North Sea investment hits record levels driven by high oil prices

INVESTMENT in UK oil exploration and production hit record highs last year despite a North Sea tax raid announced by the UK government in its last Budget, a major report has revealed.

Capital investment in licensing, exploration and appraisal topped some £7.5 billion in 2011 – the highest level in the 30 years that research group Wood Mackenzie has conducted its annual survey of the industry.

The previous record year for spending was in 1992 when £5.8bn was ploughed into capital projects.

The firm expects investment to stay consistently high until at least 2014 as new fields are brought into development and existing fields are developed, including more than £2bn of expected investment in 2012 in the West of Shetlands area.

But while investment in licences soared, with 46 offered at the end of last year, exploration and appraisal (E&A) drilling activity was weak compared to previous years. This reflected a shift to revenue-producing projects in the UK or to opportunities elsewhere around the globe, Wood Mac said.

Lindsay Wexelstein, the firm’s lead analyst for the UK “upstream” research team, insisted that the government’s supplementary charge on companies working in the UK Continental Shelf (UKCS), had “little impact” on the lower levels of exploration despite the perceived instability of the UK fiscal regime.

There have been a series of warnings from trade bodies, economists and companies operating in the North Sea that the windfall tax would hit investment.

Wexelstein added: “Companies have turned their attention away from E&A activity to developing fields for the time being as the stable, high oil price environment has offered them the opportunity to focus on progressing development projects to turn reserves into revenue. Given the lead times associated with E&A activity, the supplementary charge increase in March had little impact on the overall drop in activity.”

But the report also found that, while the buying and selling of North Sea assets was the most active since 2005, it was a “mixed year” for more mature fields, where only two deals – Apache’s acquisition of a package of assets from ExxonMobil, and Perenco’s acquisition of Wytch Farm from BP – took up 40 per cent of trades.

Mike Tholen, economics director with trade body Oil & Gas UK, said the findings actually fell short of its own “conservative” projections and showed that investment was “strong in some areas but struggling in others”.

He said: “The review illustrates that the UKCS is not proving attractive for exploration activity, that mature assets for sale are languishing on the market and that the tax increase in Budget 2011 highlighted the fiscal instability of the UK.

“While investment in 2011 was high and the outlook for 2012 onwards is positive, last year it did not reach the £8bn conservatively forecast by Oil & Gas UK just before the Budget.

“For the sake of the UK’s energy security, employment, tax revenues and balance of trade, we must therefore ensure that, through engagement with the Treasury, investment is attracted to the projects made uncommercial by the tax increase and the fields whose sale to new owners is currently being held up.”