Sector News

North Sea oil and gas output rises but investment dries up

September 28, 2016

North Sea oil and gas production is on course for its second annual increase but will plummet again within a few years unless investment rises from unsustainably low levels, the UK industry body has said.

Oil and Gas UK said it expected last year’s 10.4pc increase in production – the first rise in 15 years – to be followed by another rise of about 6pc this year as the industry “lives off the fat” of huge investment in the years before the oil price crash.

Major projects that have started up already this year include Total’s Laggan-Tormore gas field and Premier’s Solan oil field, both west of Shetland, with Engie and Centrica’s Cygnus gas field in the southern North Sea also expected on stream before the end of the year.

But the long lead-times in the industry mean the current pick-up in production – which is forecast to continue until at least 2018 – masks the dire lack of investment in further projects needed to sustain output in coming years.

Oil companies battered by the slump in prices have reined in their spending and focused their attentions on lower-cost areas elsewhere in the world.

“The lack of new development projects must be urgently addressed if we are to avoid a repeat of the sharp production decline that dominated the early part of this decade,” Oil & Gas UK said in its annual economic report.

“While costs have fallen significantly and the fiscal regime has been improved, many potential investors are unable to access the finance they require to develop assets.

“As an industry we are producing at four times the rate we are discovering new reserves – this is unsustainable.”

While operating costs in the traditionally high-cost North Sea have fallen 45pc over the last two years, to $16 a barrel, this has not been enough to stem the investment decline, with spending plunging to £9bn this year, from £14.8bn in 2014.

The group estimates that 120,000 jobs will have been lost in the wider sector including supply chain by the end of this year, compared with two years ago.

The rate of drilling new exploratory wells remains at a record low, while drilling of production wells is forecast to fall 30pc this year.

Only one new field has been approved this year, with a capital cost of £100m, compared with five fields sanctioned last year with development costs of £4.3bn.

Mike Tholen, economics director for Oil & Gas UK, said: “For probably the next two or three years we are going to an extent to be able to live off the fat of the past five years’ massive investment.

“But we are gradually running out of these new developments. That’s the big concern for the industry: that we are not seeing new investment happening at a rate to sustain the recent growth in production.

“We have got more competitive. But compared with onshore in many parts of the world it’s almost a no-brainer we are going to have to compete harder to win capital.”

He said the industry was awaiting a decision by the Treasury on whether to make changes to decommissioning tax relief to encourage acquisitions of ageing assets, which could help improve investment.

By Emily Gosden

Source: The Telegraph

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