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UK oil and gas production up, but exploration "facing its biggest challenge in 50 years", says industry body

The UK oil and gas industry is facing "its biggest challenge in 50 years" due to low levels of exploration, despite investment and production from the UK Continental Shelf being "better than expected", according to the industry body's annual report.

Oil and Gas UK said that its report "highlighted the contradictions currently at play" in the sector, where government tax allowances are driving record investment but rising costs are discouraging exploration. It said that this week's report from an industry expert containing recommendations to maximise production from the remaining UKCS oil reserves was therefore a "welcome and timely" intervention.

"Even if currently planned wells proceed, the rate of drilling is still too low to recover even a fraction of the estimated 6-9 billion barrels yet to be found," said Malcolm Webb, Oil and Gas UK's chief executive. "Britain's waters contain an abundance of oil and gas yet to be found and it is critical we find the means to turn the current state of exploration around. Rig availability and access to capital are the two main barriers noted by our members."

"This industry is being challenged on a number of fronts. It is crucial to address rising costs and improve our capital efficiency. However, without greatly increased exploration success, more conversion of discoveries into production, a significant improvement in productivity and a willingness to deploy enhanced oil recovery, we will not realise the full economic potential of our country's natural resources," he said.

The findings of the survey were based on the latest data from all the exploration and production companies operating in the UK.

Oil and Gas UK recorded record expenditure of £14.4 billion in 2013, combined with better than expected production. An average of 1.43 million barrels of oil equivalent per day (boepd) was produced in 2013 according to its figures, 8% lower than 2012 but significantly better than the average yearly decline of 15% between 2010 and 2012. Production is expected to pick up further in 2014 due to improved production efficiency, while capital expenditure by firms is expected to reach around £13bn or the second highest level on record, the industry body said.

Production is forecast to rise gradually to around 1.7m boepd by 2018, in part due to the 25 new fields that are expected to come onstream over the next two years, according to the report. However, Oil and Gas UK warned that 40% of production would come from new field developments by this point, underlining the importance of finding new reserves and bringing them into production. The fact that only 15 exploration wells were drilled in 2013, continuing the steep downward trend since 2008 when 44 exploration wells were drilled, highlighted the scale of the problem, the industry body said.

"This is just one of the apparent contradictions in the UKCS today," the report said. "There is record investment, a quarter of which is accounted for by just four large fields. The production outlook, boosted by the introduction of field tax allowances, looks encouraging yet the survey finds fewer barrels in production, under development or being considered for investment than last year. Of the 10.7 billion boe currently in company plans, four billion boe of these have yet to secure investment and proven reserves have fallen sharply from 7.1 billion boe in 2013 to 6.6 billion boe in 2014."

The report also noted continuing rising costs for UKCS oil and gas operators, which it expected to rise even further in 2014.

On Monday, the UK Prime Minister pledged to 'fast-track' the steps identified by industry expert Sir Ian Wood in his report on the future of the UKCS. Wood has said that quick adoption of his recommendations, which include the creation of a new independent regulator and more cooperation between industry and government, could result in the recovery of between three and four billion more boe than would otherwise have been produced.

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