedoutputfromexistingfacilitieshavebeenthekeydrivers.
Liquidsproduction(oil/naturalgasliquids)wasdownabout2.6percentonlastyearto0.84millionboepd,but netgasproduction(lessthatusedbyproducersoffshore)wasup1.1percentto34.7bcm,whichpartiallyoffsetthe overall decline.
Figure 23: Liquids and Gas Production
0.0
0.5
1.0
1.5
2.0
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Prod
uctio
n (M
illio
n bo
epd)
Liquids
Gas
Source: Oil & Gas UK
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ACTIVITY SURVEY 2015
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ProductionOutlook
Lookingaheadto2015,Oil&GasUKanticipatesthatthe1.1percentproductiondeclineseenthisyearislikelytobealmostentirelyrecoveredandtheUKCSshouldseeitsfirstannualproductionincreasein15yearstoaround1.43millionboepd(523millionboe).
Figure 24: Forecast Production from 2014 to 2015
0
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200
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400
500
600
Prod
uctio
n (M
illio
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2014 Production
63
Existing Field Decline
31
2014 Start-Ups
36
2015Start-Ups
523
2015 Forecast
Production
Source: Oil & Gas UK
Therearetwomajorcomponentstothisforecast–productionfromexistingassetsandproductionfromnewfieldstart-ups. Output from fields thatwere already in production prior to 2014, the largemajority of fields thatrepresent‘thebase’,isexpectedtodeclinebyaround12percent.Thisisaslightincreaseinthedeclineratefromlastyearasmanyfieldsadvancethroughthelaterstagesofproductionandanticipatesadrop-offinbrownfieldinvestmentascompetitionforlimitedinvestmentfundsintensifies.
That loss of productionwill be offset by around 67million boe fromnewfields, split equally between thosethatcommencedproductionin2014andthoseexpectedtostartin2015.Whilstthereisreasonableconfidencein theoutput from2014 start-ups, there is greateruncertaintyarounda further15fields scheduled to comeonstreamthisyear. Iffirstproductiononthesenewstart-ups isdelayed,thenthecentralforecastmaynotberealised.Ourlowcaseforecastfor2015,whichaccommodatessignificantprojectslippagefornewstart-ups,is 1.37millionboepd.
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Figure 25: Production Forecast for the UK Continental Shelf
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Prod
uctio
n (M
illio
n bo
epd)
Upper
Central
Lower
Source: Oil & Gas UK
Aswelookfurtherintothefuture,theUKCS’productionperformancebecomesevenmoreuncertain.Therearestillanumberofsignificantongoingdevelopmentsyettoproducefirstoilorgasthatwillofferasignificantboosttoproductiontowardstheendofthedecade.Asaresult,evenourmostcautiousproductionestimatestillshowsanupturnby2017.
Thetoptenproducingfieldscurrentlyaccount for justunderonethirdof totalproduction. In just fouryears’time,thetoptenfieldsareexpectedtomakeuparound44percentofproductionasthe likesofClairRidge,Schiehallion,Mariner, theGreater Catcher Area and Laggan Tormore, none ofwhich are currently onstream, becomemajorcontributors.
Figure 26: Forecast Proportion of Production from Top Ten Producing Fields
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2014 2015 2016 2017 2018
Prop
ortio
n of
Pro
duct
ion
Production from top ten producingfields
31%
44%
Production from all other fields
Source: Oil & Gas UK
1
2
3
4
5
6
7
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ACTIVITY SURVEY 2015
page 38
AsillustratedinFigure27,by2019,morethanhalfofUKCSproductionislikelytocomefromfieldsthatstartedproductionsincetheendof2012,someofwhichcommencedinvestmentbefore2011.
Figure 27: Production Forecast by Category
0
100
200
300
400
500
600
700
800
900
1,000
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Prod
uctio
n (M
illio
n bo
e)
Potential Unsanctioned New Start-UpsSanctioned Production from Fields that have Started or will Start from 01.01.13Production from Brownfield Investment (Low-Mid Case)NFI Case - Production from Existing Fields that Started Before 01.01.13
No Further Investment (NFI) Base Case
New Fields
Source: Oil & Gas UK
However,theindustrychallengetoslowthedeclinerateofbaseproductionbecomesmuchharderataloweroilpricegiventhelackoffreecash,internationalcompetitionforinvestmentfundsandthematurityofthebasin. Asaconsequence,theprimaryfocusturnstothemanagementofoperatingcostsratherthanthedrivetoinvest.It is inevitable that somefields in theUKwill bedecommissionedover the remainderof thisdecadeas theirreservoirsaredepleted,butifthehighcostbaseunderwhichthisindustrycurrentlyoperatescanbeaddressed,thelifeofmanyfieldscanstillbeextendedthroughbrownfieldinvestment.
Withnofurtherinvestment,theexistingfieldsontheUKCSarelikelytodeclineataround15percentperannum. If sufficient brownfield investment is secured to reduce the decline rate to 10 per cent, an additional 250millionboewouldbedeliveredoverthenextfiveyears.Whilstareductionintheoperatingcostsoftheassetsareessentialandmustbedelivered,areductionintheheadlinerateoftaxratewouldbethemosteffectivewayofattractingbrownfieldcapitalaspost-taxinvestmentreturnsareenhanced.
