North Sea exploration slows to a trickle, risking faster decline

Published on Thursday 9 April 2009 20:47

FALLING crude prices and a lack of debt funding saw exploration drilling in the North Sea slump 78 per cent in the first three months of 2009, a new report reveals.

According to research by business services firm Deloitte, the number of appraisal wells – which establish the scale of known reserves – drilled in the first quarter held steady, but exploration wells fell by almost four-fifths.

In all, 18 exploration and appraisal wells were "spudded" in the UK area of the North Sea in the three months to 31 March, a 41 per cent decrease on the first quarter of 2008.

Derek Henderson, Deloitte's senior partner in Aberdeen, said that if exploration continued at the current low levels, it would lead to the fall in North Sea production accelerating, with infrastructure becoming obsolete, and would kick start the decommissioning phase for the area.

"Directionally it would mean the future for UKCS (UK continental shelf], at the levels it currently enjoys, could not be very optimistic," he said.

Henderson blamed the fall in exploration wells on a "combination of circumstance", with crude prices 55 per cent lower than a year ago, at a time when credit is impossible for some companies to obtain.

Historically smaller oil and gas companies, which have little or no cash flow, focus on exploration, and the credit crunch has meant these firms are simply unable to raise finance from banks or through share placements.

Several operators have also predicted that companies would begin delaying projects ahead of an expected drop in the cost of oil services.

However, Venture Production and Dana Petroleum, two of Scotland's largest oil companies that focus on the North Sea, have vowed to maintain significant drilling programmes this year.

The fall in exploration levels and asset values has led deal-making in the first three months of the year to increase sharply compared to both the same period a year earlier and the final quarter of 2008.

Four deals involving UK- focused companies were announced during the quarter, while a string of other possible deals are in the pipeline, including the possibility of a bid for Venture after Centrica snapped up a 23.6 per cent stake in the Aberdeen-based group.

Deloitte's North West Europe Review, which also reports on deal-making in the sector, predicts the trend will continue.

Robyn Fowler of Deloitte's petroleum services group said: "The current economic conditions have prompted an increase in the level of corporate deal activity, as those companies in a strong cash position look to acquire vulnerable assets."

Henderson said that if the potential for the North Sea was to be maximised it was essential there was a fiscal regime that encouraged exploration. He pointed to the Norweigian model of generous tax rebates.

Getting on for half of the wells drilled in the first quarter were in the Central North Sea, with 28 per cent in the southern region, 17 per cent in the Moray Firth and 11 per cent in the Northern North Sea.