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Fundamental change urgently needed to address UK exploration crisis

Published:  19 February, 2014

Britain urgently needs to set up a new regulator to encourage oil and gas companies to collaborate and counter plunging North Sea production rates, a government-commissioned review has highlighted.

Commenting on Wood Mackenzie’s annual review of UK upstream oil and gas, which followed on the heels of data released by the Department of Energy (DECC) on drilling activity in the UK Continental Shelf (UKCS), Oil & Gas UK CEO Malcolm Webb said:

“Both the Wood Mackenzie review and the latest DECC figures clearly illustrate the parlous state of exploration on the UKCS. We are just not drilling enough wells in UK offshore waters and those that we are drilling are not finding enough oil and gas. 

“This worrying trend has been growing for some time. It started in 2011 with a 50% drop in the number of exploration wells drilled, which has since failed to recover. Our members tell us that drilling rig availability and the ability of smaller companies to secure equity capital are major hurdles. In any event, it is clear that we now face a crisis which demands urgent concerted action by DECC, HMT and the industry, if we are to maximise economic recovery of our offshore oil and gas resource and sustain future production. Webb continued: “The paradox is that the UK continues to record annual levels of capital investment at over £13 billion. We now have a two-speed North Sea. On the one hand we have seen tremendously strong development activity from a small number of large, highly robust projects plus a greater number of smaller ones, only made commercial by targeted reductions in unsustainably high tax rates, ranging from 62% to 81%. 
“Meanwhile, production from existing fields has fallen significantly and the total number of exploration wells has dropped to just 15 in 2013, according to data just published by DECC. We are simply not putting enough reserves into the hopper for future development. Unless we do something about exploration now, we face a risk of a collapse in capital spend in a few years’ time and hence lower future production. 

“Sir Ian Wood sets out the right prescription in his interim report to the Secretary of State for Energy, Maximising Economic Recovery for the UK, published last November. He proposes a new and strongly resourced oil and gas regulator, working in cooperation with the Treasury and the industry towards the shared goal of maximising economic recovery of the substantial remaining UK oil and gas resource. 

Oil & Gas UK said it looked forward to the imminent publication of Sir Ian’s final report and to HMT, DECC and the industry working together as a matter of urgency to implement its recommendations, including, crucially, this new tripartite approach. The organisation added that there are substantial volumes of oil and gas still to recover from the UK continental shelf but action must be taken now to avoid billions of barrels being left in the ground.

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