Industryisactivelytacklingtheissueofcost(seethesectiononOperatingExpenditure)butthegovernmentalsohasacrucialroletoplayinensuringthatthefiscalregimeencouragesbrownfieldinvestmentinsomeoftheolderassetsontheUKCS.Unless industryandgovernmentcollaboratetomaketheUKanattractiveplaceto invest,at a timewhen capital is extremely scarce,manyfieldswill face premature decommissioning and technicallyrecoverableoilandgaswillbedeemeduncommercialandwillbeleftintheground.
Awell-resourcedregulatorwithasharpfocusonmaximisingeconomicrecovery,asustainablecostbaseandapredictableandcompetitivefiscalregimeallneedtobeinplacetoexertcontrolovertheUK’sbaseproductiondecline,asshowninFigure27. Ifevenoneofthesethree isnot inplace,theUKCSwill facefurthererosion inproduction,similartothatexperiencedin2011.
page 39
ThecomplexityoftheUKCShasgrowndramaticallyoverthelast50years.Figure28,showingoilproductionbyfield, illustratesthatdynamic. IntheUKCS’earlyyears,productionwasdominatedbyasmallnumberof largefields.Now,in2015,productionismadeupofhundredsoffields,typicallymuchsmallerinsize.Thereisfargreaterinter-dependencybetween thesefieldsand there is aneed to consider jointdevelopmentsor subseatiebacksolutionsassmallerfieldsoftenmeanstandalonedevelopmentisnotcommerciallyattractive.
This does make UKCS production vulnerable to a ‘knock-on effect’ if important pieces of infrastructure areshut-in, particularly if that shut-in is unplanned. The Production Efficiency Task Force, set up as part of the government-industryforumPILOT, isworkingtoensurethatoperatorsco-ordinateplannedshutdownssothattheyarecarriedoutasefficientlyaspossible.
Figure 28: Production by Oil Field since 1975
0
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1,000
1975 1980 1985 1990 1995 2000 2005 2010
Oil
Prod
uctio
n (M
illio
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Source: DECC
1
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ACTIVITY SURVEY 2015
page 40
6.4TotalExpenditure
Total expenditureon theUKCS reached£26.5billion in2014, thehigheston record for the fourth successiveyear. The biggest componentwas £14.8 billion of capital investment in developing greenfield and brownfieldprojects.Thecostassociatedwithoperatingthebasinwas£9.6billion,almostaneightpercentincreaseon2013(£8.9billion).SpendonE&Aactivity, includingseismicdataacquisitionandinterpretation,was£1.1billionanddecommissioningactivityreached£1billionforthefirsttime.Furthergrowthindecommissioningexpenditureisanticipatedintheyearsahead.Inadditiontothe£26.5billionoftotalexpenditure,around£3.2billionwaspaidincorporateproductiontaxesin20149.
Figure 29: Total Expenditure on the UK Continental Shelf
0
5
10
15
20
25
30
35
40
45
50
1970 1975 1980 1985 1990 1995 2000 2005 2010
Tota
l Exp
endi
ture
(£ B
illio
n -2
014
Mon
ey)
Operating Costs
Development Costs
Exploration and Appraisal Costs
Decommissioning Costs
Source: Oil & Gas UK, DECC
Thedeclineinoilpriceoverthelastquarterof2014meantproductionrevenuesfortheyearwere£24.4billion,theirlowestsince1998whentheaverageoilpricefortheyearwasjust$18.20/bblin2014money.Giventhattotalexpenditureplusproductiontaxeswas£29.7billion,theindustrygeneratedanegativecashflowforthesecondconsecutiveyearin2014.Thistimethedeficitwasfargreaterat-£5.3billioncomparedto-£0.4billionin2013. Thelasttimeindustryexperiencedsuchanegativecashflowwas40yearsagowhenmanyoftheUKCS’flagshipassetswerebeingdeveloped.
Itisanticipatedthatthecashflowpicturefor2015will lookfarworse.Althoughtotalexpenditureisexpectedtofallforthefirsttimesincetherecessioninthelate2000s,revenuesarealsolikelytofalltolittlemorethan £17billion10.Therecentheavydevelopmentcyclealmostcertainlypeakedin2014anditisanticipatedthatcapitalinvestmentwillfallbyatleast£3.5billionin2015.ThereisalreadyevidencethatthecostofoperatingontheUKCSisfallingascostreductioninitiativesarebeingimplementedquickly.Additionally,muchoftheE&Aspendisunder
9Calendar-yearfigurebasedonweightedaverageof£4.7billionfor2013/14and£2.8billionfor2014/15,accordingtothe Autumn Statement 2014.10BasedonOil&GasUK’scentralproductionforecast,aUKCSoutputpriceof$50/boeandaUSDollar/GreatBritishPoundexchangerateof1.5.
page 41
threatascompaniesre-assesstheirdiscretionaryinvestmentbudgetamidthefallingoilprice.However,evenifexpenditurefallsbyasmuchas£5billionin2015,itisunlikelytomatchtherateatwhichrevenuesarefalling,asshownbyFigure30below.
