UK tax breaks stimulate renewed activity

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Courtesy of Energy Institute (EI)

A combination of sustained high oil prices, limited economic recovery and supportive government tax policy, most notably in the UK led to an increased number of field start-ups in the North Sea in 2012 compared to the previous year, writes Chris Skrebowski.

The maturity of the North Sea is clearly shown by the ongoing oil production declines seen for the three major producers - Norway, the UK and Denmark. Collective North Sea oil production fell by 8.4% in 2012 with the UK back to production levels last seen in 1977, by Norway in 1991 and by Denmark in 1996 (see Table 1). Gas production results are more mixed, with Norway continuing to expand production, the UK in sustained decline, while Dutch and Danish production is only down to a limited degree. Overall, North Sea gas production increased in 2012, by fractionally under 3% versus 2011.

As Table 3 shows, 2012 was a good year in terms of new projects coming onstream, with many more start-ups than in 2011. In the UK, Norway and the Netherlands the number of projects brought onstream in 2012 was over double the number in 2011. Possibly even more important, the volume of reserves brought onstream in 2012 was very much higher. The 2013 activity survey from Oil & Gas UK shows this very clearly. It notes that in 2011 the five new field start-ups involved reserves of just 30mn boe - well below the 84mn boe in eight new fields in 2010 and even further below the 146mn boe brought onstream in 2012.

The main factors stimulating the greater activity in 2012 was a combination of sustained high oil prices, limited economic recovery and government tax policy being more supportive, most notably in the UK. All these positive factors have continued in 2013 and Table 3 clearly shows an even greater number of field start-ups coming through this year. It is likely that the total reserves mobilised will increase, but in the case of the UKthesewill only slow the rate of production decline.

The International Energy Agency (IEA) anticipates quite large production declines between 2012 and 2013, with a marked slowdown in the rate of decline predicted for 2014 as the increased number of new field developments starts to impact (see Table 3). Both UK Oil & Gas and the Norwegian Petroleum Directorate (NPD) forecast a recovery in oil output from 2014 onwards. However, achieving this optimistic outcome will require oil prices to remain high and all development costs to be held fairly steady.

Over recent years escalating exploration and development costs have been a real challenge to the industry, particularly now that the outlook is for stable or even declining oil prices. In its 2013 activity survey Oil & Gas UK records that unit technical costs, unit development costs and unit operating costs for both oil and gas fields in the UK sector of the North Sea have been rising steadily over recent years, with some costs possibly stabilising in 2013.

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