Exploration Beyond 2003 On The UKCS

John R V Brooks (jrvbrooks@supanet.com), CBE, Director of Brookwood Petroleum Advisors Limited and formerly Director of the DTI’s Consents and Exploration Branch presents a personal view of the current status of exploration on the UKCS and what is required to stimulate further activity.

The current status of exploration for new oil and gas reserves

Since 1998 there has been a significant fall in the number of exploration wells drilled each year on the United Kingdom Continental Shelf (UKCS), from nearly 50 in 1998 to less than 30 wells per year; reducing to 16 in 1999, 26 in 2000, 24 in 2001, returning to 16 in 2002. However, signs of improvement may be seen. In the first Quarter of 2003, 10 Exploration wells had been spudded.

It may be constructive to examine the reasons for this decline and to consider what steps may be taken to arrest this trend.

The reasons for the decline are probably varied. The first reason may be a function of the number of commitment wells offered during recent rounds of licensing, due to the nature of the acreage applied for and the play concepts perceived. There is also a perception that the North Sea area, even the UKCS as a whole, is a “mature” region, thus justifying little exploration attention from oil companies. Many companies, however, are interested in prolonging the life of existing fields and are active in bringing forward existing discoveries to development. But unless further exploration wells are drilled and find more hydrocarbons to replace them, these reserves will soon be depleted.

An additional factor is the widely held view that all of the oil and gas, which may be easily identified and drilled for, has been found. It follows therefore that any remaining reserves will be present in more subtle traps, harder to image and identify and in smaller accumulations; all of which leads to the conclusion that the risks involved in exploring are higher than hitherto and that the chances of success (finding) will be concomitantly less. Thus the logic runs that continuing exploration will result in fewer and smaller discoveries, which may not be economic enough to bring to production.

As one drills the remaining traps within a single play it is true that the discoveries tend to be smaller, simply because the larger structures tend to be drilled first in any basin. But even for current exploration targets the ratio of wells drilled to those which are successful remains encouragingly high.

Another reason may be found in the view, widely held in industry, that the Chancellor’s Budget changes in 2002 did not assist investment in the UKCS, which has contributed imperceptibly to the trend.

One might assert that current licensees have not targeted any new exploration plays, outside of the main play fairways, for some years. Whilst seismic acquisition has been able to resolve new prospects within identified play fairways and particularly those adjacent to producing fields, there has been no structured effort to search for, let alone conceive new plays within the stratigraphic column in each of the basins within the UKCS.

Notwithstanding, companies recently new to the UK have been small and extremely focussed on maximising extraction from existing fields and developing adjacent finds and other discoveries. Recent larger entrant companies have yet to show interest in new exploration, their prime reason for entering being to acquire major field assets and to extend field life beyond that which previous owners might have attained economically. Their track record elsewhere in the world might suggest that in time they will be keen to explore innovatively on the UKCS, and thus for all of these reasons their presence on the UKCS will be a stimulus to others and very welcome by UK plc.

A final factor contributing to a disinclination to drill new exploration wells is the reluctance of licensees (oil companies) to take on what are perceived to be high risk projects; that is to say exploration wells drilled to targets which are unproven and perhaps deeper (and therefore more costly) than those previously drilled. Comparison of risk as between different offshore areas is now also a consideration, put forward by international oil companies, to affect the order in which wells are drilled, and which ones. Host Governments usually attempt to break any such linkage and insist that commitment wells are drilled to a schedule on their territory.

So the whole oil and gas exploration scene at the moment does not lend itself, from a licensees perspective, to making an effort to search for more oil and gas outside of the established and known plays. Exploration (sensu stricto) on the UKCS at present is effectively non-existent.

What can be done to stimulate exploration drilling?

This situation does not assist the United Kingdom in prolonging self-sufficiency in either oil or gas.

The fact remains that unless exploration is re-stimulated, there is a very real danger that large resources of oil and gas will remain underground to the detriment of the United Kingdom. Just as in the 1960s eminent people said they would drink all of the oil found on the newly designated UKCS, so today it is the height of arrogance even to suggest that no oil or gas exists in traps which as yet have not even be looked for.

So, what actions may be taken to encourage exploration on the UKCS to ensure that all conceivable play concepts are identified evaluated and tested.