ItmustbeacknowledgedthatmuchofthemoneycurrentlyspentontheUKCSiscapitalinvestmentindevelopmentsthatwillyieldrevenuesinthefuture.Suchinvestmenttodayiscrucialasitwillsecurefutureproductionforthenext20yearsandbeyond.
WhentheUKCSwasinitiallydeveloped,fundsforinvestmentweretypicallygeneratedfromshareholdersastherewasnoproductivebasetogeneraterevenues.AstheUKCSgrew,fundswereraisedthroughproductionrevenuesandre-investedinthebasin.Thecurrentdynamicofanegativecashflowplacesgreatpressureonshareholdersandislikelytorestrictthenear-termrateofinvestmentinnewprojects.
Thecostbaseunderwhichtheindustryoperatesmustreducefurther,E&Aspendmustbemoreefficient,anddecommissioningactivitymustbedelayedthroughbrownfieldinvestment.Theseactionswillservetoimprovethepresentcashflowpicture,notjustfornextyear,butfortherestoftheUKCS’life.
Figure 30: Revenues and Cash Flows on the UK Continental Shelf
-20
-10
0
10
20
30
40
50
60
70
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Cash
Flo
w (£
Bill
ion
-201
4 M
oney
)
Total Revenue
Post-Tax Costs
Post-Tax Cash Flow
Source: Oil & Gas UK, DECC
1
2
3
4
5
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8
ACTIVITY SURVEY 2015
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6.5CapitalInvestment
CapitalinvestmentintheUKCSreached£14.8billionin2014,surpassingtheforecastforthisyearof£13billionandtherecordbreaking£14.4billionspendof2013.Withlittlenewactivitysanctionedlastyear,thisrisewasprimarilyaresultofcostover-runsandprojectslippageonongoingnewdevelopments.Thiseffectisclearlyshownbythefactthataroundhalfoftotalcapitalinvestmentlastyearwasspentonjust12fields,allofwhichweresanctionedprior to 2014.
Figure 31: Capital Investment by Field in 2014
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14
16
2014 Capital Expenditure by Field
Capi
tal E
xpen
ditu
re (£
Bill
ion)
Source: Oil & Gas UK
Half of 2014 Capital Expenditure was Invested in Just 12 Fields
Half of 2014 Capital Expenditure was Invested Across 140 Fields
InvestmentOutlook
The surge in investment seen from 2010 to 2014 was largely driven by the high oil price and bespoke fieldallowances.Overthenexttwoyears,sanctionedinvestmentissettohalveasmanyofthehighspendfieldsreachdevelopmentcompletionandmoveintoproduction,unlessnewinvestmentcanbeencouraged.
Capital investment is expected to be nomore than £11.3 billion in 2015 and is predicted to fall to less than £8billionin2016.Whilstinvestmentoverthenexttwotothreeyearswillbeheldupbytheongoingdevelopmentofpreviouslysanctionedprojects,thecurrentcostandpricebasefacingtheindustry,alongsideanoutdatedfiscalregime,couldleadtocapitalinvestmentfallingtoaslowas£2.5billionby2018ifnonewinvestmentissanctionedinthemeantime.Theremustbeswiftactiontosecurenewinvestmentforthelongterm.
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Figure 32: Capital Investment Outlook for the UK Continental Shelf
0
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14
16
2010 2011 2012 2013 2014 2015 2016 2017 2018
Capi
tal I
nves
tmen
t (£
Billi
on -
2014
Mon
ey)
UncertainSanctioned
Source: Oil & Gas UK
Quarter42014dataindicatethatonly£38billionintotaliscurrentlycommittedforspendontheUKCSandsomeofthismaybeatriskastheoilpricecontinuestofall.Intherightenvironment,afurther£26billionofprobableinvestmentcouldseethedevelopmentofanadditionaltwobillionboe.Sustainingandgrowingthisinvestmentisvital tothe long-termfutureof theUKCS,butwithoutcostandtaxreductions, future investment,particularlybrownfield,isatsignificantriskascompaniescompeteforcapitalglobally.
Asignificantchangeinnewinvestmentintentionscanalreadybeseenasfreshprojectshaveslippedintimeandbeenreducedinscope.Figure33showsinvestmentplansthatareyettoreceivesanctionasofquarter42014versusthesametimelastyear.Amaximumof£3.5billionofnewexpenditurewillbesanctionedoverthenextthreeyears,anoteworthydeclinefromtheanticipated£8.5billionoverthesameperiodlastyear.Lookingfurtherahead,currentpoorexplorationsuccesscouldfurtherdamagelongerterminvestmentintheUKCSasfewnewdevelopmentopportunitiesarise.
