Drilling Activity Down 25% across UK Continental Shelf

North Sea offshore drilling activity fell 25% in the first quarter of 2011, according to the latest oil and gas industry figures released by Deloitte (UK).

The North West Europe Review, which documents drilling and licensing in the UK Continental Shelf (UKCS), reveals just five exploration and four appraisal wells were spudded in the UK sector between January 1 and March 31; compared to a total of 12 during the fourth quarter of 2010.

Analysts at Deloitte’s Petroleum Services Group said while the drop cannot be attributed to the recent Budget announcement, which proposed increased tax rates for oil and gas companies, it could set the pattern for activity in the future.

Graham Sadler, managing director of Deloitte’s Petroleum Services Group said:
“It is important to clarify that we are talking about a relatively small number of wells that were drilled during the first quarter of the year - the traditionally quieter winter months - so this is not, in itself, an unexpected decrease.

“The lead-in time on drilling planning cycles can be long – even up to several years - so any impact from the recent changes to fiscal terms are unlikely to be seen until much later in the year.
“What is clear is that despite the decrease in drilling activity towards the end of last year, and during the first months of 2011, the outlook for exploration and appraisal activity in the North Sea appeared positive. The oil price continued to rise and there were indications that this, combined with earlier UK government tax incentives, was encouraging companies to return to their pre-recession strategies.
Since the Budget, a number of companies have announced that they intend to put appraisal and development projects on hold and we will have to wait to see the full effect of this change on North Sea activity levels over the coming months.”

Deloitte’s review shows that the Central North Sea has seen the highest level of drilling activity, with the region representing 55% of all exploration and appraisal wells spudded on the UKCS during the first quarter of this year.

It also showed that the price of Brent Crude oil has experienced sustained growth throughout the period, rising 20% between December 2010 and March 2011 to a monthly average of $114.38 (USD). This increase in price is a continuation of a trend that started in 2010, however, so far this year, the rate and pattern of growth has been much more constant with regular increases rather than the rise and dip pattern seen during 2010.

Deal making has also experienced a downturn compared to Q1 last year.
Graeme Sheils, an energy partner at Deloitte in Aberdeen, said: “There has been just one corporate level deal in the UK, with Bridge Resources selling its North Sea subsidiary to Perenco. This is the completion of the only UK corporate transaction that was announced in the previous quarter and contrasts with the six announcements we saw during the first three months of 2010.”

“We have witnessed the continuing popularity of farm-ins, however, with 13 farm-ins announced this quarter, a 62% rise from the last quarter and more than double what we saw in the first quarter of last year. This could be due to the continuing rise in the oil price acting as an incentive for companies to increase their equities in reserves, whilst for others it is way of sourcing additional investment for projects and diversifying risk.”