The increase in the pace of E&A activity on the UKCS since the introduction of the first Promote Licences in 2003 has been quite phenomenal and has led to the resurrection of a domestic industry sector that had appeared to be fading as investment turned overseas to higher materiality projects. The rise of the small E&A company and exploration- led investment from North America has created an environment where there is now a thriving domestic business in which current activity levels can be maintained for at least the next two to three years. An industry hungry for activity needs to acquire land banks from which to high-grade drillable prospects and to create a core sustainable business. The UK Government has attempted to increase the flow of acreage to market through shortening the time frame for activity, but the success of the past three Licensing rounds has largely used up the supply of acreage and there are now calls for more to be made available. The dynamics between acreage supply and availability on the activity levels and investment are examined in this short article.
During the late 1990's and early 2000's the industry perception was that the UKCS was a mature hydrocarbon province with little remaining scope for finding new oil. With very few exceptions, both existing licensees and new entrants to the UKCS were focused on extracting more oil from existing fields and appraisal activity targeted at near-field incremental reserves; exploration levels were at a minimum. This served to continue the low levels of E&A drilling that had resulted from the oil price crash in 1997/8 and also resulted in the self-fulfilling prophecy that there were only low levels of reserves to find.
In order to counteract this limited perception, the DTI developed a number of Initiatives in order to stimulate E&A activity. First came the ‘prototype' Promote Licence developed with Reach Petroleum in the 20th Round of July 2002, followed by the 1st Fallow Asset Release in September 2002 and the first Promote Licences issued with effect from September 2003. These Initiatives, coupled with the serendipitous rise in oil price, resulted in a greater turnover of acreage while an aggressive marketing campaign by the DTI in North America combined successfully to alter the perception of the UKCS from a moribund province to one where exploration remains attractive. The UKCS now forms a significant part of many companies' growth strategy in a market where there are 3,600 individual working interests in the UKCS, of which 37per cent are under Fallow, Frontier or Promote pressure to generate early ‘Significant Activity' or return the Block to the DTI for re-licensing.
Drilling Results 2005-6
Hannon Westwood has been tracking and reporting UKCS well activity since 2005, and over the past two years there have been 117 individual exploration and appraisal well spuds, excluding sidetracks, equating to slightly more than one E&A well spud per week. In the previous six years there was barely one well spud per fortnight. This represents a doubling of activity to levels not experienced since before the oil price crash in the late 1990's.
Along with this increase in activity comes a welcome increase in success rate. 2005 saw the re-emergence of true wildcat drilling with Fallow acreage and, to a much lesser extent, Promote acreage starting to attract well spuds. The combined technical success rate for all E&A wells excluding sidetracks for 2005 was 48per cent, increasing to 59per cent in 2006. This compares favourably to the long-term success rate for the UKCS of 25-33per cent. These successes result from a very different strategy to that which generated success rates of 50per cent during the six years from 1995 where exploration was concentrated on near-field, or ‘snuggle', exploration. This type of risk averse drilling was commercially successful in the short-term but did not access significant new reserves, being little more than step-out drilling from producing fields in order to extend field life.
In 2005 Hannon Westwood estimated that 505 mmboe were found through exploration at an average rate of 14.4 mmboe/well with the appraisal wells confirming and progressing around 227 mmboe at an average rate of 10.3 mmboe/well from previously moribund one or two well discoveries. This was further improved in 2006 when around 760 mmboe were found through exploration at an average rate of 21.7 mmboe/well and 175 mmboe confirmed and progressed through appraisal at an average rate of 9.2 mmboe/well. Despite showing a shortfall against production of 1.2 billion boe in 2005 and 1 billion boe in 2006 these results demonstrate that the UKCS basins can still deliver cumulatively material potential reserves.
Hannon Westwood intelligence analysis indicates there are currently 225 E&A wells scheduled for drilling during 2007 to 2009 on top of the 14 well spuds to date in 2007. This level of activity cannot be supported by current rig availability, but underlines the very competitive market for rig slots. Compared to the 61 E&A well spuds in 2005 and 58 in 2006 this underpins a fully utilised rig market. Of the planned E&A wells 108 are in traditional Joint Ventures, 29 are fully funded and 10 partially funded through farm-in agreements and the remaining 78 are expected to be partially or fully offered for farm-out, mainly by independents seeking to fully fund their portfolio of proposed wells. Within this population there are 50 wells targeting Promote or Frontier Licences and 52 Blocks in various degrees of Fallow status. It is recognised that some wells will fail to secure third party funds or drilling rigs and will therefore not be drilled.
The Central North Sea remains the focus of E&A activity with about 43per cent of the planned wells being located there. The Southern North Sea has the second highest number of wells planned although the recent fall in the gas price may result in the postponement in several drilling plans as the companies re-address the proportion of oil to gas in their portfolios.
