UK offshore capex to drop by a third in 2015: OGUK

Capital investment in the UK's offshore oil and gas industry is likely to fall by as much as a third to £9.5bn-11.3bn ($14.7bn-17.5bn) this year because of high costs and a heavy tax burden, industry group OGUK said today.

Investment reached £14.8bn last year — more than expected, but this was mainly because of cost over-runs and delays to several large projects. Half of the total was spent on just 12 fields, and as "these large projects move from the investment phase into production there is very little new investment lined up to replace them", OGUK said in its annual activity survey.

"Feedback from operators indicates that very little new investment is expected to be sanctioned in 2015 as companies review their business plans in light of the falling oil price," it said. "Cost and efficiency improvements of up to 40pc are required to give this basin a viable future… a concerted effort on three fronts is needed — tax, regulation and cost — to make the basin more attractive to investors and ensure that significant sums of much-needed capital come to the UK."

The UK government launched a consultation on a new investment allowance last month, which is likely to cut the effective tax rate for companies investing offshore the UK to 45-50pc from the current levels of up to 80pc. The government also introduced some incentives to boost offshore oil and gas activity in December, including a reduction of the supplementary tax charge on oil and gas production to 30pc from 32pc. It is now expected to suggest further, more significant changes next month, and the industry wants the changes to be implemented swiftly.

But BP chief executive Bob Dudley said earlier this year that with oil prices dropping sharply in recent months, changing the fiscal regime is not going to change the situation in the industry overnight.

"Costs are going to come down quickly or else some fields will be uneconomic," he said. "I have heard that for a quarter to a third of fields in the North Sea, operating costs exceed the revenue from them."

Centrica chief executive Ian Conn has called the situation in the UK's offshore sector "dire".

OGUK estimates that £94bn of investment is needed to extract the theoretical maximum 10bn bl of oil equivalent (boe) in potentially recoverable reserves. Of this total, 6.3bn boe have been sanctioned or are under development, another 3.7bn boe represent "potential investment opportunities, although companies indicated at the end of 2014 that less than 2bn boe of those were likely to be developed" with the number expected to fall even further, the group said.

OGUK's activity survey indicates that annual investment in sanctioned projects is set to drop to £2.5bn by 2018. "Equally alarming is the three-year (2015-17) outlook for projects yet to get company sanction, in which planned investment has fallen from £8.5bn in last year's survey to just £3.5bn in current forecasts," it said.

Operating expenditure on a unit of production basis reached a record high of £18.50/boe last year, up from £17/boe in 2013, while a drop in oil prices caused revenues to fall to some £24bn, the lowest since 1998. "This, combined with rising costs, resulted in a negative cash-flow of £5.3bn for the basin, the worst since the 1970s," OGUK said.

A record low 14 exploration wells were drilled last year, compared with the expected 25. Between eight and 13 exploration wells are forecast for this year, as lower oil prices add "to the existing difficulty explorers still have in accessing capital," the group said.

But production fell by just 1pc last year from 2013, to 1.42mn boe/d, "the best year-on-year performance" since 2000 thanks to "investment in new project start-ups, enabled by targeted tax allowances, and a specific focus across the industry on improving production efficiency in existing fields which resulted in no major unplanned shutdowns".

Oil and gas production could increase to 1.43mn boe/d this year, as up to 15 new fields could come on stream.

"The impact of new start-ups is so great that, by 2019, more than half of [UK offshore] production is likely to come from fields that started production since the end of 2012," OGUK said.

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