Figure 33: Comparison of Probable New Capital Investment Outlook
0.0
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4.0
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2015 2016 2017 2018 2019
Prob
able
Cap
ital I
nves
tmen
t (£
Billi
on -
2014
Mon
ey) 2015
2014
Source: Oil & Gas UK
1
2
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ACTIVITY SURVEY 2015
page 44
6.6OperatingExpenditure
ThecostofoperatingtheUKCShasagainrisenfrom£8.9billionin2013toarecord£9.6billionin2014.However,therateofincreasehasslowedfrom15.5percentin2013toalmosteightpercent.AroundhalfoftheoperatingexpendituregrowthisattributabletonewassetsontheUKCS,whilsttheotherhalfhascomeasaresultofcostincreasesonexistingassets.
Inrealterms,operatingcostshadbeenlargelycontaineduntil2010buthavesinceescalatedatanaveragerateofninepercentperyear.Alongsidethis,therateofproductiondeclineaccelerated,placingadditionalcostpressureontheUKCS.Costcontrolhadalreadybecomeamajorthemeoftheindustryevenbeforetheprecipitousfallin oilprice. The slowingof the costgrowth rate in2014may reflectearly signs that theongoing cost reductioninitiativesacrosstheUKCSarestartingtotakeeffect.
As production revenues fall, companies will need to reduce further their operating expenditure in responsetothenewbusinessoutlook.Whilstplansfromquarter42014still indicatetherecouldbefurthershort-termgrowthinoperatingexpenditure,it isclearthatsignificantworktoreducetheUKCScostbasehasacceleratedintheearlypartof2015.Operatorsaresettingthemselvesdemandingtargetsforcostreductionrangingfrom 20to40percent.Ifacostreductionof20percentweretobeachieved,thiswouldtakecostsbacktoalevellastseenbetween2008and2012.
Figure 34: The Cost of Operating the UK Continental Shelf
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2003 2005 2007 2009 2011 2013 2015 2017 2019
Ope
ratin
g Co
st (£
Bill
ion
-201
4 M
oney
)
Source: Oil & Gas UK
Quarter Four 2014 Forecast
Potential Impact of Cost Reduction Initiatives
UnitOperatingCosts
Asanticipated,theaverageUOChasrisenagainto£18.50/boein2014.Itmustdeclinetowardstheendofthedecade if theUKCS is tohavea long-term future.Causedbybotha fall inproductionandgrowingcosts, theaverageUOContheUKCSincreasedinrealtermsbyanaverageof13percentperyearfrom2003until2011, afigurethatacceleratedtoanaverageof19percentfrom2011to2014.
page 45
TomaintainthesustainabilityandcompetitivenessofproducingontheUKCSinthecurrentoilpriceenvironment,thereneedstobea40percentreductioninUOCtooffsetthefallinproductionseensince2011.Realisingthiswillrequireacombinationofbothcostreductionandincreasedproductionefficiencyfromexistingassets,combinedwithmoreinvestmentinnewproduction.
Figure 35: Average Unit Operati ng Costs
0
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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Uni
t Ope
ratin
g Co
sts (
£/bo
e -2
014
Mon
ey)
ActualQuarter Four 2014 Forecast20% Operating Expenditure Reduction40% Operating Expenditure Reduction
Source: Oil & Gas UK
Figure36 shows theUOCs in2014 forfieldsproducinghalf amillionbarrelsor greater, split byarea (thebarwidthrepresentsassociatedproduction).Ofthe158fields,21reportaUOCgreaterthan£30/boe.Someofthemostexpensivefieldshavelitt leassociatedproduction,butarekeyhubscontainingcriticalinfrastructureandarethereforevitaltothefutureofthebasin.
Figure 36: Unit Operati ng Costs and Associated Producti on Volumes by Field and Area in 2014
1
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ACTIVITY SURVEY 2015
page 46
There is room for both efficiency improvements and cost reductions in all areas of the UKCS, but under allcircumstancessafetyofoperationswillcontinuetobethefirstpriority.
Many of the most expensive fields are located in the mature NNS region, where production peaked at 1.65millionboepdin1985.Manyassetsintheregionarelargesteelstructuresthatcarrysignificantfixedoperatingcosts.Theareanowproducesjustonesixthofwhatitdidatitspeak,yetmuchofthecostremains,causingittobethemostexpensiveregiontooperateonaunitbasis.AroundonethirdoffieldsintheNNShadaUOCofgreaterthan£30/boein2014andtheweightedaverageUOCfortheareawas£27/boe.
ThesecondmostexpensiveregiontooperateontheUKCSistheCNS,withafarlowerweightedaverageUOC of£17/boe.Although theCNShasanumberofveryhighcostfields, thebiggestproducingassetshavemuch lower costs.
TheSNSistheleastexpensiveregionoftheUKtooperateat£13/boe,andhasseenrelativelylittlecostgrowthoverthelastdecade.Thismust,inpart,bedrivenbytheneedtocontrolcoststomaintainprofitmarginsasthegasproducingregionhasnotenjoyedthesamehighrevenuesasotherareasoftheUKCSthatarerichinliquids.
