Drop in North Sea Deals and Drilling

Oil and gas firms may be adopting a “wait and see” approach before making further investment decisions in the North Sea, according to a new report from Deloitte.

The report, which details drilling, licensing and deal activity across North West Europe over the second quarter of 2014 and was compiled by Deloitte’s Petroleum Services Group (PSG), found a total of seven exploration and appraisal (E&A) wells were drilled on the UKCS. This is significantly lower than the 12 wells drilled in the previous quarter and the 17 drilled in Q2 2013.

This drop may be down to companies controlling high costs and awaiting potential changes to the industry resulting from the Wood Review and the ongoing review of the North Sea fiscal regime.

There were also fewer deals completed this quarter compared with the previous three months. Five deals in total were announced on the UKCS in Q2 2014, down from the 10 transactions reported in Q1. This is also seven deals fewer than the 12 registered during the equivalent period in 2013. There were no farm-ins reported at all in the last three months – which are generally a popular type of deal.

Derek Henderson, senior partner in Deloitte’s Aberdeen office, said that the North Sea industry has been grappling with rising operating costs, which was having an impact on activity and investment decisions, particularly given the maturity of the region.

He said: “It’s no secret that the costs facing oil and gas firms on the UKCS have been a significant issue for some time now. Understandably, it tends to be more expensive to operate in mature fields where oil is much more difficult to recover. Research suggests it’s now almost five times more expensive to extract a barrel of oil from the North Sea than it was in 2001.

“What’s more, the drop we’ve seen in the number of farm-ins could indicate that companies are holding off before committing to longer term exploration investments. Asset transactions, involving producing fields, remain at more consistent levels, which suggests companies are more confident in these types of deals, which can offer a quicker and less risky return.”

“Notwithstanding this, there are a large number of assets on sale. However, vendors tend to be larger players, and as buyers are often smaller operators, with limited budget, this is creating an expectation gap in prices. Until there is movement on that front, deal activity is likely to remain muted.”

Meanwhile, the UK’s oil and gas industry awaits the implementation of recommendations made in Sir Ian Wood’s ‘UKCS Maximising Recovery Review’, which included among its propositions the introduction of a new regulator – the Oil and Gas Authority.

Combined with the review of the North Sea’s fiscal regime, which was announced in last March’s UK Budget, Derek Henderson went on to say that oil and gas firms may well be adopting a “wait and see” approach until there was a better understanding of all the these changes and their impact.

He said: “There were many recommendations made in Sir Ian Wood’s final report, and it’s likely that the industry could be pausing until it has a better understanding of the impact of these, and the effect on the long term future of the North Sea, before making any big investment decisions.

“In addition, with the fiscal regime under review, it’s quite likely that the industry will be waiting until there is a bit more clarity over how this will take shape. The tax environment is a factor that bears heavily on the decisions of all oil and gas companies, especially with corporate tax rates that vary and can reach 81%.

Echoing this sentiment, a recent Deloitte poll of the industry, which looked at the issues facing the UKCS and how the fiscal regime could be used to address these, indicated that oil and gas firms felt the overall level of tax most needed to be addressed (46%).

This was followed by a more predictable and internationally competitive tax regime, which scored 27% and 15% respectively. In addition, only 23% of respondents said they thought the current regime encouraged new entrants into the basin.