UK: Oil investment down on last year

An oil rig in the North Sea

An oil rig in the North Sea - Credit: PA

Investment in North Sea oil and gas has fallen substantially in the last year amid reports that companies are biding their time until after the Chancellor’s Autumn Statement.

George Osborne must make the North Sea fiscal regime more predictable, with lower taxes and more incentives to boost activity, investors have told professional services firm Deloitte.

Just four deals were announced in the three months to September, down slightly on five in the previous three months but “substantially lower” than the 14 announced in the same period in 2013.

Derek Henderson, senior partner in Deloitte’s Aberdeen office, said the drop in deals may be down to North Sea operators waiting for clarity about the future of the UK Continental Shelf (UKCS).

In particular, firms are waiting for more detail about the implementation of the Wood Review, including formation of the Oil & Gas Authority, and changes to the North Sea’s fiscal regime, Deloitte said.

These measures are due to be detailed in the Autumn Statement on December 3.

Mr Henderson said: “The industry continues to wait and see how the future of the North Sea will take shape.

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“This is a particularly interesting year for the UKCS as it goes through a period of transition. There remains much change on the horizon and, as a result, many companies will be biding their time.

“All eyes will be on the Chancellor’s Autumn Statement, where industry will be looking for measures which support the challenges of operating in this mature basin.

“Having spoken to a range of investors in the North Sea, we know that a fiscal regime which is more predictable, with a lower tax burden, is key for improving investor confidence. Incentives which will encourage exploration and appraisal activity, as well as new entrants to the region, are also a vital part of the equation.

“Ultimately, the UKCS needs to be internationally competitive if it is to attract the investment it requires to boost its future prospects. We’ve made all of these views clear in our submission to the fiscal consultation. This is the most important Autumn Statement for some time now, as it could be the last chance to get the fiscal regime right.”

Meanwhile, the report also found 11 exploration and appraisal wells were drilled in the third quarter of 2014, up on the seven reported in the previous three months.

This is consistent with the 11 announced during the same period last year.

But Deloitte said price pressure and access to finance have remained issues on the UKCS, with a large number of North Sea assets on the market from some of the larger operators.

Smaller companies, in some cases with limited budgets, tend to be the most likely buyers creating a price differential in the market and potentially stalling deal activity, according to Deloitte.

Graham Sadler, managing director of Deloitte’s Petroleum Services Group, said that although the number of new wells drilled was higher this quarter compared with the previous three months, the figures have been at a steady low for some time.

“While it’s encouraging to see an increase in the number of new wells drilled this quarter, we are starting from a low base,” he said.

“Until we see the incentives required to encourage further exploration and appraisal activity, drilling could remain muted in the short to medium term.

“During this period of transition, costs have remained high for North Sea firms, access to finance has remained difficult and the price of oil has dropped to as low as 95 US dollars (£59) this quarter. This combination of factors continues to make the economics of extraction more difficult for operators.”

The report also found that one field had been approved on the UKCS in Q3 2014, down on the five reported the previous quarter. However, this was consistent with the same period last year when just one field received development approval.