North Sea at ‘crossroads’ as drilling slumps to 50-year low

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Scotland’s oil and gas industry revival may be jeopardised by a slump in exploration to find fresh deposits which have hit a 50-year low, an industry report warns today.

The recovery in production levels could be poised to fall away again in the coming years unless action is taken to boost activity.

The North Sea remains a key part of Scotland's economy, but just four exploration wells were started in the first eight months of the year. Picture: Getty

The North Sea remains a key part of Scotland's economy, but just four exploration wells were started in the first eight months of the year. Picture: Getty

Deirdre Michie, chief executive of industry body Oil & Gas UK, said the industry now stands at a “crossroads” that could threaten plans to ensure the North Sea remains a major energy player over the next two decades.

The sector has suffered a turbulent period in recent years, with the oil price slump of 2014 costing tens of thousands of jobs.

Prices have recovered to an extent and production levels are rising.

But in its Economic Report 2018, Oil & Gas UK warns the lack of drilling activity for new deposits and falling investment casts doubt over its long-term future.

We will continue to argue the UK government should bring forward measures to rebuild exploration activity

PAUL WHEELHOUSE

“Industry is emerging from one of the most testing downturns in its history,” Ms Michie will tell industry leaders today.

“Despite the improvements seen in recent years, we find ourselves at a crossroads. Record low drilling activity, coupled with the supply chain squeeze, threaten industry’s ability to effectively service an increase in activity and maximise economic recovery. The UK Continental Shelf is a more attractive investment proposition – our challenge now is to take advantage of this. We have to drive an increase in activity while continuing to find and implement even more efficient ways of working which support the health of supply chain companies whilst also keeping costs under control.”

Despite the problems of recent years, the North Sea remains a key part of Scotland’s economy, employing about 120,000 people across the country, with many based in the north-east. It also brought in about £1.2 billion in tax receipts for the UK exchequer last year.

The industry is also a bulwark for a wider supply chain, with annual sales of oil and gas produced in Scotland worth about £17.5bn.

But today’s report points to a slump in capital investment in the sector, which has gone from about £15 million three years ago to an estimated £5.5m this year.

• READ MORE: North Sea oil to boost Scottish economy but Brexit still risk, finds report

Just four exploration wells were started in the first eight months of the year. Although more wells are earmarked, total exploration activity this year is expected to be the lowest since 1965.

The 14 wells started last year was half the 28 that got under way in 2010.

The number of development wells fell to 71 last year – almost half the 129 wells which were recorded in 2015, according to the report.

This is likely to hit production levels in the coming years which have been slowly rising in recent years from about 1.42 million barrels a day in 2014 to about 1.65 million last year.

The “Vision 2035” blueprint seeks to maintain production levels at about one million barrels a day by this time, but the current trajectory will fall well short of this.

The report states: “If no intervention was to be made, production could be expected to fall to around 0.5 million boepd (barrels of oil per day) in 2035, greatly reducing the significance of UKCS production in terms of its contribution to the UK economy and it’s energy supply.”

Production increased by 16 per cent between 2014-17 and may reach 20 per cent by the end of this year. There have been six key investment decisions on major new projects in the first eight months of the year, bringing a much needed boost to the wider supply chain.

But today’s report warns: “Whilst production is expected to remain strong through 2019, the lack of new project approvals means is it almost certain that the basin will return to a position of production decline post-2020.”

Up to 40,000 North Sea jobs were lost in the aftermath of the oil price crash of 2014 which saw prices slump from about $110 per barrel to about $40 per barrel.

This recovered to about $70 last year and industry insiders are hopeful this will continue to rise.

Part of the problem for the North Sea is the costs of operating, which are far higher than other oil producing countries such as Norway, Mexico, the US and West Africa.

Scottish Government energy minister Paul Wheelhouse welcomed the 20 per cent increase in production levels in recent years.

But he said: “It is crucial that such gains are also sustainable, so OGUK are right to flag up instances where the supply chain may be being squeezed to the detriment of the sector’s future.

“For our part, we will continue to argue the UK government should bring forward measures to rebuild exploration activity and to maximise economic recovery, while also providing an immediate boost to the supply chain.”

Shaun Reynolds, of the oil and gas transaction services team at Deloitte in Aberdeen, said the North Sea operators could not grow “complacent” as the global oil price continues to recover. A key issue persists around the long-term impact of lower levels of exploration and appraisal drilling,” he said.

“It is imperative that we preserve the current low-cost environment, but with aging infrastructure and the possibility of a capacity pinch-point in the next few years, that will be a challenge.

“The industry should continue to incentivise innovative investment and reward those in the supply chain who work smart to maximise efficiencies and results.

“This is vital as a number of fields in the United Kingdom Continental Shelf (UKCS) will attempt to progress through the development process in the next few years and, if sanctioned, will be of massive significance to the UKCS and the wider economy, of which oil and gas remains a critical component.”

Russell Borthwick, chief executive of Aberdeen & Grampian Chamber of Commerce, said its research indicates that contractors as well as licensees and operators are “broadly optimistic” that the positive trend of recent months will continue into the year ahead.

He added: “Firms have generally been more focussed on international markets for business growth in recent years but we are seeing something of a rebalancing taking place, with the North Sea becoming just as important again in terms of securing future growth.

“Maximising opportunity by ensuring the right investment landscape is critical to this.”