North Sea Offshore Drilling Rises in 3Q, but Overall Decline Continues

North Sea offshore drilling activity rose 45 percent from the second to third quarter of this year, according to Deloitte's North West Europe Review, a quarterly report of drilling and licensing on the UK Continental Shelf.

However, the overall trend for UK Continental Shelf drilling activity continues to decline. Sixteen exploration and appraisal wells were spud between July 1 and Sept. 30, up from 11 in the second quarter but still 36 percent fewer than the same period in 2010.

So far this year, 37 wells have been drilled, a 41 percent decrease from the same period last year and the lowest number drilled in this period since 2003, Deloitte noted, an unexpected trend given that the average oil price is over US $100/bbl.

Outside the UK, buoyant oil prices have driven high levels of drilling activity in North West Europe. The Norwegian sector recorded 16 wells spud in third quarter 2011, double the number compared to the same period as last year and the same level seen in 2009, which saw the highest levels of drilling activity on the Norwegian Continental Shelf to date.

"It could be that factors including the relative geological maturity of the UK sector, compared to some adjacent regions, and the alterations made to the UK fiscal regime earlier this year have impacted business confidence," said Graham Sadler, managing director of Deloitte's petroleum services group.

Graham noted that some smaller, UK-focused companies may also have experienced difficulties securing finance to fund exploration and appraisal drilling in recent months.

"A combination of the tax increases announced in the 2011 Budget and general market instability around the Eurozone crisis, has led to some of these companies losing significant corporate value," Graham said.

Corporate dealmaking also rose during the quarter, with four acquisitions announced, while the level of farm-in activity declined from the second quarter.

Despite Production Decline, Optimism Grows Over Offshore UK Investment

The Department of Energy and Climate Change (DECC) estimates UK Continental Shelf oil and gas production to continue to decline through 2016. DECC reported in late September that aggregate UK oil production for second quarter 2011 experienced the largest quarterly decrease seen since quarterly reporting began in 1995. UK natural gas production was a record 24.8 percent in the same quarter versus second quarter 2010.

However, UK Energy Minister Charles Hendry told attendees at the Offshore Europe Conference in Aberdeen in September that 2011 appeared to be shaping up to be the UK's best year for new development in at least a decade, "on par with some of the very early years of the industry."

The UK North Sea will get a significant dose of new investment with the UK government's approval of the $7.1 billion development project for the Clair Ridge project by BP, Shell, ConocoPhillips and Chevron. Clair Ridge is the second phase of development of the Clair field west of the Shetland Islands. The investment represents the highest level of annual investment the company has ever made in the UK North Sea.

Industry association Oil & Gas UK praised the Clair Ridge announcement, saying the investment was a boon for the UK's economy and its energy security. However, smaller projects with more marginal economics are struggling.

"While we believe that up to 24 billion barrels of oil and gas are still to be extracted, there is evidence that, following the tax increase announced earlier this year, well in excess of one billion barrels of the UK's oil and gas resource are 'fiscally stranded' which is to say that the current tax system renders them uncommercial," said Malcolm Webb, chief executive of Oil & Gas UK.

Other significant UK North Sea investments include BP's plans to invest US $1.1 billion in the Kinnoull subsea development, the largest of three reservoirs being developed as part of the Andrew area development project in the central North Sea.

Wood Mackenzie estimates that total spending on UK oil and gas development projects will be US $38.2 billion in 2011 terms, higher than the development spending level seen in 2010. Significant progress is being made towards bringing 50 offshore UK fields containing more than 2 billion BOE towards development sanction.

However, Wood Mackenzie noted in a recent report that maintaining this pipeline of new projects and developments will require significant exploration success and continued investment in the UK offshore oil and gas sector.

NPD: Significant Oil Resources Remain on Norwegian Shelf

The Norwegian Petroleum Directorate (NPD) on Oct.12 said the number of major discoveries made in the Barents Sea and North Sea this year confirm its belief that significant undiscovered resources still remain on the Norwegian shelf.

"The remaining resources can form the basis for considerable production and value creation for many years to come," NPD said in conjunction with the publication of its report Petroleum Resources on the Norwegian Continental Shelf.

NPD estimates that future oil and gas production will remain at current levels for the next decade, in spite of a graduate decline in production from major fields. Measures to increase recovery and start production from discoveries will contribute to maintaining production.

"After 2020, production from undiscovered resources will account for an increasing share of the expected production," NPD said.

New production sources will come from discoveries such as Lundin's Avaldsnes and Statoil's Aldous Major South discoveries. Lundin President and CEO Ashley Heppenstall said Avaldsnes and Aldous Major South, which are connected with the same oil water contact, pressure regime, oil type and reservoir, could be among the largest five discoveries on the Norwegian Continental Shelf. The two discoveries will be jointly developed, Heppenstall said last month.

Lundin on Oct. 18 reported that appraisal drilling has confirmed the northern extension of the Aldous Major South discovery in PL265 in the Norwegian North Sea. Prior to appraisal drilling, Statoil had previously estimated Aldous Major South to hold between 400 million to 800 million barrels gross. Avaldsnes is estimated to contain gross Contingent Resources of between 800 million and 1.8 billion barrels of recoverable oil.

However, discoveries such as Avaldsnes and Aldous Major are exceptions to the trend seen of average discovery size on the Norwegian shelf as being much smaller than before, and exploration costs have increased, according to an NPD analysis of exploration profitability from 2000-2010.

More exploration drilling and injection of gas and water into wells will be critical towards recovering more oil from the Norwegian Continental Shelf. In addition to the injection and drilling of wells, "it is important that advanced injection methods and new technology are developed and qualified through field test. This can further improve recovery," NPD said.

Norway and Russia's ratification of maritime boundaries in the Barents and Arctic seas has opened up a new exploration frontier. NPD also reported earlier this month that the Norwegian government would fund seismic acquisition in 2012 for the southeastern Barents Sea and other frontier exploration areas offshore Norway.

NPD also is seeking to improve recovery from chalk fields on the Norwegian and Danish shelves. To achieve this goal, NPD, the Danish Energy Agency and 10 oil companies will cooperate on research and development and share experiences in this area. The companies involved with contribute funding for this effort starting in 2012 for a three-year period.