4 A Look Ahead

UKCS ACTIVITY

4.1 There are great difficulties in making predictions about the future of the UKCS. Nobody has yet produced a good predictor for oil prices which, of course, drive the industry. Furthermore, oil companies react more quickly to changes than most other business sectors. One has only to look at how technology has evolved and costs have been driven down in response to falls in oil prices.

4.2 The DTI conducts two annual surveys of operators’ intentions: to drill offshore exploration and appraisal (E&A) wells and to incur capital expenditure.

Drilling Intentions

4.3 In early 2000, the DTI conducted a survey of operators’ intentions to drill offshore exploration and appraisal wells. 

The survey covered the years up to 2002. Operators were asked to assess each well as certain, probable, or unlikely to be drilled. The survey showed that, after allowing for probabilities, operators expect to drill some 38 E&A wells in 2000 and 33 in 2001 - see Chart 4.1 and Table 4.1.

Note: The fall in intentions for 2002 reflects operators’ natural uncertainty about drilling so far in the future.

4.4 The 2000 survey intentions are slightly better than those given in the 1999 survey, showing a little more optimism, reflecting a rise in oil prices. Northern & Central North Sea areas expected to remain at 1999 levels in 2000, whereas Southern Basin expectations are slightly above 1999 drilling levels in 2000 and 2001. Increased activity is expected West of Shetland and in ‘Other offshore’ areas.

Investment Intentions

4.5 The DTI’s latest annual survey of intentions to undertake capital investment on the UKCS was conducted in the late summer of 1999. The survey was designed to obtain a view of operators’ intentions to invest in oil and gas production over the current year and the next five years. The survey intentions, which do not include expenditure on exploration and appraisal or decommissioning, are illustrated in Chart 4.2 and Table 4.2.

4.6 The decline in intended expenditure in the later years of the survey period is to be expected, since the companies provide data on intentions only where planning is sufficiently advanced to enable reasonable estimates of expenditure to be made. Normally other projects will come forward to boost the later years of the survey period, but it is possible that the reported intentions may not be fulfilled. In recent surveys, investment intentions for the first few years of each survey have been useful indicators of the size and trend of actual expenditure.

4.7 Investment intentions have been considerably affected by the low oil prices seen in the early part of 1999, so that intentions for 1999 of £3.25 billion were a third lower than the actual expenditure for 1998 and some 30% lower than the intentions for 1999 given in the previous annual survey. Investment intentions decrease a little to just under £3.2 billion in 2000, but fall to under £2.4 billion in 2001.

4.8 The investment intentions for the last year of the survey period have declined for each of the last seven surveys. This trend may indicate a decline in future investment, but would also be expected with factors working to shorten planning horizons: shorter lead times, increased use of FPSOs and phased developments, and various cost reduction initiatives. 

4.9 Table 4.2 shows the intentions under various equipment categories. The table shows yet again an increase in the proportion due to production wells: this share has increased in each of the last seven surveys. However, there is now a decrease in intended expenditure (in money of the day terms) on wells compared with last year’s survey. The share of structures has continued to decline and the share of pipelines has also fallen but terminals have increased their share.

EXPLORATION AND APPRAISAL

4.10 Despite the downturn in drilling activity in 1999, new opportunities and possibilities exist for finding additional reserves of oil and gas in all sedimentary basins in both the North Sea and west of Britain.

4.11 In 1999 "Finder Wells" became a cost-effective and popular alternative to drilling conventional exploration wells. Although the wells were different in design, data gathering and contingency plans, they shared the same basic characteristics: rigorous planning fixed at an early stage by multi-disciplinary teams focused on achieving the defined objectives of each well. Obviously, cost savings are an essential element of the Finder Well concept and these were realised without compromising the integrity of the wells or the ability to ascertain whether hydrocarbons were present. DTI expects to see more companies electing to drill "Finder Wells" in the future.

4.12 In the mature basins such as the Southern North Sea, Central North Sea and Northern North Sea, DTI expects exploration and appraisal activity to be focused on near facilities potential to add value and longevity to existing producing fields and infrastructure. Prospects and leads identified in recent Licensing Rounds reside on the Department’s inventory of wells to be drilled. Moreover, "yet to find" numbers shown in Chapter 2 also indicate that it is premature to underestimate the petroleum potential of the UKCS.

