UKCS shows signs of upside potential

Editor’s note: This report is taken from Oil & Gas UK’s (OGUK) Business Outlook 2019

The business and operational improvements implemented during the downturn have positioned the UKCS as a much more attractive basin for E&P companies. The basin’s improved cost profile, along with a stable, competitive fiscal regime and extensive infrastructure, means that significant returns can be made from UKCS investments. Investors recognize this value, with more new projects committed to in 2018 than in the previous three years. Maintaining this level of project commitments will be crucial to maximizing economic recovery.

Recent UKCS performance has been strong, with output now 20% higher than in 2014—meeting 59% of UK oil and gas demand. This performance is all the more impressive, since it was preceded by 14 years of continued production decline. 

PRODUCTION

Total UKCS production was around 619 MMboe in 2018, or 1.7 MMboed, Fig. 1. This is 4% higher than in 2017, and it means that production has increased 20% over the past five years. This performance has been underpinned by new field start-ups that have begun production over the last five years, accounting for around half of expected 2019 output.

Fig. 1. Oil and gas production from the UKCS.

Oil production increased nearly 9% in 2018, to 397 MMbbl (1.09 MMbpd), accounting for 64% of total basin output and enough to meet 75% of total UK oil demand. This increase was driven largely by the oil-based nature of the new fields that have gone onstream in recent years, including five during 2018.

These fields will contribute more than 170,000 boed—10% of current basin output—and will target total recoverable resources of about 735 MMboe. These figures are, however, dominated by the Clair Ridge development.

Conversely, gas production declined about 3% in 2018, to 222 MMboe (0.61 MMboed), equal to 36% of total production and 43% of UK gas demand. This trend was driven by lower-than-expected performance within key gas hubs, and the lack of new gas fields coming online in recent years. 

Production outlook. There could be increases in both oil and gas production this year. OGUK forecasts that total production will range from 610 MMboe to 630 MMboe in 2019 (1.67 MMboed to 1.73 MMboed), with oil and gas accounting for a similar respective proportion of production, as in 2018.

Oil production will be boosted, as Clair Ridge ramps up toward peak production and Mariner field starts up in the northern North Sea. Gas production will benefit from start-up of Culzean HPHT gas field in the central North Sea. Culzean is the largest gas project to be sanctioned in the UK for the last 25 years. DRILLING ACTIVITY

In total, 102 wells were drilled on the UKCS during 2018 (85 development, eight exploration and nine appraisal). Although this represents a slight increase from 96 wells in 2017, well construction activity remains at record-low levels. This largely results from only the most valuable work programs being progressed amid continued capital discipline and reduced investor risk.

Despite this, there could be further improvement during 2019, with some increases possible across all types of drilling. In line with reduced drilling, there has been an increase in well decommissioning activity, with more wells decommissioned than drilled in both 2017 and 2018.

E&P EXPENDITURES

Pre-tax expenditure on the UKCS was £14.3 billion during 2018, or £15.4 billion post-tax, slightly less than had been anticipated, as companies retained strict capital and operational budgets. However, a slight increase in pre-tax expenditure to more than £15 billion, or £16.4 billion post-tax, can be expected this year. This will be underpinned by:

• A pick-up in capital investment, driven by new projects
• Increased operating expenditure, as major new projects come onstream
• Increased decommissioning expenditure
• A projected increase in exploration and appraisal activity.