One is well-aged, complex and sells for a premium... the other is a single malt Scotch whisky.

The maturity of the North Sea's oil reserves has long been a topic for discussion in the industry, and our latest report shows drilling and deals are both down offshore Aberdeen.

Whisky and North Sea oil have both been long-regarded as successful Scottish exports. But their association with Scotland is not all they have in common.

For example, in April the Scotch Whisky Association reported a flat year for exports of the national drink after a drop in demand from Asian markets. Over the same period, we've seen a decrease in North Sea corporate deals and drilling activity.

However, North Sea oil and whisky have another important theme in common: the longer they mature, the more expensive they become. That's a finding that is reflected in our latest Petroleum Services Group (PSG) report for Q1 2014, which looks into oil and gas activity across North West Europe.

The headline figures for the first three months of 2014 were:

  • 12 E&A wells were drilled on the UKCS – That's up five wells on the final quarter of 2013, but represents a decrease of one well on a year ago.
  • 10 deals were reported this quarter – This is eight fewer than the last quarter and nine down on the same time last year.
  • Farm-ins remain popular – They represented 50% of deals this quarter suggesting operators are spreading risk.

It's undoubtedly a mixed bag. A casual glance at these findings might cause concern, but things are not as black and white as they might at first appear.

Drilling activity is down on a year ago, but slightly up on the last quarter. Some of this can be put down to the bad weather often experienced during winter months which has affected exploration and drilling in Q1. We could well see an upturn later this year if the weather improves.

Likewise, we've seen a reduction in the number of corporate deals, both compared to a year ago and against last quarter. While that doesn't make for a great headline, the reality is slightly more complex.

There are certainly deals being done in the North Sea, but they may take some time to complete. At the moment, vendors and buyers are quite far apart in terms of price expectations and that's having an effect on deal flow.

The North Sea has been fertile ground for oil and gas operators for some years, and that has an impact on costs. The economics of profitable extraction are becoming increasingly difficult, which is likely to lead to more caution among operators.

It's mainly for that reason we're seeing farm-ins take hold as the most common type of deal being done in the region. These help operators reduce their risk and cut costs by sharing a field with another company within the time frames they are required to drill.

Nevertheless, we're seeing movement on issues that could address this challenge. Sir Ian Wood's report, "UKCS Maximising Recovery Review", is a positive step and looks as though it could lead to more incentives for the industry. That's something we called for in our blog from earlier this year. In addition, this year's Budget also saw the announcement of a review of the North Sea's fiscal regime, to ensure it is fit for purpose.

Meanwhile, we're also hearing some evidence that rig rates are coming down which is also good news for operators. On the other hand, the industry has expressed concern at the bareboat charter announced in the Budget, which could see higher costs passed on to them.

While we might not see the levels of activity that were registered in the peak years, we expect there to be a steady low in the North Sea for the year ahead. There is much to be done if we want to instil confidence in the industry and see a return to the performance of its boom years.

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