U.K. North Sea Drilling at 40-Year Low, Risking Growth Goals

(Bloomberg) -- The oil business has mostly recovered from a worst-in-a-generation crude price slump, but not everyone is celebrating.

The U.K. North Sea is on track this year to have the fewest exploration, appraisal and development wells since 1973, according to a report from Oil & Gas UK, a trade group. Drilling dropped to four-decade lows both last year and in 2016 as companies cut spending to cope with falling oil prices.

The more than 40-year-old North Sea has got a new lease of life in the last few years as more efficient wells and new projects boosted production. But the slowdown in new drilling is a “serious concern,” and could end up putting the region in danger of missing its “Vision 2035” goals, which include extending the productive life of the aging basin for another generation, said the trade group.

“We know we have 10 billion, maybe 20 billion barrels” of oil equivalent left in the North Sea, Mike Tholen, upstream policy director at Oil & Gas UK, said in a phone interview. “If we don’t drill, we don’t get any of it.”

U.K. North Sea Drilling at 40-Year Low, Risking Growth Goals

In 2018, the U.K. North Sea is expected to have no more than 12 exploration wells, fewer than last year, and as many as 80 development wells, in line with 2017. Total investment is estimated to be about 6 billion pounds ($7.8 billion), less than half of the level five years ago.

With oil’s crash still fresh in their memories, company bosses are keeping a tight rein on spending. Large North Sea operators Royal Dutch Shell Plc and BP Plc are trying to keep breakeven costs at about $40 a barrel, half the level for projects sanctioned prior to 2014. That’s limiting their ability to expand drilling in a region that’s comparatively more expensive.

But for now, there’s also some good news. It’s about 30 percent cheaper to get a barrel of oil out of the North Sea than it was before the 2014 price crash. And though there are fewer new wells, they are operating more efficiently. Production has been rising steadily since 2015 and output this year is expected to reach up to 1.75 million barrels of oil equivalent a day, 7 percent higher than 2017.

Brexit Risks

Changes resulting from Britain’s imminent exit from the European Union also risk altering the economics of the North Sea. If Brexit opens up the U.K. to negotiate new deals, oil and gas industry “trading costs” could fall by 100 million pounds a year, according to the report. Alternatively, in a “hard Brexit” scenario, costs could rise by 500 million pounds annually.

There’s also a possibility that losing “frictionless access” to the EU could hamper the industry’s ability to hire specialists or import essential equipment. On the other hand, negotiations could lead to a change in the visa system, making it easier to hire workers from outside Europe and widening the pool of accessible talent. North Sea operators have privately been expressing frustration at the continuing uncertainty of what a post-Brexit scenario would look like, according to Oil & Gas UK’s communications director Gareth Wynn.

Still, changes in the U.K. government’s regulations and tax rules, aimed at boosting investments, are giving operators some confidence. There have been six final investment decisions this year, more than 2016 and 2017 combined. A growing number of smaller companies and private equity firms have also moved in, attempting to squeeze the remaining oil and gas out of the basin.

“The challenge will be to keep the success rolling,” said Tholen. “Survive the upturn without letting the costs get out of control.”

©2018 Bloomberg L.P.