EIA: UK Oil Production Snaps Decline Streak

Thanks to output from new fields in recent years and improvements at mature fields in the North Sea, the U.K. broke a more than 15-year oil production decline in 2015, according to the U.S. Energy Information Administration (EIA).

But the production gain might be short-lived as producers react to today’s lingering low oil prices, the result of global supply-demand imbalance.

In a report released March 28, the EIA said the U.K. boosted production of petroleum and other liquids by about 100,000 barrels per day (bbl/d) in 2015, a performance improvement the region hasn’t seen since 1998.

“The largest contribution to this increase came from fields that were brought online in the second half of 2014,” the EIA said. “Significant increases also came from fields that came online in 2015 and from improved performance of the U.K.’s largest producing field, the offshore Buzzard Field.”

As the U.K.’s highest-producing field, the Nexen Petroleum-operated Buzzard in the North Sea’s Moray Firth Basin has produced more than 500 MMbbl, meeting nearly 10% of the U.K.’s energy needs. Nexen says the field is expected to produce more than 850 MMbbl of oil by 2027.

More Success

Apache Corp. (NYSE: APA) is also seeing success in the U.K. North Sea, where it drilled 23 development wells with a success rate of 83% in 2015, as it continues work at the Forties and Beryl fields.

Since acquiring the Forties Field from BP Plc (NYSE: BP) in 2003 for $630 million, Apache has spent more than $2 billion on infrastructure and just as much on drilling and workovers. Its efforts have reversed the field’s declining trend, pushing its decommissioning date back to at least 2030, Apache said during a November 2015 update on is North Sea assets.

A similar story is playing out at the Beryl Field, where Apache has invested about $300 million in infrastructure upgrades to support growing production since acquiring the field from ExxonMobil (NYSE: XOM) in 2012 for $1.44 billion.

RELATED LINK: Apache Bets On North Sea, Odds Appear Favorable

In recent years, several discoveries have been made and other developments have been brought online. These include:

• BP’s Kinnoull Field in the central North Sea. The field, which marked first oil in December 2014, is tied back to the Andrew platform.
• Golden Eagle, operated by Nexen Petroleum UK, produced first oil in October 2014. The field is the second biggest oil find in the U.K. North Sea since Buzzard.
• Talisman Sinopec Energy UK’s Tartan and Godwin Field also increased production.

But the 2015 production gains are not enough to strip the U.K. of its energy importer status and slow movement by legislators to stimulate investment.

Tax Cuts

On March 16, Britain’s Finance Minister George Osborne unveiled a budget that would cut the supplementary charge on oil and gas from 20% to 10% and axe the petroleum revenue tax altogether.

“The oil and gas sector employs hundreds of thousands of people in Scotland and across our country. In my budget a year ago, I made major reductions to their taxes,” Osborne said. “But the oil price has continued to fall. So we need to act now for the long term.”

However, analysts questioned the timing of the measures, which would be backdated to take effect Jan. 1.

Douglas-Westwood pointed out that the U.K. oil and gas sector has already lost about 65,000 jobs and has been “severely impacted by a longer than anticipated suppression in oil price.”

“A change in taxation regime is not going to dramatically alter the fate of production operations within the North Sea. What is required is substantially increased investment; this is only likely to occur as a function of higher oil prices,” the consultancy wrote in a note. “Operators also require support in ensuring that production infrastructure is maintained—and accessible—to allow future additions through satellite developments. Widespread decommissioning could put this under threat, potentially limiting future field activities and ultimate recovery in the UKCS.”

Challenges Remain

The tax cuts could do more harm than good for some producers, according to Veronika Akulinitseva, an analyst for Rystad Energy.

“Essentially, only companies with the most competitive portfolios would benefit from the tax cut, while operators with more mature portfolios could be hurt by the current tax reduction and could see the value of their U.K. assets diminish,” Akulinitseva said in a statement. “With the current oil price hovering around $40 per barrel, most of the companies operating on the UKCS are not in a tax position this year.”

Meanwhile, companies continue to cut costs and slow the pace of new projects. The consequences could become more apparent two to three years from now, resulting in production declines in 2018, according to the EIA.

“In the U.K., project developers must receive governmental approval of their field development plans (FDP) prior to developing a field. The number of FDPs approved in 2015 was less than half the number approved in 2013 or 2014,” the EIA said in the report. “Additionally, although the number of FDPs approved in 2014 was similar to the number approved in 2013, the investment associated with the fields approved in 2014 was much lower.”

On the positive side, however, some projects that secured funding approval before the downturn are set to start production in 2016 and 2017, “at least partially offsetting production declines from existing fields,” the EIA said.

Velda Addison can be reached at vaddison@hartenergy.com.