Production may be falling in the North Sea – but spending is going to do quite the opposite, says Andrew Reid, group chief executive at Douglas Westwood
Many of the UK’s major fields are in a state of terminal production decline, with oil output at its lowest level since 1977.
Increased investment in new developments west of Shetland is likely to be the most effective method of sustaining production levels.
Notable projects including Total’s Laggan and Tormore, the redevelopment of BP’s Schiehallion field and Chevron’s Lochnagar and Rosebank.
Many of these west of Shetland projects feature substantial investment in subsea equipment and hardware and, therefore, Douglas Westwood forecast that the number of subsea trees installed per year on the UK Continental Shelf (UKCS) will grow to a peak of around 50 by 2014 before declining.
Despite this decline forecast, we still believe that commercial opportunities will remain in the UKCS as the region will see an increase in subsea tiebacks as operators seek to develop marginal fields more economically.
Outside the UKCS, exploration activity in Norway remains robust – over 260 exploration and appraisal wells were completed over the last five years, leading to a number of record-breaking discoveries including the highly prospective Sverdrup field.
Proximity between Norway and the UKCS results in a feasible transfer of skills, providing additional opportunities for UK oil and gas companies.
In 2012, the UK had the highest costs per barrel of all offshore producing regions through a combination of field maturity, lack of prospects and cost inflation.
Therefore, despite terminal decline in offshore production and relatively flat drilling levels, operating expenditure (opex) is set to grow year on year.
An important component of opex is brownfield engineering and maintenance (E&M) work.
As a field’s production rate declines investment in brownfield engineering increases as enhanced oil recovery techniques are employed in an effort to extend the field’s life. This can clear be seen in the North Sea.
In addition, the infrastructure in the North Sea is characteristically old and large, coupled with harsh conditions these factors lead to a high average spend on E&M per installation.
North Sea E&M expenditure is expected to increase at a compound annual growth rate of 2% from 2012 to 2014, totalling nearly £3.8billion over the three years – only the Brazilian market is expected to show stronger growth.
All this equates to a positive outlook for brownfield engineering and maintenance service providers, many of which have bases in the north-east of Scotland.
The maturity of assets and conditions in the North Sea are key drivers of demand for brownfield engineering services.
Expenditure growth in the coming years is, therefore, likely to be driven by investment in enhanced oil recovery and engineering and maintenance services in the UKCS.
This is further supported by the continued development of reserves in the west of Shetland basin.
The outlook for the global oil and gas industry in the short term is very robust.
Worldwide spending on exploration and production is expected to grow by around 7% to £404billion as investment levels are sustained in North America and double-digit growth is realised in Latin America, Asia Pacific, Middle East and former Soviet Union.
The big story of the past few years has been the unconventionals boom in North America – particularly onshore US, which saw the rapid increase in drilling and associated expenditure which positively impacted many service businesses exposed to the region.
2012 however was a tougher year as the rig count declined due to lower gas prices and the switch to drilling for oil and other liquids was not quick enough to fill the gap.
Expectations are that the market will bottom and start to recover during 2013.
More generally, subsea and offshore deepwater activity will remain the big story.
High growth rates and investment is expected across the main territories in Latin America, west Africa and Asia as increasing numbers of subsea developments are brought into operation.
This will have a positive impact on many north-east firms that are leveraged to the global market for subsea equipment, construction and engineering.
By Andrew Reid, group chief executive, Douglas Westwood.