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UK oil and gas output to take hit as drilling slumps to lowest since 1970s: OGUK

Highlights

2020 drilling activity around half 2019 levels

Two to three years to recover lost investment

Service sector woes risk UK competitiveness

London — Drilling activity in the UK oil and gas sector this year is set to slump to the lowest level since the 1970s, with lower activity expected to negatively impact production in 2021-22, and fears for the competitiveness of the overall North Sea basin, industry group Oil & Gas UK said Nov. 11.

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UK oil and gas production was above average in the first half of 2020 as companies deferred non-essential maintenance and upgrade work to protect the workforce from COVID-19, although production slumped in August and September as such work resumed, Oil & Gas UK said in an autumn update, describing the sustaining of production through COVID-19 as a "significant achievement."

It added that output levels could recover in the fourth quarter as autumn maintenance work eases off, but warned that in terms of overall activity, including new projects, the threat of COVID-19 infection is still weighing on companies' planning for next year, and this uncertainty could dent the competitiveness of the North Sea versus other basins around the world.

UK oil output was down by 4% over the first seven months of 2020, at around 1.1 million b/d, according to government statistics.

However, OGUK said the North Sea industry had taken a considerable hit and it was likely to take two to three years for investment levels to recover, estimating that overall spending this year, on capital projects, operations and decommissioning, would fall by GBP3 billion-4 billion ($4 billion-$5 billion), from GBP14 billion in 2019.

"Increasing activity and investment levels from those seen this year will be important from a reserves progression perspective and are also vital in providing new opportunities for the supply chain. However, it will take time for the activities lost this year to be recovered and it is not simply a case of moving everything into 2021. OGUK anticipates that it could take two to three years to re-phase and recover the activity lost from 2020," OGUK said.

The report said 54 wells had been drilled overall in the first 10 months of 2020, down from a full-year level of 112 in 2019, with just six exploration wells drilled and the possibility of no further exploration wells will being drilled this year.

This follows a marked recovery for both exploration and development drilling in 2019, as well as improvements in efficiency, reported earlier by OGUK and the regulator, the Oil & Gas Authority.

Competitiveness fears

The report warned "lower levels of new production are now expected to come on stream in 2020 and 2021 in comparison with recent years, due to the operational impact of COVID-19 and the low commodity prices. Combined with lower-than-expected levels of barrel-adding activity taking place, this will likely have a negative impact on output into 2021 and 2022."

OGUK added that work by operating companies continued, with a "significant number of opportunities being matured," but noted the fragile state of the drilling and rig companies needed to carry out projects, with many undergoing US Chapter 11 bankruptcy reorganizations.

"Decisions that companies are being forced to take now will have a lasting impact on the capabilities across the industry," OGUK said. "It is important that activity levels on the UK continental shelf keep pace with those in other basins to ensure it remains a competitive place for supply chain companies to anchor and invest in resources."