UK Upstream Emerges from Downturn

Upstream lobby group Oil & Gas UK sees an improved landscape for the sector, with reduced costs, competitive fiscal terms, improved operational performance and more stable oil and gas prices. 

Its latest Economic Report, published September 11, shows that operating costs have halved in the last few years and are now being sustained at around $15/barrel of oil equivalent (boe); this year’s production is on track to be a fifth higher than it was in 2014; and that more major new projects have been sanctioned by upstream companies so far this year than the last two years combined.

On the negative side, the total exploration activity this year is expected to be the lowest since 1965. But despite the low levels of activity, total discovered volumes have increased in the last two years, with more than 700mn boe added across 2016-17. Although this was due to a small number of large discoveries west of Shetland, this figure represents almost the same amount as the period 2008-15 combined.

There have also been successes recorded by the wells spudded so far in 2018, with Apache announcing a 10mn boe discovery at the Garten field in the Beryl area, as well as early indications that the Cambo appraisal well drilled by Siccar Point Energy has been positive. Total E&P UK is also continuing to review the results of its Glendronnach well in the west of Shetland area. Cairn Energy spudded the Ekland exploration well in July and Zennor Petroleum has begun further appraisal activity on the Finlaggan prospect, with the intention of moving towards development of the field. Azinor Catalyst has also spudded the Plantain exploration well and will look to follow this with a contingent sidetrack to appraise the Agar discovery.

There is expected to be a pick-up in exploration drilling activity in the second half of the year, with a number of plans and contracts already in place including Siccar Point’s “eagerly anticipated” Lyon well in the west of Shetland region, and Neptune Energy’s near-field exploration well in the area around its Cygnus field. Nexen is also planning further exploration and appraisal work on its Glengorm and Cragganmore prospects, the report says.

The supply side has been badly squeezed, and this could lead to capacity constraints by 2021 across the supply chain as a result of the reductions in recent years and an expected increase in new development activity at home and abroad, says OGUK. The constraints are expected to be felt most across drilling and wells services and within engineering and subsea sectors.

Oil & Gas UK CEO Deirdre Michie told industry ahead of the launch that the industry is emerging from one of the most testing downturns in its history. However, the steps that have been taken by industry, government and the regulator have delivered tangible results. 

“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,” she said.