The pace of E&A activity is scheduled to be maintained over the next two years and is only prevented from increasing further by the restrictions occasioned by lack of capacity in the rig market and associated materials and services. There are some indications that there may be an increase in rig supply from new arrivals and temporary release from development projects, although the net effect, when departures and re-assignments are taken into account, is likely to be slight. There have been recent indications that the seemingly inexorable rise in rig rates has peaked and a slight downward adjustment may follow. This could allow some of the projects that have become progressively more marginal as rig rates increased, to be brought back into the drilling schedules.
With the wave of Promote licence awards and Fallow acreage listings, the perception of the UKCS acreage market to deliver investment opportunity has grown strong on the back of a high oil price, despite higher taxation. It is now clear from the general awareness of the high level of under-drilled acreage and unappraised discoveries, that the UKCS is entering a second phase of activity where the next 25 billion barrels or so of oil and gas resource will be exploited and secured by a new wave of investors. This process has been growing since the mid 1990's but has never been more apparent than today, with 167 companies holding UKCS licence acreage, compared to 75 companies five years ago.
There is a race to examine and secure acreage on offer through annual Licensing Rounds, Promote licensees, or Fallow acreage still in the hands of the oil majors. In the last three Licensing Rounds, almost the whole stock of unlicensed acreage in the mature basins, including a considerable swathe on the margins or chasing new plays outside these areas, has been taken up in a land grab reminiscent to the early 1960's on the UKCS. The annual relinquishments from Promote and Fallow acreage and inclusion of acreage from successive SEA areas do not seem to be sufficient to assuage the appetite for new acreage, and there is a perception that this is beginning to create a supply and demand gap where the lack of acreage supply could create a dearth of quality opportunities for the number of companies chasing them and that this could precipitate a change of sentiment
For the sector with some companies beginning to look elsewhere. Against this trend, there are some companies that are arguing that the pressure to turn over acreage within the two to four year period is insufficient to adequately evaluate the acreage and that annual Licensing Rounds exacerbate the situation. The short time frames do become particularly evident when the acreage is held by under-funded Promote companies that need complete specialised evaluations including seismic acquisition within two years before committing to drilling a well as well as to attract funding to undertake such a programme.
It has recently been recognised that a further niche or wave of properties in the form of licence relinquishments is beginning to surface that may go some way to maintaining the acreage stock in circulation. The timing of the end of terms for licences awarded in some previous Rounds has been largely overlooked or dwarfed by the attention paid to Promote or Fallow acreage. The 11th Round end-of-the-second term and 19th and 21st Rounds end-of-first term fast approaches in 2007, closely followed by a precipitation of 22nd and 23rd Round full or partial relinquishments and 12th Round end-of-2nd term, and the complete expiry of 1st and 2nd Round Licensed acreage between 2008 and 2011. In total, some 671 properties are under scrutiny and will require some definitive decision and relinquishment of all or part of the area under licence by 2009.
If there was any question about the ability of the UKCS to supply acreage into future licence rounds, we need look no further than this Licence expiry chart to show various waves of acreage relinquishments that will be injected into each year forward to add to the continuous wave of Fallow blocks.
It remains very obvious that the main constraint to current UKCS investment is not the lack of acreage or the creation of prospects, or the acreage offered for new licensing, but is the limit in rig capacity and the imperfections in the farm-in market to secure the current $1 billion or so that is needed to fully fund all planned wells.
Hannon Westwood well intelligence indicates that there are some 225 known wells in the 2007 to 2009 scouted drilling schedules and about 88 of these are currently short of funds. The UKCS currently drills about 50 or so vertical E&A wells per year plus sidetracks at an average cost of about $16 million per dry-hole vertical well. The pace of acreage injected into the market needs to match both the supply of rigs and funds. At present there are too many wells chasing too few rigs, despite 40per cent of planned wells not yet fully funded. A further 671 currently licensed properties could appear in Licensing Rounds within the next two years to fill the perceived acreage gap. All of these will require evaluation, a number will attract well commitments and more will require top-up funding.
For the new investor, the situation presents a "buyers" market where there is more opportunity than funds; and it points to the informed investor having to seek proactive ways to invest in the UKCS rather than be drawn into reactive bids and open market data rooms. It also points to careful analysis of the level of promote that is used in the business plan. The smaller expected size of prospects and the higher technical risk associated with some of the stratigraphic traps has changed the nature of exploration drilling in the UKCS and weighs against a high level of promote.
Despite the inefficiencies in the market, the past two years' drilling in the UKCS has provided an average of over 800 mmboe in new or fallow appraised discoveries and there is no particular reason why this rate of potential reserves additions should not continue through the acreage recycled in future rounds fed by the wave of properties highlighted above.