Blog & News


Tue 30 August 2016

Category: President's Page

After the Summer Break 

Colin Percival - invisibleOver the last 2 years the industry has had laser-like focus on cashflow – maximising existing production and minimising costs, with everyone rebalancing their portfolios to try to achieve the lowest cost of supply. This is to be expected in a low oil price world, where those producers with the lowest cost of supply and hence highest margin per barrel will be the most likely to prevail. Sanctioning of new developments has been rare during this period. In the North Sea the few projects achieving sanction have been mainly gas, which has held up better than oil, as although the gas price has declined, the cost of doing business has declined somewhat faster. But just as night follows day, this situation will change when the oil price improves and companies start to shift their focus from cost/margin per barrel to volume. New projects will be sanctioned and these incremental barrels will be added, typically at a higher cost of supply as this is invariably what stopped them going ahead previously. Production growth and reserve replacement will be back on the agenda and we will all be trying to play catch up once again. Growth requires additional resources such as finance, people and equipment and, although there may be plenty of available people and equipment, finance will be the largest constraint in the short term. Companies will be trying to repair their balance sheets and the capital markets will remain wary of investment in oil and gas for some time. Any growth is to be welcomed given the low level of activity and employment we have seen over the last 2 years.

Capex spend on the UKCS is forecast to drop dramatically in the next few years from the peak of £14.8 billion in 2014 to possibly only £2.5 billion in 2018. This picture will no doubt change as the oil price improves and the project pipeline finally starts to move again with new fields achieving approval. Breakeven costs have dropped by around 45% over the last 2 years but the province still needs an oil price of around $70 bbl or better to make a significant impact on the ca. 4 billion bbls of discovered resource that is currently undeveloped, and to start making exploration look attractive. There is only so much cost cutting that can be done and the consensus view is that this will be pretty much complete by year end. Indeed rig rates have fallen to as low as they are likely to go, as new contracts are being set at or close to the daily operating cost for the rig owner. Any further drop will result in it being cheaper for the owner to cold stack or cut up the rig depending on their view on when it might be brought back into service.

In the 2016 UK Budget the Chancellor announced a further £20 million of funding for new seismic on the UKCS. This new data will be acquired this year and OGA have awarded a contract for the acquisition of 2D over the East Shetland Platform to PGS and a contract for acquisition of 2D over South West Britain to WesternGeco. The programme is anticipated to collect between 10,000 and 15,000 km of new seismic data from these under-explored frontier areas. This new data will be supplemented by selective reprocessing of legacy 2D over these areas. All this new and reprocessed data will be available free to the industry by early April 2017. It is expected that these frontier areas will be available for licensing in the 31st Frontier Licensing Round scheduled for 2018.

The 29th UKCS Licensing Round opened on the 27th July and next month sees two PESGB field trips focussed on the round taking place. The first trip is to Skye as an analogue for Rockall which will run from 1-4th October, and the second trip to north east England as an analogue for the Mid North Sea High will be held 14-16th October. Both trips will allow participants to see the closest onshore outcrops relevant to these frontier areas. The trips should not be missed if you are interested in exploring the new plays in these areas or indeed seeing some great geology with some excellent trip leaders. Please contact the PESGB office if you are interested in attending either of these field trips.