Oil firms play ‘wait-and-see’ amid North Sea changes

NORTH SEA firms are adopting a “wait-and-see” approach before making fresh investment decisions, according to a new survey which highlights a sharp fall in drilling activity.

Companies are awaiting potential changes to the industry resulting from the recently published Wood Review. Picture: PA

The research, released today by professional services giant Deloitte, points to a combination of factors for the drop in deals and drilling.

During the second quarter of 2014, there were just seven exploration and appraisal wells drilled in the UK continental shelf (UKCS) area, down on the 12 drilled in the previous three months and the 17 sunk a year earlier.

One factor cited by the report was companies awaiting potential changes to the industry resulting from the recently published Wood Review, under- taken by oil veteran Sir Ian Wood. It also flagged an ongoing reassessment of the North Sea fiscal regime.

Derek Henderson, senior partner in Deloitte’s Aberdeen office, said the North Sea industry had been grappling with rising operating costs, which was having an impact on activity and investment decisions, particularly given the maturity of the region.

“It’s no secret that the costs facing oil and gas firms on the UKCS have been a significant issue for some time now. Understandably, it tends to be more expensive to operate in mature fields where oil is much more difficult to recover.

“What’s more, the drop we’ve seen in the number of farm-ins could indicate that companies are holding off before committing to longer-term exploration investments. Asset transactions, involving producing fields, remain at more consistent levels, which suggests companies are more confident in these types of deals, which can offer a quicker and less risky return.”

He added: “There were many recommendations made in Sir Ian Wood’s final report, and it’s likely that the industry could be pausing until it has a better understanding of the impact of these, and the effect on the long-term future of the North Sea, before making any big investment decisions.”

In total, five corporate deals were announced within the UKCS in the second quarter, down from the ten transactions reported in Q1 and the 12 conducted in the same period a year ago.

There were no farm-in deals – where a company buys into a licence – reported at all in the last three months.

Last week, the body responsible for independent analysis of the UK’s public finances dramatically reduced its forecasts for North Sea oil revenue over the next two-and-a-half decades.

The Office for Budget Responsibility revised its predictions to suggest around £39.3 billion will be raised in North Sea revenues in total between 2019-20 and 2040-41 – a fall of £12.6bn on last year’s projections.