UK North Sea industry warns government on curbing exploration, urges stability

London — UK North Sea operators expressed concern March 16 over a potential government move to curb offshore licensing as the sector seeks to recover from the lowest levels of investment in at least two decades.

At an industry event, the sector's representative body, Oil & Gas UK, said capital spending had dropped 33% last year to GBP3.7 billion ($5.1 billion). Executives warned the security of UK energy supplies was put at risk by renewed uncertainty over the North Sea exploration licensing regime, which is currently suspended pending a review to ensure it aligns with energy transition goals.

OGUK chief executive Deirdre Michie called for government "leadership" and warned of "concerning" unintended consequences after reports that ministers were considering a moratorium on future exploration licenses – a move the government has played down, but not ruled out. The Department for Business, Energy & Industrial Strategy suspended licensing in September 2020.

"Our ask of governments is to be mindful of the unintended consequences of the decisions that they are about to take… Our current licensing regime works, investors have confidence in its stable approach," Michie told the online event.

"Our concern is that if a decision is taken that undermines this confidence because of an arbitrary end-date being set, or even another pause, the unintended consequence will be a drop in investment that will mean the UK having to import more, resulting in security of supply issues, loss of skills and jobs and infrastructure, and undoubtedly making the UK's net zero ambitions even harder to achieve," she said.

She was echoed by a senior executive from China-owned CNOOC International, operator of one of the UK's highest-producing oil fields, Buzzard, while the head of one supply chain company described the issue of continuity of government policy as "the elephant in the room."

The UK upstream industry is home to the S&P Global Platts Dated Brent benchmark and produced just over 1 million b/d of oil last year, while also meeting about half the country's gas needs. The industry argues it can play a central role in the transition to greener forms of energy and technologies such as carbon capture and storage, noting oil and gas are still expected to meet 20-25% of UK energy demand in 2050, down from 70-75% at present.

It argues that if the industry is prematurely shut down, this will push up the country's imports of oil and gas and reduce the potential for energy transition investment.

"As operators we understood the need for the review… But exploration licenses and licensing rounds are absolutely critical to investor confidence and the future of the basin," CNOOC business services vice president Scott McGinigal said. "A strong Exploration & Production business is really the backbone, and that strong E&P business allows companies to pivot or transition towards that net-zero future."

Production decline

In a new report March 16, OGUK said the industry had the potential to approve new North Sea projects holding a combined 700 million barrels of oil equivalent by the end of 2022 – slightly more than the industry produced in the course of 2020. But it warned investment in those projects would require both a stable market and regulatory and governmental support.

OGUK forecast a further decline in oil and gas production of 5-7% in both 2021 and 2022, following a 7% decline in oil output last year. It cited the drop in investment levels in recent years, as well as high levels of maintenance as likely to crimp production this year.

Project investments that stemmed from high oil prices up to 2014 have largely exhausted their capacity to support output, OGUK said, going on to highlight a number of projects being considered for approval by upstream companies.

"It is likely that following recent increases, the basin is entering a period of longer-term production decline and a steady stream of investment in new fields is required to ensure the effective management of decline rates," OGUK said.

"There are a range of opportunities being considered for investment approval in 2021 and 2022, but they are contingent on greater market stability and continued regulatory and government support," it added.

With companies currently in a "fragile" state, OGUK said recent capex cuts would take a while to fully impact production levels. It added that up to eight new projects will start producing this year, with combined peak production of 130,000 boe/d.

However, OGUK highlighted one further bright spot: a recent flurry of M&A activity in the sector that has totaled around GBP2 billion so far this year.

The UK upstream industry is home to the S&P Global Platts Dated Brent benchmark, used in the trading of oil around the world. Platts has recently been consulting on the possibility of adding US WTI Midland crude to its North Sea price assessments as production from the region declines.