LONDON, 17 January 2017 — Activity was low on the UKCS in 2016 as companies were in full survival mode during the oil price downturn and added Brexit uncertainty. However, there was a change of pace towards the end of the year, with the rise in oil price and larger deals signalling a return of confidence. Global natural resources consultancy Wood Mackenzie expects a modest recovery in 2017, underpinned by an improving oil price. Growth opportunities, including frontier exploration, small project sanctions and increased M&A, also look likely, according to the consultancy's new Insight, UK Upstream: 5 Things to Look for in 2017.
The UK is traditionally a high-cost region. The downturn challenged companies to reduce operating costs and increase cash flow. Ms Fiona Legate, Senior Analyst at Wood Mackenzie, said “Operating costs were slashed to £16.50/boe, down more than 40% from the peak just two years ago. This helped a number of companies to survive.” These measures, combined with increased uptime at fields, provided a welcome boost, despite the difficult operating environment.
Another ray of light in the challenging year was the sweeping cuts to the UK marginal tax rate. Ms. Legate said: “2016 was an important year for the UK fiscal regime as it was adapted to maximise investment in the ultra-mature sector.”
She added: “Exploration and appraisal drilling hit a 50-year low in 2016, but despite this volumes discovered were the highest since 2008." In 2016 wells were drilled “faster and cheaper on a like-for-like basis versus 2014”, Ms Legate said.
The 15 exploration wells forecast in 2017 will also benefit from the current low-cost environment. There is still appetite to drill from a range of players and this year we expect to see the Majors return to UK exploration, Ms Legate said, adding: “The Majors are having a last look ahead of mature and costly infrastructure timing out.”
Production is set to increase for the third year in a row. “14 new fields are expected onstream this year adding to the strong near-term production outlook, although we expect decline will set in again after 2018,” Ms Legate said. New developments are few and far between, but “by 2020, 30% of production will come from fields that aren’t onstream yet”.
“Capital investment declined 20% in 2016, to £8.4 billion. The decline is due to investment projects reaching completion, a scarcity of new investments and cost reductions.”
Prior to the oil price crash, investment was already forecast to decline as the UKCS lacked material investment projects. Investment decisions should start to pick up as investment increases across the oil and gas industry which in turn will benefit the North Sea, Ms Legate said. “Three are expected in 2017, and a further three could get the go-ahead if conditions improve,” she added.
The second half of 2016 brought three large deals, signalling higher market confidence. “Wood Mackenzie expects 2017 will be a record year for M&A activity in the UKCS, the biggest year since 2012,” Ms Legate said. Majors' divestments and utilities exiting the play will contribute to this. Private equity players are expected to remain big buyers.