Financial Times: Investment in North Sea falls sharply

By Ed Crooks, Energy Editor
Published: February 26 2008 02:00 | Last updated: February 26 2008 02:00

Investment in oil and gas in the North Sea fell sharply last year, in spite of record oil prices, as the industry found it increasingly difficult to extract Britain’s remaining resources.

Companies invested £4.9bn in 2007, down 14 per cent from the previous year, according to Oil & Gas UK, the industry association. With costs rising by about 15-20 per cent over the period, the decline in the real value of investment was even steeper.

Insufficient investment, project slippage and depletion of the mature fields developed in the North Sea’s heyday meant that production was likely to fall short of objectives set at the start of the decade, the association said. The government and the industry agreed a target of keeping Britain’s UK’s oil and gas production at about 3m barrels of oil equivalent a day by 2010. It now looks likely to be only about 2.4m boe/d.

Malcolm Webb, O&GUK’s chief executive, said he did not expect any radical changes in the tax regime in next month’s Budget, apart from technical changes flagged last year. The industry is in a consultation with the Treasury that is not due to end until June. But he added: “The rates of tax have got to be brought down over time.”

The search for oil and gas picked up sharply last year: there were 111 exploration and appraisal wells drilled, up from 70 in 2006. The volumes being discovered have also picked up from the very low levels of the late 1990s and early 2000s: Oil & Gas UK estimates about 300m-400m boe were found last year, down from about 500m in 2006, but up from just 82m in 2005. Smaller companies are coming in to the North Sea to take over assets sold or rejected by the long-established operators such as Royal Dutch Shell and Exxonmobil.

The UK sector is thought to still hold 16.5bn-25.5bn boe of oil and gas. However, the resources are increasingly being found in very small pockets that are difficult to exploit commercially. About half of last year’s discoveries held less than 20m boe: enough to provide the UK North Sea’s production for just a week.

The result is that the capital efficiency of investment in the UK North Sea has been falling steeply. In 2003, the industry invested about £3.6bn to enable it to produce about 1.3bn barrels of oil equivalent, for an average investment of about £2.80 a barrel. In 2007, its £4.9bn investment will lead to the production of about 600m boe, at an average capital cost of £8.20 a barrel.

Michael Tholen, O&GUK’s economics director, said: “I am a bit concerned about declining capital efficiency. [Getting] less bang for your buck really hurts investors.”

Rhodri Thomas of Wood Mackenzie, a consultancy, said: “Yes, there is quite a lot of activity, but on the other hand there is old infrastructure, high costs and assets that are not performing as expected.

“None of that is unique to the UK, but what makes it different is the maturity of the region.”

Copyright The Financial Times Limited 2008

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