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Peter Taberner

Peter Taberner

Peter is a reporter for  FX Empire, and the International Finance Magazine, where he writes on energy markets, specializing in nuclear power and the renewable…

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Drastic Changes Needed For UK Oil To Survive

UK Rig

Investment into the UK Continental Shelf (UKCS) sea areas, which incorporates all of the UK held parts of the North Sea, has fallen down to £9 billion this year, compared to a record £14.8 billion two years ago, according to leading trade association Oil and Gas UK.

Their economic report for 2016 revealed that so far in 2016, only one field has been approved for investment, with less than £100 million of fresh capital committed to the basin.

In comparison to a year ago this is a derisory figure, as five Greenfield sites were sanctioned, with associated development capital surpassing £4.3 billion.

Speculation on Brownfield projects has also decreased, Oil and Gas UK wrote, as just five new projects were approved in the first eight months of 2016, compared to ten in total during the whole of last year.

Overall, total expenditure fell to £21.7 billion from £26.6 billion in 2015, as discretionary spending was placed on the back burner to preserve cash flow.

The report forecasts that expenditure is likely to decline down to £19 billion this year, as a result of a decline in operating costs and capital investment.

The news on cost reduction from the report is more positive, with operating the UKCS expected to be £7.5 billion cheaper this year, a decrease of 8 percent. Unit development costs are set to fall by 25 percent from a year ago. The average unit operating costs are expected to be around $16 this year, in contrast to $29.30 in 2014, a 45 percent reduction in terms of barrels of oil equivalent.

Production output has increased, this has been attributed to raised efficiency in existing assets, field restarts, and new start-ups, the total oil yield in the first half of this year is 5.7 percent higher than for the first six months of 2015.

This follows a 10.4 percent increase in 2015, when 602 million barrels of oil equivalent per day was produced in the UKCS.

The UK’s Office of National Statistics (ONS), have stated in their companies bulletin for April to June this year, how all of the cost flows in the UKCS has effected profitability.

In the second quarter of this year, companies in the UKCS reached 0.6 percent profitability, down by 0.5 percent quarter on quarter, since the early part of 2011 the trend has been for profits to fall away.

The net rate of return for UKCS companies is now at the lowest it has been since 1997, and the ONS believes that the low-price environment is to blame.

Oil and Gas UK stress that the situation in the North Sea and beyond needs to be viewed in a global context, as price expectations across the globe are lower than in the first part of this decade, leaving developments a far less appealing option to invest in by any criteria. Related: What Trump Means For LNG

The issues that the industry needs to address the trade body said, include working in partnership with governments and the Treasury, plus the UK Oil and Gas Authority to attract fresh capital investment, to sustain activity and maximise the economic recovery of the UKCS.

The industry will also continue the focus on efficiency improvements, to keep driving our competitiveness.

On the prospect of the lack of investment leading to decommissioning, a spokesperson for Oil and Gas UK explained: “The most up to date information, contained in Oil & Gas UK’s Decommissioning Insight report, covering both the UKCS and the Norwegian decommissioning market, shows that, despite downturn bringing pressure to bear more mature offshore assets, there has not been a ‘rush to decommission’.”

“The reality is much more complex, with different market forces influencing decommissioning strategies across the North Sea. Some companies are delaying activity due to cash-flow constraints, others are deferring cessation of production as sustained efforts to improve efficiency result in extended field life.”

“Others are expediting decommissioning as field economics weaken, and the cost of some decommissioning activities becomes cheaper at lower prices.”

Christopher Hains, head of oil and gas at BMI Research, reflected: “Lack of investment is not unique to the North Sea in the current environment, low prices are making it hard to make projects work, with prospects reduced for smaller projects, as the major companies prefer a huge field.”

“The major discoveries have been found, in western Shetland, but in deep water and lower quality oil, you have to look at the cheaper projects and lower priced infrastructure at the moment.”

He added: “There are several issues that are obstacles in the North Sea, including relatively high tax rates, even though not all companies pay it. Also, there are high service costs and wages compared to other oil producing regions. In Norway there are more attractive smaller infrastructure to invest in.”

To encourage more investment into North Sea oil, Hains explained that there has to be a radical upheaval of the tax system, which could be used to encourage fresh exploration projects.

More tax incentives are needed, particularly for the marginal fields where there is not a great profit return. Related: Which Oil Majors Are Best Positioned For The Future?

In Norway for example, if companies fail to make a profit, then the losses are carried forward, only the profits are taxable.

An uncertain political climate is also to be considered, which could alter the regulatory system. This is due to Brexit and the increasing prospect of Scottish independence, following the UK’s decision to leave the European Union, as most Scots voted to remain in the bloc.

On why profits are falling, Hains opined: “A lot of that is to do with oil prices for projects that are ongoing, we have been through the worst period. Companies have reacted via collaborations to save costs, such as pooling shipping circumstances together.”

“Essentially it is about operating costs for North Sea companies, they have a lot to do there, more standardisation in the supply chain, and simplification of engineering is required.”

By Peter Taberner for Oilprice.com

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