UK Offshore Prospects Beyond 2022: Uncertainty

Wood Mackenzie predicts that investment in the UK North Sea will remain at or near 20-year lows next year, despite high oil and gas prices.

According to Wood Mackenzie investment in the UK, the North Sea will likely remain at 20-year lows next year, despite high oil and gas prices.

Principal analyst for North Sea upstream Neivan Boroujerdi expects that the sector will still experience steady production growth of 1.6 MMboe/d with record cash margins. However, he cautioned that there are questions over government and E&P appetites for new developments.

However, the UK could see an increase in offshore transactions, even though regulatory uncertainty may reduce valuations.

Boroujerdi said that fiscal changes could be a hot topic. The government’s desire to be a net-zero leader is in conflict with its desire to encourage investment in upstream oil, gas and other resources.

Harbour Energy’s Tolmount in South Gas Basin, NEO Energy’s Finlaggan, Shell’s Arran, Pierce and NEO Energy’s Finlaggan are some of the new/upcoming field start-ups.

After the completion of the postponed maintenance last year on the Forties Pipeline Systems, production should increase.

Operators will attempt to extend the field life where possible when they have high prices. Combining the savage cost reductions made during previous downturns with high prices will generate cash flow generation levels that were last seen before 2008’s financial crash.

“The government might be tempted to increase its revenues… The UK has a track record of varying tax rates with prices. A windfall tax is not impossible to imagine.

“Producers would resist the move, and would usually stop investment as a result.” This threat might not be as convincing if the government is already looking at winding down this sector.

Next year, up to 10 UK offshore projects may be sanctioned. An average breakeven price of below $40/bbl could also be considered economic.

Investors face uncertainty due to tension between the government’s goals to be a net-zero leader and encouraging upstream oil-and-gas investment.

The government’s refusal of approval for the HP/HT Jackdaw plan development plan and the pause in the major Cambo oil plant west of Shetland this year (both involving Shell), could prompt more investors to examine projects based on carbon credentials and their PR impact.

Despite these difficulties, UK exploration activity could double by 2022. Up to 10 prospects are expected to be drilled. Shell will continue to operate the UK’s highest number of wells since 2006, despite recent disappointments.

The company plans to drill up to 1 Bboe. Stand-out wells include Shell’s HP/HT Edinburgh (388 MMBoe) in Central Graben, and Total’s 500 bcf Benriach prospect near the company’s Greater Laggan Area, west Shetland.

Boroujerdi warned that “but the scrutiny will continue on exploration’s part in the energy transition.” “The UK Oil and Gas Authority suspended new licenses in 2021. Although unlikely, a permanent suspension is possible.

There could be as much as $10 billion in UK offshore assets up for sale. Boroujerdi says that bidders might include “boutique buyers such as trading houses and new privately-backed management team to fill the gap.

“Consolidation is likely to be a driver as investors see value in increased scale and operating efficiencies…Neptune Energy’s rumoured merger with Harbour Energy could hint at larger regional tie-ups to come.”


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