4.13 In March 1999 the then Energy Minister, John Battle, announced a package of measures. One such measure involved outstanding Initial Term Working Obligations, which gave companies the option of having wells, under certain licensing rounds and subject to specified conditions, waived or the licence period extended. The aim was that some of the cost savings to industry would be re-invested in other higher quality opportunities on the UKCS.

4.14 November 1999 saw the launch of LIFT (Licence Information for Trading) on the Internet (see also Chapter 1), which has allowed opportunities on the UKCS to be viewed by a global audience. DTI is confident that this initiative will also help to generate an increase in activity by allowing companies to optimise their exploration and production portfolios.

THE FUTURE FOR DEVELOPMENTS

4.15 Excluding frontier areas noted above, the future development potential of the UKCS lies mainly in the exploitation of small fields located near existing infrastructure. Such developments will rely heavily on innovative technology and the sustained use of the extensive infrastructure associated with existing mature fields. The window of opportunity for this is limited and success will hinge on the need properly to integrate new satellite fields with mature fields. This will require both technical and commercial effort and flexibility.

4.16 The form of development for small satellite fields tying into existing infrastructure is likely to be subsea or extended reach drilling in the Northern and Central North Sea and either subsea or via small unmanned surface facilities in the Southern North Sea. Long reach drilling will feature strongly.

DEVELOPMENTS UNDER DISCUSSION

4.17 At the time of going to press (June 2000) eight oil and gas development plans were being discussed with the Department and, during 2000, discussions could begin on a further 15-25 new and incremental developments.

FUTURE LICENSING ROUNDS

4.18 An announcement by the then Energy Minister, John Battle, on 31 March 1999 indicated that annual licensing rounds would be held on the UK Continental Shelf. Whilst the DTI remains committed to maximising the nation’s energy resources, this has to be done in a manner consistent with the recent High Court judgement that the EU Habitats Directive must be applied to the UKCS. The Department hopes to hold a licensing round once the necessary implementation measures are in place.

COAL BED METHANE

4.19 The UK has relatively large potential reserves of coal bed methane although there are geological and economic difficulties in translating this potential into a commercially viable industry. However, there is Government interest in exploiting coal bed methane (set out in last year`s Energy Paper 67), both in terms of its contribution to the diversity of the UK`s energy base and as a stimulant to a fledgling export industry for goods and services. This is backed-up by some financial support.

4.20 UK activity in this area has so far been limited to coal bed methane development in Scotland and a number of projects to utilise the gas venting from abandoned coal workings in the East Midlands. It is anticipated, however, that further such projects are likely to be brought forward in the future. Vent gas projects also offer an opportunity to reduce the UK`s emissions of greenhouse gases, by capturing one of the most potent contributors.

OIL AND GAS PRODUCTION FORECASTS

4.21 Forecasting oil and gas production forms an important element of DTI’s work relating to this sector. The forecasts below show that the UKCS is approaching peak, with still significant production due over the next few years. Although not carried out within the same exercise, these forecasts point towards the Oil and Gas Industry Task Force vision for 2010 to maintain production at three million barrels of oil equivalent per day. However, achieving this longer-term target relies upon the industry working actively to seize all opportunities.

4.22 The forecast is presented as a range of outcomes for each year to take account of the many uncertainties involved. The figures include stabilised crude oil, natural gas liquids and condensates.

4.23 Production of oil is expected to remain at peak levels for the early part of the forecast period and to decline thereafter [see table (a)]. It is important to note that the timing of the peak and speed of any decline is dependent on a number of different factors: continued investment from operators, the success of further exploration, the use of secondary recovery techniques on mature fields etc.

4.24 The production range has been scaled down for the latter part of the forecast to reflect the fact that the recent weakness in oil prices has meant some projects may not now come forward in the timescale previously expected.

