UK oil output up but exploration slumps

Production from UK oil and gasfields in 2015 increased for the first time in 15 years but investment in exploration hit a record low as companies cut spending in response to low energy prices.

The 10.4 per cent rise in output compared with the previous year was the result of a spate of new North Sea developments as well as technological innovations to maximise extraction from existing fields.

However, industry leaders cautioned that the increase stemmed from investment decisions made during the boom years of $100-a-barrel oil and warned that exploration had almost ground to a halt since then. This meant North Sea production risked resuming the sharp declines of the past decade unless the investment drought was broken.

“As an industry we are producing at four times the rate we are discovering new reserves. This is unsustainable,” said Deirdre Michie, chief executive of Oil & Gas UK, in the trade group’s annual report on the state of the industry.

She called for the UK and Scottish governments to spur fresh investment with fiscal stimulus and other measures that put oil and gas at the heart of industrial strategy, alongside other industries such as aerospace and car manufacturing.

Trumpeting the industry’s efforts to maintain competitiveness in a protracted era of low oil and gas prices, Ms Michie said operating costs for offshore producers had fallen by 45 per cent in the past two years. This had lowered the average cost of extracting a barrel of oil or gas equivalent from more than $29 in 2014 to $16 this year.

Companies were no longer holding out for a return to $100 a barrel prices, Ms Michie said, but instead “positioning themselves to survive and succeed in the long term at $50 per barrel, with the ability to tolerate the possibility of even lower prices”.

However, while efficiency gains were improving the outlook for existing UK fields, new investment was desperately needed to prolong the life of the North Sea basin, Ms Michie added. Investment is expected to fall to about £9bn this year, from a record £14.8bn in 2014.

The North Sea has been especially badly hit by the slump in capital expenditure across the oil and gas industry over the past two years because, even after the recent productivity improvements, it remains one of the world’s highest cost offshore basins.

Spending cuts have caused a 30 per cent fall in revenues for oilfield service companies and other parts of the UK supply chain since 2014 — with the brunt of the impact felt in Aberdeen, capital of the UK oil and gas industry. About 120,000 jobs are expected to have been lost across the sector by the end of this year compared with the level before the collapse in crude prices.

“In light of this I am calling on governments to vigorously champion the UK’s oil and gas industry, by providing certainty in our fiscal regime, encouraging new entrants to the market and recognising our supply chain as vitally important to the economy,” said Ms Michie. Her comments came as Philip Hammond, the UK chancellor, prepares to set out his policy blueprint in November’s Autumn Statement.

In particular, she urged Mr Hammond to reaffirm the Treasury’s commitment to tax breaks introduced by his predecessor, George Osborne, and to push ahead with planned measures to enable buyers of offshore assets to benefit from tax relief on decommissioning costs when production ends.

Decommissioning liabilities have been one of the biggest obstacles to investment in the North Sea, complicating efforts by several large producers, including Royal Dutch Shell, to sell UK offshore assets. Mark Andrews, UK head of oil and gas at KPMG, the consultancy, said clearing the blockage in asset sales was crucial to unleashing fresh capital into the North Sea.

More than 43bn barrels of oil and gas have been recovered since the first UK production in 1967 and a further 10bn-20bn barrels remain to be recovered, according to Oil & Gas UK.

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