WORLD OIL SPECIAL REPORT

Grounds for optimism exist on UKCS

Alexander G Kemp, Schlumberger Professor of Petroleum Economics, University of Aberdeen, Aberdeen, Scotland

This year saw some encouraging developments on the UK Continental Shelf (UKCS). In particular, field investment registered a sharp increase over 2000 levels. From just under £3 billion ($4.37 billion) in 2000, it could end up at around £4 billion ($5.83 billion) by the end of 2001.

Compared to many other parts of the world, investment was relatively slow to pick up in the UK following the oil price increases of 1999 and 2000. This sparked fears that perhaps the maturity of the UKCS would have a stronger, negative effect on investment than other influences. In turn, this would have raised the specter of permanent decline. The substantial upturn in investment this year is thus doubly welcome.

Oil production, which fell in 2000 compared to 1999, will end up still lower in 2001 – perhaps averaging 2.3 million bpd. This reflects delays in the completion of some new developments, production problems in some existing ones, and natural decline in others. When the causes are closely examined, however, the evidence is not yet conclusive that a long-term decline started after 1999.

Gas production is likely to show a small increase over levels achieved in 2000. Average output could end up at around 10.9 Bcfgd. A major landmark was the start-up of production from the very large, Elgin-Franklin fields. The UKCS is becoming increasingly gas-prone in terms of production and remaining reserves.

An historic event was the announcement in October of development of Clair field, 47 mi west of the Shetland Islands in the Atlantic Ocean. This field was discovered in 1977 and, although it contains around 1.7 billion bbl of oil-in-place, has not been deemed economic until now because of the heavily fractured reservoir and the heavy nature of the oil.

The most likely development scheme will be a fixed platform linked by pipeline to Sullom Voe. This will produce significant infrastructure in the Atlantic Ocean that can facilitate the development of other fields. Over time, it is quite likely that further satellite developments will occur in the Clair complex. The whole field covers a very large area, totaling 220 sq km (85 sq mi).

During the year, many initiatives were in progress, with the objective of enhancing activity levels. The joint government / industry body, PILOT, has been active in promoting various schemes to foster development of some of the many undeveloped discoveries. A promising concept is the field cluster. Many small fields are not viable when viewed as stand-alone investments. However, when they are considered as a group with a common infrastructure, there can be substantial cost-savings.

There are also benefits from the sharing of risks, as in a portfolio of financial assets. There is much scope for the further employment of this concept, given that many of the undeveloped discoveries are located within sufficiently close proximity of each other to permit effective use of a common infrastructure. This is especially true in the southern and central areas of the North Sea.

"The year 2002 on the UKCS may turn out to be very active. Field investment may considerably exceed this year’s levels."   – Alexander Kemp

The only disappointing activity has been exploration. The year 2000 saw a good increase from 1999’s very low levels. This year, however, the number of exploration and appraisal wells started has been running more than 15% lower. Overall, drilling has still improved, because development wells are up by more than 50%. A bright exploration spot was the Buzzard oil field discovery, which may turn out to be very large by current UKCS standards, perhaps as high as 200 million to 300 million bbl.

The year 2002 may turn out to be very active. There are some indications that field investment may considerably exceed this year’s levels. This would indicate that the industry has indeed found substantial opportunities despite the province’s maturity.

The completion in 2002 of projects that have slipped behind schedule, along with the fruits of some new investment undertaken in 2001, could mean that oil production might exceed this year’s level. If so, it would reverse the trend of the last two years.

Gas output should also increase next year. The same "health warning" applies as it does for oil. Given the continued increase in UK gas demand, and the existing export contracts, the UK gas market has tightened considerably. This has resulted in the signing of a new long-term import contract with Norway. It would not be surprising if further contracts with Norway become an issue next year.

A 20th License Round should take place in 2002. This will apply to some of the North Sea’s mature areas. With respect to relinquishment, terms may be tightened to encourage accelerated exploration and development. Much of the acreage that will be offered will actually be re-licensed, resulting from relinquishment of blocks from earlier rounds. This may give the impression that the new round will attract only moderate interest.

However, technological progress made over the past decade may mean that such acreage is still interesting to investors with new geological and development ideas. The government is certainly keen to reduce the amount of fallow acreage and the number of undeveloped fields. Thus, it has been pursuing a number of initiatives.

In discussing activity levels, attention generally concentrates on investment and production. In recent years, UK operating costs have actually exceeded field investment in value. They have increased gradually, despite the continuing cost-reduction initiatives. This is because the number of producing fields continues to increase. Next year should see a modest, further increase, mostly because the number of producing fields continues to grow. Exploration levels are always difficult to predict. While confidence in the UKCS generally improved during 2001, exploration did not increase, and there may not be much change in 2002.

The political risk in the petroleum industry worldwide is always present, but has become more pronounced recently. For some risk-averse investors, this may give the UKCS some relative advantage over other locations, although other features of the investment climate are likely to be more important. When they are all added together, the UK could look forward to a very active year.