North Sea oil and gas exploration is at a crossroads

North Sea oil and gas exploration at a 'crossroads'

North Sea oil and gas exploration is at a "crossroads", according to a report from Deloitte's Petroleum Services Group (PSG).

The PSG report states that while the number of fields starting to produce in the UK hit its highest level for five years, with a 44 per cent increase in 2013 compared with the previous year, there has also been a 28 per cent drop in exploration and appraisal drilling.

Optimism and pessimism are about equal within the industry, the firm's energy partner Graham Hollis said: "The rise in field start-ups over the last year and increased interest in licensing rounds are positive indicators for the future of the North Sea. However, more than ever companies appear to be at a crossroads in their attitude towards it, with optimism and pessimism seemingly present in equal measure.

"We have recently seen a number of announcements of significant, and in some instances all-time high, levels of investment in the UK continental shelf. However, a number of other companies, some of whom have been key players in the UK sector for many years, have publicly announced or are taking steps that seem to indicate that the North Sea is no longer a core focus for investment within their global portfolios.

"Any longer-term decline in exploration and appraisal drilling will be of concern and there are measures that seriously need to be considered by industry and government to reinvigorate drilling activity and ensure the longevity of the UK continental shelf."

The report looks at activity across north-west Europe. Of the 13 fields brought on-stream last year, 84 per cent were eligible for tax allowances. It points to a "positive industry reaction" to government incentives, Deloitte said.

While exploration and appraisal wells dropped from 65 to 47 last year, activity in the Norwegian continental shelf increased by 41 per cent.

Graham Sadler, managing director of Deloitte's PSG, said that more needed to be done to encourage drilling in UK waters. "Despite the high oil price, margins are tight and the drop in drilling during 2013 most likely reflects the increased costs of operating," he said. "Staff costs remain high and access to equipment such as rigs, which are limited in number, drives prices upwards.

"Nevertheless, we are seeing evidence that government incentives are helping to stimulate field developments - even historic discoveries - with Chevron's recent announcement that it will start work on the Alder field, which was discovered in the 1970s. Advances in technology have also been vital to the development of this and other historic discoveries. Greater overall knowledge and understanding of the North Sea's complex geology and economics also play an important role in the current viability of these older discoveries."

The environmental impact of fossil fuel exploration was raised in response to the PSG report. WWF Scotland director Lang Banks said, "The real crossroad the world faces is whether or not it takes steps to address climate change by reducing our reliance on oil and gas, not on lobbying for additional government incentives to be able to extract and burn even more fossil fuels.

"We need to see a transition that enables us to harness the engineering skills currently deployed in the oil and gas industry and apply them to supporting a range of cleaner forms of energy production.

"One thing we do know is that the planet certainly can't afford to allow all the oil and gas left in the North Sea to be burned."

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