Takingabaselineof2014costsandproduction,itwasanticipatedthatat$50/bbl,20percentofoilproductionandonethirdofoilfieldsweremakingalossonacashbasis.Whilstthisdoesnotmeanthesefieldsaregoingtoceaseproductionimmediately,operatingatalossisclearlynotsustainableoverthelongterm.Ifoperatingcostswerereducedby20percentacrosstheboard,thenumberofoilfieldsinalossmakingpositionwouldreducetoaroundonequarter,12percentoftotalproduction.This20percentreductionisequivalenttoa$10increaseinoilprice.However,somefieldsrequireevengreateraction,andothershavedepletedtheirreservestosuchanextentthatdecommissioningintheneartermisinevitable.
Althoughsomeofthemostexpensivefieldstooperateonaunitbasisnowyieldlittleproduction,theinfrastructureis crucial to the wider operations of the UKCS. Work continues to ensure these hubs are not prematurelydecommissioned,butitwilltakeconcertedeffortbyallinvolvedtoavoidthishappening.
Figure 37: Potential Impact of Operating Expenditure Reductions at Various Oil Prices
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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Oil
Pric
e ($
/bbl
)
Percentage of UKCS Oil Fields Operating at Loss
2014 Activity Survey Data
20% Operating Expenditure Reduction
Source: Oil & Gas UK
page 47
CostReduction
WhilstitistruethatthefallingoilpricehasplacedadditionalattentiononthecostsofoperatingUKCSassetsanddevelopingnewopportunities,theindustryhadalreadyacknowledgedcostasamajorconcerninthelatespringof2014andsubsequentlybeganworkonanumberofpan-industrycostreductioninitiatives.Theserecognisedthatsignificantcostbenefitcanbedeliveredbytacklingthefundamentalbehavioursdrivingcostescalationonthe UKCS.
Theinitiativescrossfourthematicareasoutlinedbelow,prioritisedbythesizeofpotentialimpact.AlongsidearevisedfiscalregimeandtheswiftimplementationoftherecommendationsoftheWoodReview,successfulcostreductioninitiativeswillundoubtedlyextendtheproductivelifeoftheUKCSanddeliveramoreinternationallycompetitiveandsustainablebasin.
Theproposalsforcostreductioninitiativesarestillbeingrolledoutacrossthewiderindustryandwilltaketimetogaintraction.
Figure 38: Cost Reduction Initiatives
1
2
3
4
5
6
7
8
1. People BenchmarkContractorRates
OffshorePartnershipAgreement
OptimiseOffshoreRotas
2.OffshoreEfficiency Increase Wrench Time
ShareBestPractice
SeekEfficiencyDrivingTechnologies
3.LogisticsPlanning EstablishRigClubs
EstablishSupportVessel/HelicopterClubs
SharingofSpareswithInventoryVisibility
Crew Sharing
4.StandardisationandSimplification StopGoldPlating
LookBackAnalysis/ResetofCostBase
NewEntrantLowCostStandard/TransformationalIdeasForum
Source:Oil&GasUK
ACTIVITY SURVEY 2015
page 48
6.7 Decommissioning
At£1billion,decommissioningaccountedfornearlyfourpercentoftotalUKCSexpenditurein2014.Thisissettorisesignificantlyoverthenextfiveyearsandcouldsurpass£2billionin2018.
Expectedaverageannualspendoverthesecondhalfofthedecadehasrisenfrom£1.5billionin2014to£1.8billion. Thisincreaseisdrivenbyacombinationofcostescalationandaccelerationofdecommissioningactivitycausedbyareductioninfuturerevenueestimates.Incontrast,therehavealsobeensomeexampleswheredecommissioningexpenditurehasbeenpushedback,contributingtotheincreaseover2017and2018.ThefastimplementationofadecommissioningstrategywillbeapriorityfortheOGAastheyseektoensuremaximumeconomicextensionoffieldlifewhilstalsoachievingmacro-levelcostreductionsindecommissioning.
Figure 39: Forecast Decommissioning Expenditure on the UK Continental Shelf
0
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2014 2015 2016 2017 2018 2019
Deco
mm
issio
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Spe
nd (£
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ion
-201
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oney
)
2014
2015
Source: Oil & Gas UK
Lookingoutto2040,theforecastfortotaldecommissioningspendhasrisenfrom£41.3billionto£46billion in2014money.£43billionof thiswillbespentondecommissioningexistingandsanctionedprojects,andafurther£3billionwillbespentondecommissioningprojectsthatareyettobedeveloped.Althoughit iscrucial tomaintain the infrastructure of theUKCS for as long as economically possible, the undoubtedfuture growth in the decommissioningmarket will present an excellent opportunity for the UK supplychaintoestablishworld-classexpertiseinthisarea.
page 49
Comparisonof2014and2015cessationofproductionforecastssuggestsasixpercentriseinthetotalnumberoffieldsplanning toceaseproductionover thenextfiveyears.This increase isprimarilydue tofieldsceasingproductionearlierthanpreviouslyanticipatedashighercostsandlowerrevenuesmeantheyreachtheireconomiclimitsooner.Asthedatawerecollected inquarter42014,thefull impactoftheoilpricefall isyettobefelt. Itisanticipatedthatwithoutfreshinterventionthenumberoffieldsreachingcessationofproductionovertheremainderofthedecademayrisesignificantly.
