Wood Mackenzie’s annual UK upstream oil and gas review concludes that 2013 was a mixed year for the industry. Capital investment continued to increase, however, this was set against the backdrop of project delays, production underperformance and poor exploration success.
However, Wood Mackenzie says there are promising new fields due onstream and an increase in UK focused deals expected in 2014. The year ahead could prove to be pivotal with an improvement in exploration success and production performance crucial to ensuring the longevity of the sector. Final recommendations from the Wood Review could ultimately change how the industry is regulated and the Scottish independence referendum could lead to the division of the UK’s North Sea assets.
In 2013, the North Sea investment boom which began in 2011 continued, as Lindsay Wexelstein, Head of UK Upstream Research for Wood Mackenzie, explains: “Last year capital investment reached the highest level in real terms since the mid-1970s. We anticipate £21.3 billion (US$33 billion) will be spent on capital investment across 2013 and 2014. However, spiralling costs did put pressure on project economics and caused some developments, such as Bressay and Rosebank, to be put on hold.”
Wexelstein continues: “High levels of activity and stretched resources have also led to project delays and only 13 new fields were brought onstream in 2013, which was lower than the 21 expected at the start of the year.” Wood Mackenzie says new fields brought onstream in 2013 equated to 438 million barrels of oil equivalent (mmboe) of recoverable reserves. A similar number of fields and volume of reserves is expected onstream in 2014. Although Wexelstein cautions: “Due to poor exploration performance in recent years, capital investment is unlikely to be sustained at the current high levels beyond 2015.”
Exploration success low
Exploration success has been low since the beginning of 2011 and according to Wood Mackenzie only 79 mmboe of recoverable reserves were discovered in the UK in 2013, fuelling concerns about the longer term outlook. Wexelstein said: “Just 52 exploration and appraisal (E&A) wells were spudded last year. This is largely due to stretched company and service sector resources as well as difficulties some companies faced in raising finance to fund exploration activity.”
Wood Mackenzie’s 2013 review also notes that, in contrast to a buoyant 2012, merger and acquisition (M&A) spend in the UK slumped in 2013. Wexelstein adds: “Total value traded in UK focused deals was £1.1 billion (US$1.7 billion) – compared to £6.1 billion (US$9.6 billion) the previous year. Although global activity has fallen, it was more pronounced in the UK due to a restricted pool of buyers and perceived risks around later life assets. For many 2013 was also a year of integration and evaluation after a bumper year in 2012.”
So what does 2014 hold for the UK’s upstream sector? “The UK’s upstream sector should look to 2014 with cautious optimism. In terms of the UK’s production, the outlook is positive, as we forecast 14 new fields with 438 mmboe to be brought onstream. There is downside risk to our production forecast if companies fail to fulfil plans, as we have seen in recent years. Despite poor exploration success over the last few years, the second tranche of awards associated with the 27th UK Offshore Licensing Round in November 2013, demonstrates that companies are still interested in exploring in the UK. However, we expect E&A drilling activity to remain low over the near term due to the same issues experienced over recent years. We expect to see deal activity increase in 2014, albeit this is on the back of low levels in 2013 as some of the larger players will continue to look to optimise their portfolios.”, says Ms Wexelstein.
Wexelstein comments in closing: “Although some uncertainty remains over the longevity of the sector, 2014 could prove to be a pivotal year for the UK’s North Sea. The final recommendations from the Wood Review will be delivered in early 2014 and could ultimately change how the industry is regulated. In addition, potentially one of the most significant events to take place this year will be the Scottish independence referendum in September, the results of which could ultimately lead to a division of oil and gas assets between Scotland and the rest of the UK.”
Source: Wood Mackenzie, January 21, 2014