Hannon Westwood report: Activity fell in UK, flourished in Norway in 2014

In 2014, activity levels in the UK and Norwegian sectors continued to diverge, with Norway seeing consistently high activity levels that were not replicated in the UK, Hannon Westwood (HW) reported. HW estimates that in 2014, UK fields produced approximately 600 million BOE, an increase from the approximately 520 million BOE produced in 2013. In Norway, production levels declined to 1.12 billion BOE, down from 2013’s 1.35 billion BOE. However, 2014 saw significantly higher levels of drilling activity in Norway than in the UK.  By year-end, 46 exploration and appraisal (E&A) wells had spudded in Norway, of which 36 were exploratory while 10 were classified as appraisal. Only four years have had higher E&A activity since E&A drilling began in the 1960s.

In the UK, although the vast majority of UK fields are in decline and production efficiency is falling, a number of new large fields were brought on stream. These include Jasmine, Juliet, Rochelle and Golden Eagle. The British government also approved the restart of production from the Rhum Field, which was shut in as a result of sanctions against Iran.

The UK saw a decline in the number of E&A wells spudded in 2014, along with an even sharper reduction in the number of completed deals, compared with the levels seen in 2013.  A total of 25 E&A wells spudded during 2014, comprising 12 exploration wells and 13 appraisal wells.  This compares with 32 wells spudded in 2013 and is the lowest level of UKCS activity since 1970.

By area, the Central North Sea saw the most activity, with 12 spuds (eight exploration and four appraisal), followed by the Southern North Sea, where six wells were spudded (three exploration and three appraisal). Four wells, all appraisals, were spudded West of Shetlands, while only two wells were drilled in the Northern North Sea (one exploration and one appraisal). In addition, a single exploratory well was drilled in the East Irish Sea.

Five discoveries – Avalon, Marconi/Vorlich, Leman SW, Romeo and Cepheus – were made in 2014, amounting to a total estimated potentially recoverable resource of approximately 50 million BOE.

Four of these discoveries are considered commercial, with only Romeo understood to be non-commercial. The UKCS, therefore, recorded an exploration success rate of 38%. This compares with the 57% achieved in 2013 when eight discoveries were made.

Similarly, A&D activity was muted in what has been a prolific sector in recent years. In total, 53 deals were conducted, compared with 56 deals in 2013 and 66 in 2012. However, the total estimated deal value was estimated at just $788 million, a fall from $4.4 billion in 2013 and $7.6 billion in 2012.

In Norway, the North Sea was once again the most active area in terms of drilling, with 25 E&A (18 exploratory and seven appraisal) wells spudded. This was followed by the Barents Sea, where 13 wells were drilled (11 exploratory and two appraisal), while the Norwegian Sea saw the lowest level of activity with eight wells spudded (seven exploratory and one appraisal).  Of these regions, the Norwegian Sea was the most technically successful, with an average exploration success rate of 86%, while the mature North Sea experienced the lowest exploration success of just 22%.

In the Barents Sea, Statoil had a number of successes that helped to push the region toward a 64% technical success rate. In total, 15 new discoveries were made in 2014, to which HW attributes an estimated 700 million BOE. Worthy of note are Lundin’s Alta structure, which contains an estimated 270 million BOE and the VNG-operated Pil Discovery, which contains an estimated 120 million BOE.

The deal market in Norway was active, with 36 deals concluded, compared with 39 deals in 2013 and 21 deals during 2012. Major deals included the acquisition of Marathon’s Norwegian subsidiary by Det Norske for a total consideration of $2.7 billion; the acquisition of Statoil assets by Wintershall for a total consideration of $1.25 billion; and the acquisition of several of TOTAL’s assets by PGNiG for a total consideration of $317 million. HW estimates that deal values for 2014 total approximately $4.1 billion, compared with $3.8 billion in 2013 and $4.2 billion in 2012.

While activity levels have remained low in the UK, 2014 saw a number of positive initiatives take place, according to HW. The implementation of some of the Wood Review’s recommendations has begun, a major milestone being the establishment of the Oil and Gas Authority to be headed up by Andy Samuel. In addition, it was announced in the Autumn Budget Statement that Supplementary Corporation Tax levels were to be reduced immediately by 2%. A full review of the UKCS Fiscal regime is in progress.

Looking ahead, little change is anticipated in the short term. HW expects approximately 50 E&A wells to spud in Norway during 2015, while the UK will see between 20 and 30 wells at best.

“The 2014 results show that the oil and gas industry still provides major investment in the UK and Norway. However, the trend towards lower E&A drilling in the UK in recent years, which will only be compounded by an extended period of low oil prices, is a major concern. Looking ahead to 2015, spending cuts are expected in response to lower oil prices, whilst in the UK, in the medium term, industry, government and the regulator must work collaboratively to ensure that a fit-for-purpose fiscal, regulatory and licensing regime is developed in the hope of securing the long-term future of the UKCS industry,” HW CEO Ian Norbury commented.