Oil firms reacting positively to Government incentives, but more needs to be done, says report

Out-Law News | 30 Jan 2014 | 10:01 am | 2 min. read

The UK Government must do more to incentivise exploration and appraisal work on the Continental Shelf (UKCS) if it is to maintain current levels of investment in offshore oil and gas production, according to professional services firm Deloitte.

A recent report by the firm covering offshore activity over the past 12 months showed that the energy industry was reacting positively to recently-established incentives and tax allowances on production. However, it noted that while the number of North Sea fields starting production rose to the highest level in five years in 2013, the number of exploration and appraisal wells fell by 28%.

"The North Sea industry is complex and companies operating in there have to consider many factors," said Graham Sadler, head of the firm's petroleum services group. "Despite the high oil price, margins are tight and the drop in drilling in 2013 most likely reflects the increased costs of operating. Staff costs remain high and access to equipment such as rigs, which are limited in number, drives prices upwards."

"Nevertheless, we are seeing evidence that government incentives are helping to stimulate field developments – even historic discoveries – with Chevron's recent announcement that it will start work on the Alderfield, which was discovered in the 1970s," he said.

According to Deloitte's report, 13 UK fields started production in 2013 – a 44% increase on the nine that started production in 2012 and the highest number since 2008. Of these, 84% were eligible for one of the Government's new tax allowances, which have included incentives for operators in small fields, large shallow-water gas fields, older 'brownfield' sites and certain unexplored fields in the north west of Scotland.

However, only 47 exploration and appraisal wells were drilled on the UKCS over the same period, a 28% drop when compared with the 65 drilled in 2012. At the same time, drilling activity on the nearby Norwegian Continental Shelf increased by 41%.

"More than ever, companies appear to be at a crossroads in their attitude towards [the North Sea], with optimism and pessimism seemingly present in equal measure," said Graham Hollis of Deloitte. "Any longer-term decline in exploration and appraisal drilling will be of concern and there are measures that seriously need to be considered by industry and government to reinvigorate drilling activity and ensure the longevity of the UKCS."

The UKCS has already produced 41 billion barrels of oil and gas, but production has dropped in recent years as smaller companies work to exploit remaining supplies located in smaller, harder to access fields. Although the UK Government has previously said that the area is past 'peak production', it has estimated that at least 20 billion more barrels of oil and equivalent (boe) could still be produced.

Last year the UK oil and gas sector attracted a record £14 billion of capital expenditure, while 36 new offshore projects were approved. There are now over 50 companies at work in the North Sea following the entry to the market of 21 new licence holders following a record-breaking 27th Licensing Round last year, and applications opened for the 28th Licensing Round this month.

Industry expert Sir Ian Wood, who is currently conducting a review of how best to extract maximum value from the UK's remaining oil and gas supplies, has suggested that an additional four billion boe could be extracted over the next 20 years. His interim report, published towards the end of last year, made a number of recommendations including the establishment of a new arm's length regulatory body and a shared strategy with industry and Government involvement. He is expected to publish his final report shortly.