Derek Henderson, Deloitte, UK, presents an overview of 2014 drilling and deal activity across the UK and Norway.
In 2014, the UK and Norway have continued to lead drilling and deal activity across North West Europe, contributing to 78% of drilling activity and 76% of deal activity. Across the region, there has been a significant decrease (45%) in the total number of deals announced, dropping from 121 deals in 2013 to 67 deals last year. A total of 125 wells were drilled offshore across North West Europe, representing a slight increase from the 124 wells drilled last year, with UK drilling only making up 32% of the total, compared with 52% two years ago.
Looking back on 2014, there has been a significant decrease in drilling activity on the UK Continental Shelf (UKCS). A total of 40 exploration and appraisal wells were spudded – this is a 20% decrease when compared with 2013, when a total of 50 exploration and appraisal wells were drilled. This also represents the lowest level of well spuds since 1999, with the total number of wells for 2014 being 47% less than the average number drilled per year for the last 10 years.
Figure 1. The distribution of 2014 well spuds and deals across the North West Europe (Please note that all figures referred to in this report, unless otherwise stated, include re-spuds, re-entries and sidetracks as separate wells.) Source: Deloitte.
As detailed in the Deloitte End of Year Review 2014 and as described in the Oil and Gas UK Activity Survey 2014, exploration on the UKCS continues to face its biggest challenge in 50 years. In addition to basin maturity, other factors include cost control pressures, poor weather conditions causing delays/cancellations in rig mobilisation and pushing back drilling dates, and the recent downward trend in oil price. The impact of recommendations from the Wood Review and possible changes to the fiscal regime will contribute to future investment decisions.
The Wood Review, which focused on how to maximise economic recovery from the North Sea for the benefit of the UK, includes recommendations that have the potential to turn things around and encourage a shift towards a more holistic approach, with strong collaboration between industry and government. The implementation of a government enforced shared strategy for ‘maximising economic recovery (of oil and gas) for the UK’, coupled with a new arm’s length regulatory body to oversee this programme and a greater commitment by industry to the sharing of infrastructure and reduction of operational delays may provide the boost the UKCS needs. The addition of a new field allowance for ultra-high pressure, high temperate field clusters, included in the Finance Bill 2014, has been described by OGUK as having ‘the potential to attract £5 - 6 billion of investment in the near term if it is pitched at the appropriate rate’.
The first quarter of 2014 was the most active period of the year for drilling, with 30% (12) of wells spudded between January and March. The lowest number of wells was recorded during the second quarter of 2014, with a total of seven wells commencing activity.
Figure 2. Distribution of 2014 well spuds across the UKCS. Source: Deloitte.
By the end of 2014, 40 wells had been spudded – 22 exploration and 18 appraisal wells – of which five encountered hydrocarbons. The geographic distribution of the wells spudded during 2014 was focused primarily in the Central North Sea and Moray Firth regions, with both areas seeing 12 wells spud, or collectively holding 60% of the regional total. The Southern North Sea and West of Shetland both had six wells spudded in the area.
A total of 23 deals were reported on the UKCS – a 63% decrease when compared to 2013, during which a total of 63 deals were announced. Farm-ins continue to be the most popular deal type, making up 57% of the total deals, as companies seek to mitigate risk in difficult times. As previously described, it is likely this drop in activity during 2014 can be attributed to a more cautious approach taken by the industry driven by changes to the UK oil and gas fiscal regime and the effect of the Wood Review and Scottish referendum.
In terms of licensing activity, the first tranche of awards in the 28th Licensing Round was announced in the fourth quarter of the year. Deal activity was at its highest level in the first quarter of 2014 when 10 deals were reported. This represents 42% of the total annual deal activity.
Deals announced in 2014 included assets in all phases of activity across all basins, with the Central Graben, Moray Firth and West of Shetlands being particularly popular. A range of companies were involved in UK deals during 2014, with Independent Oil & Gas Plc, Parkmead Group Plc, JAPEX UK E&P Ltd and Southwestern Resources Ltd all involved in acquiring assets while Hess Ltd, Tullow Oil Plc, Chevron Corporation, Sumitomo Corporation, Cairn Energy Plc and Apache Corp. were involved in selling assets.
Figure 3. Number of deals on the UKCS by quarter from 2009 to 2014. Source: Deloitte.
Six oilfields, one gas field and one condensate field were granted Final Development Plan (FDP) approval and 28 incremental projects – eight of which were secured by Apache – were approved by DECC during 2014. The field development activity in 2014 remains steady compared with 2013 when 10 new FDP and 26 incremental project approvals were granted. The number of incremental project sanctions continues to be a positive factor for overall field development in 2014. This, in part, could be attributed to rising focus on maximizing project efficiencies, therefore, prolonging the life of projects on the back of brownfield allowances introduced for existing projects.
