UK: A Sea Of Change – Three Commitments Needed For The North Sea In 2015

Last Updated: 28 January 2015
Article by Derek Henderson

Most Read Contributor in UK, August 2017

The last 12 months have been anything but dull. I would have to think back some way to recall a year that saw so much change – particularly in Scotland. Nowhere is that more true than in the North Sea.

Around this time last year, my colleague Graham Hollis looked back on 2013 and said the UK Continental Shelf (UKCS) needed new incentives to ensure its longevity. Following a recent announcement from the UK Government those seem to be on their way in some form or another, but there is still a lot more work to be done to achieve what is necessary.

Undoubtedly, the wheels of change have been stimulated by the wholesale changes experienced during 2014. This was the year that saw broad acceptance from government and industry of the recommendations made in Sir Ian Wood's "UKCS Maximising Recovery Review", which outlined plans for the establishment of a new regulator, the Oil and Gas Authority (OGA), among many other suggestions.

Building on that, the Chancellor of the Exchequer announced amendments to the North Sea's fiscal regime in his Autumn Statement in a move welcomed by industry. These are positive steps taken in the right direction, indicating that some much needed progress will be made.

However, all of this has inevitably been impacted upon by volatility in commodity prices over recent months as the industry gets to grips with over supply and uncertain levels of demand.  

It's against this backdrop that the latest quarterly research from our Petroleum Services Group's (PSG) North West Europe Review, which this time looks over the whole of 2014, found that the number of wells drilled on the UK basin had dropped from 50 to 40 year-on-year.

This decrease in exploration and appraisal (E&A) activity is largely consistent with expectations given recent trends and market conditions. We would hope to see this increase, but that will require industry dialogue with, and strong guidance from, the OGA, together with further clarity from the UK Government over the fiscal incentives that will be made available for further E&A activity.

There was also a decrease in the number of deals reported in the last year. Corporate transactions dropped from 63 in 2013 to 23 in 2014. Making up the majority of this figure were farm-ins (13 deals), which involve more than one company to spread costs and risk, with six asset acquisitions, two corporate acquisitions, and two divestitures representing the remainder. 

Yet, this dearth may not be sustained into 2015. The drop in the price of oil means that valuations will be revised down and, as price pressure is relieved, this could mean more deals are done on assets which are still up for sale. There are definitely companies on the lookout for the right asset at the right price.   

As 2015 begins one thing is abundantly clear: while we continue through this period of transition for the North Sea, the region requires commitment from both the industry and government if we are to secure its long term future. That means commitment to investment; commitment to a change in culture; and commitment to a simpler, more reliable tax regime from everyone involved.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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