Oil & Gas - Maximising Recovery Programme (formerly SHARP) IOR Views

It is widely recognised that oil and gas production from the UK Continental Shelf (UKCS) has passed its peak. Total hydrocarbon production peaked in 1999 at around 4.5 million barrels of oil equivalent per day (mmboe/d). The annual decline rate since then has averaged 3.1%. The Government and the industry have been engaged in a variety of initiatives with the objective of moderating the pace of decrease. An aspirational goal for 2010 has been set at 3 mmboe/d by PILOT.

This goal is challenging, especially in the light of the low level of exploration since 1998 and the consequential low level of discoveries. In the period 1999-2003 inclusive the number of significant discoveries has averaged just over six per annum despite the high level of oil prices.

Against the background of the experience of recent years with respect to exploration and development, and taking into account the current plans of operators with respect to the development of incremental projects and fields in the probable and possible categories, the future prospects to 2020 were estimated using financial simulation analysis. The Monte Carlo technique was employed to model new discoveries and the development of fields currently in the category of technical reserves. (For a more detailed discussion of the methodology and results see A.G. Kemp and L. Stephen “A Reassessment of Potential Production from and Expenditures in the UKCS”, North Sea Study Occasional Paper No. 93, University of Aberdeen, Department of Economics, March 2004.)

The study was undertaken under a variety of oil and gas prices. The exploration effort and the annual total number of potential field developments were taken to be directly related to the level of oil and gas prices. The central case highlighted here reflects oil prices of $20 per barrel and gas prices of 18 pence per therm, both in constant real terms. These are representative of prices employed for screening long-term investment decisions.

The prospects for total hydrocarbon production under this scenario are shown in Figure 1. It is seen that aggregate output just meets the PILOT target of 3 mmboe/d in 2010, while in 2020 production is 1.9 mmboe/d. There are major changes in the composition of the total over the period. Thus production from sanctioned fields accounts for 44.8% of the total by 2010 but only 13.3% in 2020. Probable and possible fields account for 23.4% of the total in 2010 but only 6.8% in 2020. Future discoveries account for 3.3% in 2010 and 17.9% in 2020.

Figure 1: Potential Hydrocarbon Production (evaluated at $20/bbl, 18p/therm, hurdle rate 10%)

Incremental projects (current and future) are seen to make very important contributions both in 2010 (24.4% of the total), and 2020 (30.7% of the total). Currently incremental projects are those which are related to sanctioned fields. At present 135 are being examined by the industry. The majority are small and are typically infill drilling schemes. Thus 62 of them have reserves of 5 mmboe or less (each). Others are satellite developments and EOR schemes. Some are quite large. Seven have reserves of 50 mmboe or more (each). Under the price scenario considered here they contribute around 1.5 billion boe over their lifetimes.

Future incremental projects are not currently being examined by the industry. They have been modelled to reflect the experience of the industry over the past few years. They are cautious in the sense that they reflect a substantial decline rate over time in the volumes likely to be recovered from the projects. The projects relate to host fields in all the categories shown in Figure 1. Their potential cumulative contribution to total production could be 2.3 billion boe to 2020 and 3.8 billion to 2030.

To put this in perspective total cumulative production from all sources from 2004 to 2020 and 2030 is shown in Table 1. Future incremental projects contribute 13.3% of the total to 2020 and 17.3% to 2030. The full results of the study may be compared with the results of a recent survey by UKOOA on the remaining potential in terms of reserves (www.ukooa.co.uk/media/documents/UK_Offshore_Operators_2003_Activity_Survey_13Jan041.pdf). This is summarised in Figure 2. There is a broad consistency in the results.

Table 1: Cumulative Potential Production (bn boe) from 2004 ($20/bbl, 18p/therm case, 10% cost of capital)

Figure 2: UKCS Reserves at End 2003 (UKOOA, 2004)

It should be emphasised that the substantial production from future incremental projects (and technical reserves) is by no means guaranteed. Its attainment is consistent with historic performance and the reserves base, but is dependent on the initiatives currently being undertaken bearing fruit. These relate to a wide range of subjects such as the enhanced efficiency of the operation of the infrastructure Code of Practice, and further successes from the fallow discovery/block initiative. It is clear from work currently being undertaken by the present author that enhancements of the infrastructure will be required to facilitate the economic development of many small incremental projects and new fields. The most obvious method of exploiting many of these is via platforms on host fields which are likely to reach economic cut-off before the new projects are economically exploited. Infrastructure enhancements incorporating, for example, more spur lines will thus be required. Investors will require adequate incentives to proceed with the necessary investments. Government needs to intervene when markets are failing or operating very sluggishly. The long-term rewards to all stakeholders, including contractors and Government, from successful cooperation are very substantial.