A decline in activity is seen in the number of start-ups in the UK. In 2014, six fields came onstream compared to 13 in 2013. Four of the six start-ups were eligible for the small field allowance which shows that the introduction of tax relief incentives by the UK government has continued to aid start-ups into production.
Across the North Sea, drilling activity remains buoyant in Norway, with a total of 57 exploration and appraisal wells spudded on the Norwegian Continental Shelf (NCS) last year – a minor decrease of 3% from 2013, when a total of 59 wells were drilled.
Of the 40 exploration wells drilled during 2014, 17 of these successfully encountered oil, gas or condensate, representing a well success percentage of 42%. A majority 61% of the exploration and appraisal wells spudded on the NCS during 2014 were located in the Norwegian North Sea. Nine wells were spudded in the Norwegian Sea and 13 were spudded in the Barents Sea.
Figure 4. The distribution of 2014 well spuds across the NCS. Source: Deloitte.
Although previously there has been a bias towards exploration activity seen on the NCS, attributed to the positive incentives for exploratory drilling currently offered by the Norwegian government, last year there was a 36% increase in the number of appraisal wells spudded from 2013, with 17 appraisal wells recorded during 2014.
The most active companies on the NCS have been Statoil and Lundin Petroleum with 29 wells drilled between them. Centrica spudded four wells and Det norske, RWE Dea, Total and VNG all spudded three wells each.
The number of reported deals that took place in Norway increased by 2 from 26 deals in 2013 to 28 deals in 2014. Of the 28 deals announced, the vast majority were farm-ins, making up 21 of the total (75%). The remaining deals were asset swaps (four deals), asset transactions (two deals) and one corporate acquisition. This increase in the number of farm-ins year on year seems to be a growing trend. In 2012, farm-ins were the second most popular type of deal, making up 30% of the total deals reported, which then increased to 46% for 2013.
In the third quarter, the Norwegian Petroleum Directorate (NPD) announced a record number of applications for Awards in Predefined Areas (APA) 2014, following the closure of the deadline on 2 September 2014. The blocks available for application were located in the North, Norwegian and Barents Seas. In the APA2014, the predefined area had been extended by an additional nine blocks compared to the APA2013. The new areas include six blocks in the Norwegian Sea, close to the Aasta Hansteen field, and three blocks in the Barents Sea, close to the Snøhvit field. The awards were announced in January 2015, with E.On receiving overall the largest number of offers with 12, followed by Total with nine. Det norske, Lundin and Wintershall followed with nine, eight and eight respectively.
Atlantic Petroleum has been the most active company in terms of the number of deals in 2014, closely followed by North Energy. Several large deals have occurred – Det norske acquired Marathon Oil Norge, gaining interest in the Alvheim, Volund and Bøyla fields as well as PL736 S. Wintershall expanded their Norwegian 2P/2C reserves and resources by approximately 170 million boe by acquiring shares in the producing Gjøa and Vega fields, the Aasta Hansteen development, the Asterix discovery, the Polarled pipeline project and exploration licences PL602, PL603, PL528 and PL528B from Statoil.
During 2014, one Plan for Development and Operations (PDO) was approved by the NPD and five fields came onstream, offshore Norway. These figures demonstrate a decline in field development activity, in comparison with the previous year. In 2013, five fields were granted PDO approval and five fields came onstream. The only field granted PDO approval in Norway during 2014 straddles the UK/Norway median line – Flyndre which was approved for development in the second quarter. Out of the five field start-ups in 2014, Svalin M commenced production in the first quarter, Gudrun commenced production in the second quarter, Fram H Nord and Svalin C started producing in the third quarter and Brynhild commenced production in the fourth quarter.
Figure 5. Number of deals in Norway by quarter from 2009 to 2014. Source: Deloitte.
Overall, levels of exploration and appraisal drilling activity across North West Europe in 2014 have remained relatively constant when compared with 2013. The UK and Norway have been the main contributors to the number of exploration and appraisal wells drilled in 2014 In the UK, levels of exploration and appraisal activity in 2014 are down on 2013 levels, with 20% less exploration and appraisal wells drilled on the UKCS. The UKCS has seen drilling activity from 21 different companies as operators throughout 2014 and remains a focus area for an extensive range of companies, from majors to small independents. Activity in Norway remains relatively dynamic, with 57 exploration and appraisal wells spudded in 2014 compared to 59 wells in 2013.
Licensing activity across North West Europe has remained buoyant. The UK offered licences following the successful 28th Offshore Licensing Round. Norway and Denmark both announced a record number of applications for their respective offshore licensing rounds. UK firm and contingent well work commitments, however, are looking to be significantly lower in the 28th Round compared to the 27th Round.
Deal activity has decreased significantly by 45% across North West Europe, however, and has been relatively equally spread across all countries in North West Europe.
Adapted by David Bizley