The premier league of global E&P has changed dramatically with the USA overtaking both Saudi Arabia and Russia to become the world’s largest oil and gas producer in 2014. The last time the USA was the world’s largest oil producer was in 1975. The impact of this change will no doubt have profound implications in geopolitical terms.
So what about the UK’s position in the elite oil and gas premier league? According to the BP Statistical Review, the UK ranks now in the middle of the pack out of more than 50 countries in terms of oil and gas production in the global E&P table. The UK’s contribution has declined from c. 4% of the world’s production in 2000 to c. 1% in 2014. It is expected that the world’s oil and gas production will continue to grow over time to meet the ever increasing demand. With the UK’s production declining further in years to come, the UK may be relegated from the oil and gas premier league, unless we find ways to re-invigorate exploration, increase appraisal drilling and new field development activities in the UK.
Over the last three years, the UK produced more 10 times more than it found through exploration activities (c. 1.60 billion boe produced, compared to c. 150 million boe found). This year it is likely to drill single digit number of exploration wells and the situation for 2016 doesn’t look much better.
The UK has found over 50 billion boe in its 50 years history, but the lack of exploration success over the last few years is now seriously undermining the future “project hopper” of UK Plc. According to the 2015 Oil and Gas UK activity survey, the flow through of new projects based on exploration success is expected to reduce significantly by the end of this decade (from about £15 billion of capital spend in 2014 to less than £3 billion by 2018), which, in turn, is likely to accelerate the domino effect of assets being decommissioned. The operators are rightly focused on addressing their cost base and sorting their efficiency, but exploration and appraisal drilling is likely to be the victim of this approach.
The issue has been widely recognised by both industry and government and efforts are underway to identify new means of stimulating exploration. The government, through the new Oil and Gas Authority, have earmarked £20 million for seismic surveys in the Rockall Trough and Mid North Sea. The results of these seismic surveys will be shared with the industry and will be part of the 29th licencing round. This is no doubt a helpful start, but to turn the situation around, it will require a more material and transformational approach.
To drive the right outcomes, the government should also consider introducing either a specific exploration allowance or extending the investment allowance to stimulate new exploration well drilling, particularly between 2016 and 2020. An Oil and Gas Authority managed bidding and quality control system could be introduced in parallel to ensure that only those wells, which have completed rigorous technical work and have been subject to peer reviews, will be considered for such allowance. This will minimise any tax deadweight and will ensure that the allowance is only focused on the most promising and valuable wells for UK Plc.
In this case, time is of the essence. Unfortunately the UK can’t just wait to see how the commodity cycle plays out. If we want to sustain the North Sea as a premier league player, the UK simply needs more exploration, appraisal and development activity.
Normally a free market will drive the right behaviours and outcomes, but every so often even free markets need the helping hand of intervention to ensure its long term sustainability.
Paul de Leeuw is the director Robert Gordon University’s Oil and Gas Institute. The industry veteran has worked at a number of companies in his 27-year career, including including Shell, Marathon Oil, Amoco, BP, Venture Production and Centrica Energy.