Figure 40: Forecast Number of Fields Ceasing Production
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2014 2015 2016 2017 2018 2019
Cum
ulat
ive
Num
ber o
f Fie
lds C
easin
g Pr
oduc
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2014
2015
Source: Oil & Gas UK
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ACTIVITY SURVEY 2015
page 50
7. SupplyChainPerspective
Thousands of businesses across the UK provide goods and services to the exploration and production (E&P)companiesoperatingoffshore,whichhasenabledtheextractionofmorethan43billionbarrelsofoilandgasoverthelastfivedecades.Thesecompaniesprovidehighlyskilled,well-paidemploymentforhundredsofthousandsofpeopleacrosstheUKandrelyonastablehomemarkettoprovideafoundationfortheirinternationalbusinesses. As a measure of its success, the UK supply chain achieved a turnover of more than £35 billion in 2012, 40percentofwhichwasintheexportofgoodsandservicesaroundtheworld,accessingaglobalenergymarket. ThisisanachievementtheUKshouldbeproudof.
Overthelastfouryears,rapidgrowthinexpenditureontheUKCShasplacedconsiderabledemand-sidepressuresonthesupplychain.Thishasbeenexacerbatedastherecentrecordinvestmentcomesafteraprolongedperiodofmuchlowerexpenditureoverthelastdecade,whenprevioustaxincreaseshaddeterredmuchneededinvestmentintheUKCSandreducedtheproductivecapacityofthesupplychain.Inthelastyear,awarenessofcostpressuresbecame more widespread and has resulted in the introduction of cost reduction initiatives outlined in section6.6.
Lower oil prices have now sharply reduced production revenues and both operators and their supply chainhavehadtoadjustquicklytothenewmarketconditions.Thesupplychainwillinevitablyhavetoreappraiseits UKbusinessand,inmanycases,seektoaccommodatelowerdomesticdemandaswellasdownwardpressureoncosts.Thismayencouragemanyinthesupplychaintoplaceagreaterpriorityontheirexportmarketstoprovidesomeprotectionagainstadeclininglocalmarket.
Inwhat is inevitablyacyclicalbusiness,given thevolatility inoilandgasprices,fiscaland regulatorystabilityon the UKCS are as important for the wider supply chain as for the E&P companies. The ability to sustaininvestmentontheUKCSthroughoutthecycleiscrucialandhasattimesbeenmadeharderbytheimpactofpolicy changes by successive governments. If spending on theUKCS declines over the coming years, as is currentlyanticipated,therewillbeconsequencesforthewidersupplychainanditisinevitablethatmanycompanieswillmigrateoverseasinsearchofnewmarkets,diminishingthevalueoftheircontributiontotheUKeconomy.
page 51
TheUKupstreamoilandgassupplychaincanbesplitintofivebroadareasofactivity:reservoirs,wells,facilities,marineandsubsea,andsupportandservices.
Figure 41: UK Upstream Oil and Gas Supply Chain Sub-Sectors
Tier 1: E&P Companies (EndUser)
IntegratedMajors Large/SmallIndependents
EnergyUtilityCompanies
Non-OperatingCompanies
ExplorationCompanies
Supply Chain Categories
Reservoirs Wells Facilities MarineandSubsea Support and Services
Tier 2:Main contractors and consultants
 Seismic data acquisitionand processing contractors
ÂWell services contractors ÂDrilling contractors ÂWell engineering consultants
 Engineering,operation,maintenance and decommissioning contractors  Engineering consultants  Structure and topside design andfabrication
ÂMarine/subseacontractors ÂHeavylift/pipelay contractors  Floating,production,storage units
 Catering/facilitymanagement  Sea/airtransport ÂWarehousing/logistics  Communications  Recruitment  Training ÂHealth,safetyandenvironmental services  Energy consultancies  IThardware/software
Tier 3:Product and servicessuppliers
Components
Sub-contractorsandsub-suppliers
ÂGeosciences consultancies ÂData interpretationconsultancies  Seismic instrumentation
ÂDrilling and well equipmentdesign and manufacture  Laboratoryservices
ÂMachinery/plant design and manufacture  Engineering support contractors  Specialist engineering services  Specialist steels andtubulars  Inspectionservices
 Subseamanifold/riserdesign and manufacture ÂMarine/subseaequipment  Subseainspectionservices
Thefollowingconsiderssomeofthebroaderimpactsofcurrentmarketconditionsoneachofthesesectors.Clearly,manycompaniesarealreadyadjustingtheirbusinessestoaccommodatethecurrentoutlook;manyarelookingtomakeoperatingefficiencies,reduceheadcountor,attheleast,rebalancethemixbetweenstaffandcontractorswithintheirworkforce.Whilstthishasledtoconcernsabouttheriskoflosingskilledpersonnel,employersareseekingtobalancenear-termactionwithmid-termexpectations for theUKCS.Supplychainconfidence inthesustainabilityoftheUKCSanditsabilitytoattractnewinvestmentfundsinthecurrentenvironmentwillbecrucial.Inthemeantime,forthosecompaniesthatcandoso,geographicandtechnicaldiversificationsarebeingusedtooffsettheimpactofreducedbusinessfromtheUKoffshoreoilandgasindustry.
