In a year during which the oil price remained stable at circa US$100 per barrel until the last quarter when a significant collapse in commodity price began, activity levels in both the UK and Norwegian sectors have continued to show a distinct divergence, with Norway seeing consistently high activity levels that are simply not being replicated in the UK, Hannon Westwood reports.
HW estimates that in 2014, UK fields produced approximately 600 million bbls of oil equivalent (mmboe), an increase from the c. 520 mmboe produced in 2013. Despite the vast majority of UK fields being in decline and production efficiency falling, a number of new large fields were brought on-stream including Jasmine, Juliet, Rochelle and Golden Eagle. In addition the British Government issued approval to restart production from the Rhum Field where as a result of sanctions against Iran the field had been shut-in.
The UK saw a decline in the number of Exploration and Appraisal (E&A) wells spudded in 2014, along with an even sharper reduction in the number of completed deals, compared to the levels seen in 2013. A total of 25 E&A wells spudded during 2014, comprising 12 exploration wells and 13 appraisal wells. This compares to 32 wells spudded in 2013 and is the lowest level of UKCS activity since 1970. By area, the Central North Sea saw the most activity, with 12 spuds (8 E and 4 A), followed, perhaps somewhat surprisingly given recent neglect, by the Southern North Sea where six wells were spudded (3 E and 3 A). Four wells, all appraisals, were spudded West of Shetlands whilst only two wells were drilled in the Northern North Sea (1 E and 1 A). In addition, a single exploratory well was drilled in the East Irish Sea
Five discoveries namely Avalon, Marconi/Vorlich, Leman SW, Romeo and Cepheus, were made in 2014 amounting to a total estimated potentially recoverable resource of approximately 50 mmboe. Whilst this resource is seemingly low, four of these discoveries are considered commercial with only Romeo understood to be non-commercial. The UKCS therefore recorded an exploration success rate of 38%. This compares to the 57% achieved in 2013 when eight discoveries were made.
Similarly A&D activity was muted in what has been a prolific sector in recent years. In total 53 deals were conducted, compared with 56 deals in 2013 and 66 in 2012. However, the total estimated deal value was even more depressed at just US$788 million*, a fall from US$4.4 billion in 2013 and US$7.6 billion in 2012.
In Norway, production levels in 2014 declined to 1.12 billion bbls of oil equivalent (bnboe), down from 1.35 bnboe produced in 2013. However, 2014 saw significantly higher levels of drilling activity than in the UK. By year-end 46 E&A wells had spudded in Norway, of which 36 were exploratory whilst 10 were classified as appraisal. To put this in context, since exploration and appraisal drilling began in the sixties, only four years have had higher E&A activity levels.
The North Sea was once again the most active area in terms of drilling with 25 E&A (18 E and 7 A) wells spudded, followed by the Barents Sea where 13 wells were drilled (11 E and 2 A) whilst the Norwegian Sea saw the lowest level of activity with eight wells spudded (7 E and 1 A). Of these regions the Norwegian Sea was the most technically successful, with an average exploration success rate of 86% whilst the mature North Sea experienced the lowest exploration success of just 22%. In the Barents Sea, Statoil had a number of successes, which helped to push the region toward a 64% technical success rate. In total 15 new discoveries were made in the year to which HW attributes an estimated 700 mmboe. Worthy of note are Lundin’s Alta structure, which contains an estimated 270 mmboe and the VNG-operated Pil Discovery which contains an estimated 120 mmboe.
Similarly the deal market in Norway was active, with 36 deals concluded compared to 39 deals in 2013 and 21 deals during 2012. Major deals included: the acquisition of Marathon’s Norwegian subsidiary by Det norske for a total consideration of US$2.7 billion; the acquisition of Statoil assets by German company Wintershall for a total consideration of US$1.25 billion; and the acquisition of several of Total’s assets by PGNiG for a total consideration of US$317 million. HW estimates that deal values for 2014 totalled approximately US$4.1 billion*, compared to US$3.8 billion in 2013 and US$4.2 billion in 2012.
Whilst activity levels have remained extremely low in the UK, 2014 saw a number of positive initiatives take place. The implementation of some of the Wood Review’s recommendations has begun, a major milestone being the establishment of the Oil and Gas authority (OGA), to be headed up by Andy Samuel. In addition, a further glimmer of light was the announcement in the Autumn Budget Statement that Supplementary Corporation Tax (SCT) levels were to be reduced immediately, albeit marginally, by 2%. A full review of the UKCS Fiscal regime is now in progress.
Looking ahead, little change, certainly in the near term, is anticipated. Hannon Westwood expects approximately 50 E&A wells to spud in Norway during 2015, whilst, in the current oil price environment, the UK will see between 20 and 30 wells at best
2015 may be a pivotal year for the UKCS. Wood’s recommendations are now beginning to be implemented and both the Government and Industry are in the process of working together to encourage activity. Only time will tell if these adjustments will have the desired effect on activity levels but what can be said is that, without change, the remainder of the UK’s national hydrocarbon resource remains at risk.
Hannon Westwood’s CEO, Ian Norbury, commented “The 2014 results show that the oil and gas industry still provides major investment in the UK and Norway. However, the trend towards lower E&A drilling in the UK in recent years, which will only be compounded by an extended period of low oil prices, is a major concern. Looking ahead to 2015, spending cuts are expected in response to lower oil prices, whilst in the UK, in the medium term, industry, Government and the Regulator must work collaboratively to ensure that a fit-for-purpose fiscal, regulatory and licensing regime is developed in the hope of securing the long-term future of the UKCS industry.”
*Deal values exclude the acquisition of RWE Dea by Mikhail Fridman’s LetterOne Group in March 2014 for US$7.1 billion which includes assets in Norway, Denmark, Egypt, Germany and the UK for which no country level breakdown is provided. In addition the purchase of Talisman by Repsol for US$8.3 billion is excluded for the same reason.
Adapted from a press release by David Bizley