Economic Report 1999 Index

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The Challenge of Maturity The first gas discovery off East Anglia was made some 35 years ago in 1965, with first production two years later. The first offshore oil discovery was made further north in 1969 with first oil production in 1975. Successful exploration and development over the ensuing years have driven current UK production to its highest point to date , shown earlier in Fig 1. earlier. After reaching its peak, production from existing fields is expected to decline. The pace of decline will depend on industry and Government successfully overcoming the challenges presented by a mature province. The maturity of the UKCS as an exploration province is well illustrated by Figure 15. Figure 15 - Declining UKCS Field Size Source:  Arthur Andersen Petroview Please click on the image below to view the full chart: It is a feature of all hydrocarbon provinces that the largest most attractive prospects tend to be drilled first. The early gas discoveries in the mid 1960s and the early 1970s oil discoveries were typically 300-400 million boe, with the largest discoveries (Brent & Forties) being over 2500 million boe. However, the typical discovery in recent years has been 20-30 million boe. The economic development of fields of this size in the North Sea relies heavily on both new technological solutions, such as subsea completions and floating production systems, and extensive use of the existing infrastructure. Figure 16 indicates that the industry has successfully overcome the challenge of declining field size and actually reduced the unit cost of bringing new fields on-stream over the past 10 years, but as discoveries become even smaller the challenge remains. The chart also shows that for fields developed since the mid 1980s there has essentially been no scope for special taxes. Figure 16 - Field Life Costs Source:  DTI Please click on the image below to view the full chart: The large fields developed in the 1970s have underpinned UK production throughout its history, but are now very much in decline. The production rate of these fields is now less than 20% of that achieved in the early production phase. Figure 17 - Oil Production: Diminishing Economies of Scale Source:  Cogent and PACEC Figure 17 indicates that currently in excess of 35% of UKCS oil production was from fields that produced less than 40 thousand barrels per day; only 2 fields in the UKCS produce in excess of 100 thousand barrels per day. Further confirmation of this maturity can be drawn from the fact that the 10 largest fields account for 38% of UKCS oil production; for Norway the top 10 fields represent 81% of production. The contrast in economies of scale is clear. Figure 18 - Mature Field Cost Pressures The producing life of the largest fields has been extended far beyond the first estimates by a programme of continual reinvestment, to capture more of the oil and gas beyond reach of the initial development. However, 25 years after first oil flowed from these fields the incremental oil targets for this additional investment are becoming smaller and hence more challenging. Many opportunities for further investment in mature fields are made unattractive by the high marginal tax rate of up to 69%. Sustaining mature field investment is critically important, not only for the direct impact of the additional oil or gas recovered, but also because the fields provide the infrastructure essential for the economic development of the small surrounding fields yet to be found or developed.