Analysis by UK oil and gas industry consultants, Hannon Westwood, indicates that the new Value Allowance introduced by the Chancellor of the Exchequer could stimulate development of up to 45 small discoveries at an oil price of $45 per barrel and up to 157 discoveries at $60 per barrel.

In April, the UK Government published new tax allowances targeting certain categories of undeveloped discoveries: “Small Fields”, and so called Ultra Heavy Oil and Ultra HPHT, in order to stimulate investment in indigenous resources within a low oil price environment.

Hannon Westwood maintains its own in-house database on all UKCS discovery wells, and developed commercial software to enable an NPV and “dpi” to be calculated in tandem for each discovery, in order to measure the effect of fiscal change across the whole sector. The key question asked of each discovery was: if there was an option to drill this particular discovery well in 2010 and develop within 24 months, is it likely to be commercial and therefore a candidate for drilling?

In the Hannon Westwood database there are 259 discovery wells in the “small fields” category; 235 of these discoveries have estimated reserves from near zero to 20 million barrels of oil equivalent (MMboe), and a further 24 discoveries have reserves of 20 to 26 MMboe. The Hannon Westwood analysis was run initially with a base case $45/bbl oil price (37p/therm gas price), and the number of projects of 20 MMboe or less that could move to potential commercial status increases from 12 to 28 as a result of the £75 million Tax Allowance.  At $60/bbl (with gas at 44.4p/therm pro rata increase), further analysis shows that with a £75 million Allowance, the number of potentially commercial discoveries increases to 139.

For discoveries between 20.1 and 26 MMboe, a similar picture unfolds but on a smaller scale, and in a $60/bbl scenario the Allowance increases the number of potential developments by only one, from 17 to 18 out of a total of 24 discoveries. In effect, the sliding scale appears to work well at the margins in ensuring that no Allowances are in place to stimulate developments that are already potentially profitable – at least in a $60 oil climate.

Overall, the number of projects that might prove attractive in a $60 oil climate is estimated at 157 (139 discoveries < 20 MMboe and 18 discoveries < 26 MMboe).