Promote Licences

By announcing a “Promote” Round (http://www.og.dti.gov.uk/UKpromote/) within the 21st Offshore Round of Licensing, the Licensing, Exploration and Development Branch in the Department of Trade & Industry have gone some way to encourage petroleum geologists to come up with geological concepts that could lead to drilling unevaluated prospects.

Successful applicants for a promote licence, which may embrace a number of contiguous blocks, will have two years to substantiate their ideas with seismic and well data and to acquire new seismic information. Before the end of this time, prospects must be “promoted” for funding to drill.

New concepts know no block boundaries and so whilst a new play may exist on an unlicensed block it may extend to adjacent licensed territory on which the optimum location to evaluate it may also exist. Some onus then clearly needs to be placed upon existing production licence holders, as well as those receiving production licences in the 21st Round, both to afford access to “Promote” Licensees and even to contribute to any evaluation.

Funding of Promote Projects

Funding may come from a number of sources, oil companies, singly or in groups, perhaps licensees in blocks adjacent to the promoted well (which perhaps own infrastructure and /or a field into which to tie any hydrocarbons produced), finance houses, and banks. There is a presumption that all possible sources of investment are aware of the opportunities provided by the “Promote Licence”. It is important that those funding such projects understand fully the opportunities and risks involved.

Finance can be sought at any time for the project; but the earlier that this is done the better, so that those funding the project may continually assess the evaluation of “risk”.

Legal Assistance

There will also need to be legal involvement for Joint Operating Agreements in the light of success and options for equity arrangements in any subsequent development of the asset.

Risks/Chances of Success

Currently the chance of success of finding hydrocarbons in a well drilled to established targets ranges from 1 in 5 to 1 in 10. However, for untested concepts the initial “risks” will inevitably be greater for a first well, simply because there may not have been previous drilling to establish the existence of a source or reservoir rock.

This was the case when drilling commenced on the UKCS in 1964 in the southern gas basin, although the Groningen Field was by then discovered. Subsequently the Brent Field was drilled in the northern North Sea for which there was no onshore analogy.

Tax Incentives

There is a case to be made for tax concessions on genuine and defined projects related to new exploration plays, whether drilled by licence holders or “promoters”. The announcement in the 2003 Budget, offering consultation on the tax regime relating to exploration activity is obviously a good start (http://www.og.dti.gov.uk/consultations/conllexp.htm). Revenue from oil and gas production is set to decline as production falls so that it is the long-term interests of HMG to encourage the finding and development of new reserves. Such an initiative might go some way to raising awareness of the potential of the UKCS again.

Reduction in the period of confidentiality for well and seismic data

A reduction in the period of confidentiality for wells from five years to three years has been incorporated into licences issued for the 20th and future Rounds. At the same time consideration is being given to earlier release and/or availability of seismic data. This could be linked perhaps to the renewal of Exploration Licenses.

New seismic acquisition

Seismic contractors need to be alerted to the need for new data to be acquired over areas perhaps un-surveyed for some time and for experimental data aimed at imaging deeper potential and to recognise new plays and targets. Ways of involving contractors in the rewards of “promote” ventures may also need to be considered.

The need to interpret and map new plays is crucial to their success and so a dialogue with seismic contractors will prove positive.

Recommendation

There is a need to draw together those aspects that are not currently being fully addressed and to share concerns and the ways forward for exploration with all those (stakeholders) involved in exploration and production on the UKCS, especially including politicians and civil servants from the Treasury. This dialogue might take the form of a seminar, or workshop, building on the consultation announced in the Budget; the goal being to inform about the current position of exploration and to conclude a series of actions to be undertaken by Government and licensees.

Such a dialogue needs to take place soon, whilst there is a window of opportunity.

But the low level of exploration activity is not just confined to the United Kingdom Continental Shelf and North-West Europe, it is also endemic in the United States where there is a lack of appreciation of the opportunities being lost. A perception exists on both sides of the Atlantic Ocean that alternative sources of energy will bridge the gap. The science, however, does not support such a view.

The time is right for a strenuous debate on where the energy resources to fuel our economies is to come from, and what reasonable percentage of them could come from renewables.

There are sufficient learned societies which might sponsor the debate here in the United Kingdom, and in the United States, to make the dialogue a robust one, and indeed such is the seriousness of the issues raised they might just promote the debate in concert.

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