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North Sea drilling and deals will stay low "for at least the next year", according to Deloitte research

Out-Law News | 02 May 2014 | 9:52 am | 2 min. read

High costs and the ongoing challenges of a "mature region" for exploration are expected to keep drilling activity and oil and gas deals on the UK Continental Shelf (UKCS) low for at least another year, according to new estimates from professional services firm Deloitte.

A report by the firm's Petroleum Services Group (PSG) on activity over the first three months of 2014 showed that poor weather and high costs had already had an impact on exploration and appraisal work when compared to the same period last year, it said. A total of 12 wells, one fewer than in the first quarter of 2013, were drilled on the UKCS; while the number of deals fell considerably, it said.

Looking forward to the next 12 months, the firm said that the UK government's support of Sir Ian Wood's recommendations of how to maximise future recovery could lead to new incentives being put in place to encourage offshore activity. However recent tax changes, including the 2014 Budget announcements on bareboat chartering, were a blow for the industry, it said.

"While the tax to bareboat chartering doesn't affect operators directly, many expect that the cost will be passed on to them and could discourage drilling," said Derek Henderson of Deloitte.

"The sector is in for a long haul back to anything like the performance of the peak years and, while there are sound measures being brought in to encourage activity, we'll need to see a concerted effort from government and industry to restore confidence in the sector in the short term and to ensure maximum recovery from the UKCS in the long term," he said.

Bareboat chartering arrangements involve hiring a ship, boat or rig, but with no crew or provisions included as part of the agreement. The changes announced at the 2014 Budget will affect companies operating on the UKCS which are leasing rigs and offshore accommodation, by capping the costs deductible from taxable profits.

According to UK government figures, North Sea oil and gas production has fallen by 40% and production efficiency by 60% in the last three years. However, it has estimated that the equivalent of at least 20 billion more barrels of oil could still be extracted. In his recent report on how to maximise future oil and gas production, industry expert Sir Ian Wood recommended the adoption of a new shared strategy between industry, government and a new regulator based on recovering the maximum amount of oil and gas from UK waters as a whole, rather than from each individual licence block.

The government, which has accepted these recommendations in full, has also committed to work with the new regulator on a broad review of its tax treatment of the North Sea in order to "ensure that it continues to incentivise economic recovery as the basin matures". It has already introduced a number of incentives designed to boost production in harder-to-exploit areas, most recently a new allowance for ultra high pressure high temperature fields as part of the 2014 Budget.

In its report, Deloitte said that both of the new gas fields that started producing over the first quarter of the year, and the single condensate field that was approved for development, received the government's small field allowance.