Reservoirs
Thisisasmall,butnonethelesscritical,segmentoftheindustry.ActivitywithinthissectorisdominatedbydemandfortheirservicesfromE&Pcompanies,particularlyfromtheUKCSandNorthSea,whicharetheircoremarkets.Theneedtodeployhighqualityseismicdatausingthelatest3Dtechniquesiscrucialbothtoimproverecoveryfromexistingfieldsaswellastopromotefreshexplorationactivity,butdemandforservicesfromthissectorareunderpressureatthistime.Anumberofcompaniesreportthattheyhavenotyetbeenaffectedbythecurrentdeclineinoilpriceduetoongoingseismicwork.However,thesecompaniesanticipatetheirorderbookstodeclinelaterin2015,and,inanticipation,havehaltedallnon-essentialspending.
Importantly,anumberofindustryinitiativestomitigatethefallindemandwithinthesectorarebeingprogressedwith government. These include the preparation of a 21st Century Exploration Roadmap to encourage freshexplorationandmoretargetedseismicsurveysinunder-exploredareasoftheUKCS.
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ACTIVITY SURVEY 2015
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Wells
Activitywithinthewellssector is linkedtothefortunesoftheindustryasawhole;afall intherateofdrillingactivityisaleadingindicatorforanimminentdownturnontheUKCS.
Thisisacapitalintensivesectorwithlargedrillingrigsandexpensivedownholeequipmentandtechniquesengagedinmuchofthework.Normally,companies’rigsandskilledresourcesarehighlymobileandtheirservicesareindemandinalloftheoilprovincesaroundtheworld.However,whilstdrillingactivityislikelytodeclineglobally,theUKisatriskofabiggerfallinactivitygiventhereducedcompetitivenessoftheUKCSatloweroilandgasprices.
Companiesarerecognisingthedeclineinpreviouslyplanneddrillingactivityandtheearlyterminationofsomedrillingprojects.Measurestosustainfreshinvestmentinnewdevelopmentswillbeparticularlyimportantforthis sector.
Facilities
ThisisrecognisedasthelargestsegmentofactivityontheUKCS,contributingaroundathirdofthetotalsupplychainrevenue in2012andemployingnearly62,000people11. It is a sector that engages with a wide range of companiesinvolvedinallaspectsofthebusinessfromoriginalconceptdesignofplatformsthroughtoconstruction,in-fieldmodificationsandfacilitiesmaintenance,andeventuallyontodecommissioning.Companiesrangefromlargemultinationalorganisations,employingawiderangeofskillsanddisciplines,tospecialisedsmallcompanies.
Theopportunitiesfordiversificationwithinthissectorareconsiderable.Thelargerorganisationsinparticulararealsoinvolvedinotherformsofenergyprovision,includingnuclearandrenewables,plusbuildingandconstruction,road,railandairtransport.Suchdiversificationcanhelpbutdoesnotcompletelyamelioratetheimpactofthecurrentbusinessenvironment.
Someofthesmallercompanies,however,whicharepredominantlyreliantonworkfromtheoilandgassectorfacethebiggestpressurestoadapt.Whilstanumberofthesecompaniesarepartiallyprotectedbytheircurrentcontractwork,othershavealreadynoticedasignificantdropoffinspendonengineeringprojectsandanticipateafurtherfallintheirworkload.Inaddition,withfewernewprojectsbeingtendered,thereisstrongdownwardpressureoncompanyrates.Mostofthebusinessesinthesectorexpectareductioninrevenueand,assuch,haveakeenfocusoncostreduction.Thereisalsotheexpectationthatworkloadwillswitchfromnewdevelopmentstomaintenanceandlimitedbrownfieldexpenditure.
11 The EY report on the UK Upstream Oil and Gas Supply Chainisavailabletodownloadat www.oilandgasuk.co.uk/knowledgecentre/economic-contribution.cfm
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MarineandSubsea
Thisisthesecondlargestsegmentofactivityandcontributedaroundaquarterofthetotalsupplychainrevenuein 2012.
TheUKisgenerallyregardedasagloballeaderinsubseatechnology,whichhasstemmedfrommorethan30yearsofapplication intheNorthSea.Subseatechnology isakeyelementthatcanoffersignificantadvantagesoverfixedinstallations,allowingoilandgastobeextractedmorecosteffectively.Thishasobviousbenefits,especiallyinareasofdeeperwatersuchasintheNNSandWofSregionswhereseveralmajorprojectsareinproductionorunderdevelopment.Here,anydownturninUKinvestmentwillhaveadirectimpactonthesectorandwillresultinlossofcapabilityandcapacityandriskresourceflighttomoreattractiveprovinces.
