Outlook for the UKCS in 2007

UKCS Drilling

Exploration and Appraisal Drilling

Despite a slow start to the year, exploration and appraisal (E&A) activity remained buoyant during 2006, supported by high oil prices. The total number of wells drilled declined slightly to 69, but intentions to drill outweighed resource capacity. The tightness of the rig market and a reasonably successful exploration year in 2005 saw efforts being concentrated on appraisal wells in 2006, with 40 being drilled versus 29 exploration ones. Many planned exploration wells were delayed until 2007, but the first quarter of this year has not seen a rebound, with nine exploration and seven appraisal wells being drilled.

Figure 34: UKCS Drilling: E&A Wells by Region 1999-2008

As Figure 34 demonstrates, drilling in 2006 was primarily targeted at well explored areas like the central and southern North Sea, a trend which is expected to continue in 2007-8, although the recent reduction in gas prices may affect gas dominant areas of the UKCS. Following successful exploration in 2005, there was little new exploration activity in the Atlantic margin where potential rewards and risks are higher. It is expected, however, that exploration activity in this region will increase in 2007-8, possibly as a result of Frontier Licence commitment deadlines. It is also likely that an increased proportion of exploration and appraisal wells will be drilled on fallow acreage over the next two years.

Oil and Gas Discoveries

Continuing 2005’s relatively high success rate, 36% of exploration wells encountered hydrocarbons that proved to be commercial, particularly in the southern and northern North Sea. In 2006, about 500 million boe were discovered with two accumulations believed to be larger than 100 million boe. However the remainder of the discoveries averaged at less than 20 million boe. While this is larger than in recent years, the downward trend in volumes discovered, as highlighted in Figure 35, is clear. Prospectivity is just one of the factors considered in investment decisions but, in the case of the UKCS, the volumes being discovered render it less attractive as a place to invest than in the past and when compared with newer oil and gas provinces.

Figure 35: UKCS Volumes Discovered 1965-2006

Prospectivity

Prospectivity refers to the likelihood of finding commercial quantities of oil and gas. In the past decade, there has been a substantial shift in the size of UKCS prospects. Once it was normal to find accumulations of over 100 million boe, but 85% of all prospects are now less than 50 million boe. However, there are still potentially large volumes to be discovered, particularly in the Atlantic margin / west of Shetland, where exploration remains limited due to the depth of the waters and a lack of infrastructure, especially for gas.

Figure 36: UKCS Prospectivity (unrisked)

Some 50 billion boe of reserves have already been discovered. Assuming that similar success rates to those of recent years can continue to be achieved, it can be extrapolated that between 4.0 and 8.2 billion boe may yet be discovered in the years ahead (see also Figure 44 below), although current trends would indicate the lower end of this range.

Development Drilling

Oil price hurdles used by many companies for investment decisions were raised during 2005 in response to higher prices. The volume of reserves that were economic to develop rose, therefore, and drilling of development wells increased accordingly from 2004 to 2005. However, the number then fell from 227 wells in 2005 to 211 in 2006, indicating substantial cost inflation in this important element of capital expenditure.

Figure 37: UKCS Drilling: Development Wells 2000-2006

Although it is difficult to gauge from only three months’ data, a relatively slow start to development drilling was seen in the first quarter of 2007 with only 43 wells drilled. However, the summer season is usually the busiest period for this and other offshore activities and so it is to be hoped that this slow start does not signal a further reduction in the drilling of development wells, compared with 227 in 2005 and 211 in 2006.