4.25 The forecast for gas production shown below relates to UKCS production available for sale. The importance of UK household sector demand means that production in particular years will be influenced strongly by winter temperatures relative to the seasonal average.

4.26 Gas production is also expected to reach a peak at some point within the forecast period; timing of the peak remains unclear and is subject to a number of factors. Uncertainty for the later years of forecast relates mainly to the possibility of further significant investment in gas-fired capacity and the degree of utilisation of the UK-Belgium Interconnector which will allow new gas developments to find profitable sales opportunities in a range of western European markets.

4.27 PILOT has recognised the short-term problems facing the UK oil and gas industry and held an awayday in March 2000 to look at what could be done to accelerate development of UKCS projects. It was agreed that the operators would look at their portfolio of "undeveloped discoveries", i.e. those smaller fields that have been discovered but are unviable on their own. The operators and the DTI would then work together to attempt to progress these fields by working them as collaborative initiatives. An example might be that three fields in one area could mean that a pipeline or FPSO was viable, whereas each individual field was too small to warrant the investment. This should lead to some projects being developed which otherwise would be left unproduced.

4.28 PILOT will also be monitoring the work of LOGIC and ITF. These aim to reduce costs in areas such as logistics, subsea tie-backs as well as promoting new technology development over the next year. These projects have to work with the operators and contractors, and require the support of the industry as a whole, if they are to cut costs and save jobs in the UKCS

4.29 It is clear that this joint Government/Industry approach will need to continue working together to ensure that all opportunities are seized and PILOT will meet throughout 2000 to ensure the practical application of the Task Force initiatives.

DECOMMISSIONING - FUTURE ACTIVITY

4.30 To date relatively few offshore installations have been decommissioned and, during 1999, the Department did not approve a decommissioning programme. However, with the maturing nature of the UKCS this picture will change and the next five years are likely to see a growing number of decommissioning proposals coming forward for consideration. At the present time decommissioning programmes for the Camelot CB installation and facilities in the Blenheim & Bladon, Durward & Dauntless fields, as well as refloat of the Maureen installation are under consideration. Discussions are also proceeding on decommissioning proposals for the median line Frigg field facilities, which are being conducted jointly with the Norwegian Government.

EU GAS LIBERALISATION DIRECTIVE

4.31 Regulations implementing the Gas Liberalisation Directive will come into force this year. The Directive is primarily concerned with opening up the European downstream gas market to competition but one Article specifically provides for third party access to upstream pipelines. Such access is already provided for in the United Kingdom by provisions in the Pipelines Act 1962 and the Petroleum Act 1998 but those provisions will have to be amended to reflect the requirements of the Directive. The main changes to be introduced by new regulations will be:

	a direct obligation on owners of upstream oil and gas pipelines to consider applications for third party access, with factors which may be taken into account when considering such applications;
	a clearly defined dispute settlement role for the Secretary of State, with specific duties and obligations placed on him including the obligation to act in a manner designed to ensure fair and open access and competitive markets and the right to demand accounting and other information from pipeline owners.

4.32 The regulations will effectively bring parts of the industry’s voluntary Offshore Infrastructure Code of Practice into statute. The impact on industry is expected to be minimal.

4.33 In March 2000 DTI issued a Consultation Document seeking views by the end of May 2000 from interested parties on the implementation of those elements of the Directive which relate to access to upstream pipeline networks.

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Title | Table of Contents
Chapter 1 | Chapter 2 | Chapter 3 | Chapter 4 | Chapter 5
Appendix 1 | Appendix 2 | Appendix 3 | Appendix 4 | Appendix 5 | Appendix 6 | Appendix 7 | Appendix 8 | Appendix 9
Appendix 10 | Appendix 11 | Appendix 12 | Appendix 13 | Appendix 14 | Appendix 15 | Appendix 16
Index Map | Plate 1 | Plate 2W | Plate 2E | Plate 3W | Plate 3E | Plate 4W | Plate 4E | Plate 5W | Plate 5E | Plate 6
Plate 7 | Plate 8W | Plate 8E | Plate 9W | Plate 9E | Plate 10W | Plate 10E | Plate 11 | Plate 12 | Legend
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