Thewholemarine sector is under pressure to reduce costs by clients further up the supply chain andmanycompaniesare freezing recruitmentor cuttingheadcountasa consequence.The two typesofmarinevesselscurrentlydeployedintheNorthSeaare:
•Generalservicetypeboatsthatareusedtotransportgoodstoandfromoffshorelocations.Thesehavebusinessmodelsthatassumehighutilisationboothstosupportroutineoperationsandservicesummershutdownandconstructionactivity.Whilsttherewillremainabaseloadofwork,asdemandreducesduetoloweractivity,dayrateswilldecline,oftenquitesignificantly.
•Specialist service units that are more likely to be used in a campaign or project-specific mode (suchaspipelay,heavylift,constructionsupport).Thespecialistunitsareoftenbookedmonthsoryearsinadvanceandaremuchlessvulnerabletoshort-termfluctuationsinoilandgasprices.However,evenifinvestmentdeclines,theirserviceswillbeunderpressure.
Support and Services
ThissectorofthemarkethasconventionallybeendependentonactivityontheUKCSandtraditionallydominatedby domesticbusiness from larger operator and contractor companies.However, there are signs of increasingdiversification with, for example, companies that provide IT services, recruitment, catering, consultanciesand communications to the oil sector broadening their reach to access other sections of the UK economy. Whilst the support and services sector has some protection through diversification, where oilfield servicesdominatethelocaleconomy,suchasinthenortheastofScotland,therewillbesignificantpressurestoreducecostsandincreaseoperatingefficiencyinthefaceofamuchmorecompetitivemarketplace.
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ACTIVITY SURVEY 2015
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8. SummaryofKeyStatistics
Total Production
Oil/Liquids
Gas
Total (£ Billion)
Capital Investment
Operating Expenditure
Exploration & Appraisal
Decommissioning
Unit Technical Cost ($/boe)
Unit Dev't Cost ($/boe)1
Unit Operating Cost ($/boe)
Unit Technical Cost (£/boe)
Unit Dev't Cost (£/boe)1
Unit Operating Cost (£/boe)
Oil Price (avge)
Gas Price (av'ge – day ahead)
Combined Oil and Gas Price
Direct N. Sea Tax Revenues (Fiscal Year)
Wells Drilled incl. sidetracks
excl. sidetracks
incl. sidetracks
excl. sidetracks
incl. sidetracks
excl. sidetracks
incl. sidetracks
excl. sidetracks
Exploration 22 21 15 15 14 13 ~8-13 ~
Appraisal 31 22 29 18 18 15 ~ <5 ~
Development 122 75 120 69 126 76 ~ ~
Total 175 118 164 102 158 104
New Field Approvals
Incremental Projects
New Field Start-ups (Excludes incrementals)
Exploration Volumes Discovered
1This reflects the average unit development cost of new fields approved in the year2Based on HM Treasury's Autumn Statement 2014 Forecast
N.B - All expenditures and costs are quoted in money of the day
List of new fields given DECC field approval:
KrakenKraken North
MarinerMorrone
OrcaOrlandoTonto
£2.8 billion 2
8
28
5 (195 million boe)
~55 million boe
2013BallochCladhan
Enochdhu
48.2
20.4
27.8
32.1
13.6
18.5
$99/bbl
50 p/th
$78/boe
2014
1.42 mln boepd
0.84 mln boepd
0.58 mln boepd 34.7 bcm
£26.5 billion
£14.8 billion
£9.6 billion
£1.1 billion
£1 billion
Shaw
GodwinHarrierHarris
2012Solan
SoitaireStella
Rhyl
JulietKatyKew
Leman South
AlmaBarra
CayleyConwy
Cormorant EastCygnusFionnFramGala
13.1
13.5
$112/bbl
60 p/th
$89/boe
£6.5 billion
2012
1.56 mln boepd
0.95 mln boepd
0.61 mln boepd 36.7 bcm
~£21.3 billion
£11.4 billion
£7.7 billion
£0.5 billion
41.2
£1.7 billion
2013
1.44 mln boepd
0.86 mln boepd
0.57 mln boepd 34.4 bcm
~£25.8 billion
£14.4 billion
£8.9 billion
£0.9 billion
52.6
£1.6 billion
21
8
9 (146 million boe)
20 million boe
19.7
21.5
26.6
10
26
13 (392 million boe)
80 million boe
26.1
26.5
34.4
17.4
17
$109/bbl
68 p/th
$90/boe
£5 billion
2015
1.43 mln boepd
~0.85 mln boepd
~0.58 mln boepd ~35 bcm
~£22 billion
~£9.5-11.3 billion
~£8-10 billion
~£1 billion
~£1.5 billion
AlderAviat
BurgmanCatcherCawdor
Flyndre (UK)Varadero
Ythan
~ £2.2 billion 2
~
~
~
~
2014
~
~
~25-26
~
~
~17-18
~
~
~
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ACTIVITY SURVEY 2015
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