The North Sea needs continued investment from businesses and government through its current period of transition, according to a new report from Deloitte, the business advisory firm.
Deloitte’s Petroleum Services Group’s latest North West Europe Review, which details drilling, licensing, and deal activity across the region for the whole of 2014, follows a year of change on the United Kingdom Continental Shelf (UKCS), along with volatility in commodity prices over the last five months.
The report found that 40 wells were drilled offshore UK throughout the year. This is down on the 50 wells reported in 2013 but largely consistent with expectations given recent trends and market conditions.
Following broad acceptance by government and industry of the recommendations made in Sir Ian Wood’s “UKCS Maximising Recovery Review”, subsequent changes have included adjustments to the North Sea’s tax regime and the establishment of a new industry regulator, the Oil and Gas Authority (OGA).
“We continue to see steady but low levels of drilling and hope this will increase”
Graham Sadler, managing director of Deloitte’s Petroleum Services Group, said: “Over the last 12 months, both industry and government have recognized the need for change on the UKCS. We have started to see some positive steps taken in that direction, with the recommendations made in the Wood Review and tax changes announced in the Autumn Statement among them.
“We continue to see steady but low levels of drilling and hope this will increase. However, that will require industry dialogue with, and strong guidance from, the OGA. It will also need further clarity from Government over the fiscal incentives that will be made available to support exploration and appraisal activity.
“To sustain its future, the North Sea’s stakeholders will need to adapt to a lower oil price environment and reduce costs in order to get through this period of transition.”
The Deloitte report also found there was a reduction in the number of field start-ups in 2014, decreasing from 13 in 2013 to six this year.
“With the price of oil dropping significantly, many asset prices are likely to be revised”
There were fewer deals completed in the last 12 months, dropping from 63 in 2013 to 23 in 2014. Farm-ins were the most prevalent type of deal again this year, representing 57% of transactions (13 deals). The remaining UK offshore deals consisted of six asset acquisitions, two corporate acquisitions, and two divestitures.
With the price of oil dropping significantly, many asset prices are likely to be revised. Derek Henderson, Deloitte’s Aberdeen Office Senior Partner, said this could result in more deals being completed in 2015.
Henderson said: “Last year saw a reduction in the number of deals taking place in the North Sea, despite a large number of assets being available on the market. Price pressure and access to finance were issues for the most likely buyers – smaller companies with limited budgets – creating a price differential in the market and stalling deal activity.”
“While it is not the only consideration, it is likely that if the oil price remains low assets will become more affordable to some of the region’s more cash-rich players who may be looking to invest in the UK basin.
“As a result, we could see more transactions in 2015 as some businesses look to divest and focus on other areas. This could also bring about further consolidation among some of the players in the market. There are definitely firms on the lookout for assets and deals will be done if the price is right.”