North Sea Oil and Gas at a Crossroads: How Can Policy Help?

Professor Alex Kemp and Linda Stephen

University of Aberdeen

Overview of Issue

Activity in the UK Continental Shelf (UKCS) is currently at a crossroads.  While field investment was at a record high of £14.4 billion in 2013 and could be as much as £13 billion in 2014 this reflects the coincident development of a few very large and very expensive fields.  It is expected to fall dramatically thereafter.  Production has been declining briskly since its peak in 2000, and fell by 38% in the period 2010-2013.  Production efficiency (the ratio of actual production to the maximum efficient rate) has fallen from 80% in 2004 to 60% in 2012.  Exploration drilling has been at very low levels since 2011 and the resources discoveries correspondingly small.  Development, operating and exploration costs (per barrel) have suffered from substantial inflation in recent years.  At least two very large new field developments have been put on hold despite the availability of large tax allowances.  At least two companies have signalled their intention to exit the whole province.  Despite the very large recent investment levels DECC foresees no increase in production in the near term and continuous significant decline in the medium and longer term.  But some encouraging signs remain.  DECC’s central estimate of the future ultimate potential is around 22 billion barrels of oil equivalent (compared to a total produced to date of nearly 42 billion).  In the 27th Licensing Round over 330 blocks were offered to successful applicants.

Methodology

Against this background the proposed paper will examine (a) the effects of the present licensing and taxation policies on recent, current and prospective activity levels over the next 30 years (with special reference to field investment and production), and (b) the possible effects of modifications to the tax system, and to the regulatory arrangements as proposed in the Wood Review.  Financial simulation modelling, including the Monte Carlo technique to deal with exploration and other risks will be employed.  The value of the modelling is enhanced through the use of a very large, high quality database incorporating key information on over 400 fields in the categories of sanctioned, probable, and possible developments, and incremental projects.  New discoveries reflecting the product of the Monte Carlo modelling are also included.  The current complex tax system with the various allowances for Supplementary Charge are incorporated in the modelling.  Modifications to the current new field allowances, brownfield allowance, and exploration reliefs (including the Ring Fence Expenditure Supplement) will be modelled.  Their effects on investment, production, and tax receipts will be highlighted in the outputs.

The modelling will incorporates EOR projects including CO2 EOR, polymer flood schemes, and low salinity waterflood schemes.  Plausible variations in oil and gas prices and investment hurdle rates will be included in the study to highlight the sensitivity of the results.  The results will be shown separately for oil and gas.

Some comments will be added on the economic aspects of the shale gas potential in the UK.

Results

The results will highlight potential oil and gas production, field investment and operating and decommissioning costs over the next 30 years under the current tax and regulatory arrangements and with modifications to these.

Conclusions

The conclusions will highlight the potential for policy changes to modify the long term decline of both oil and gas production from the UKCS and give insights into the most potent changes.