Economic Report 2018

ECONOMIC REPORT 2018

In general, total volumes discovered from acreage awarded in recent Rounds have been low. Around 100 exploration and appraisal wells have been drilled on acreage awarded in the 25 th Round (2008) or later, yet only 534 million boe has been discovered. All discoveries larger than 100 million boe from the last 20 years have been found on acreage awarded prior to the 25 th Round or outside of Licensing Round awards. This is largely reflective of the increased maturity of the UKCS. There is a need to ensure that there is a focus on the value of the discovery, rather than solely the volume. The improved competitive position of the UKCS mean that smaller discoveries can be as valuable in terms of return on investment as those with larger reserves in place. Projects identified for development on newly licensed acreage have taken an average of nine years to progress from award to first production. To slow the decline of the UKCS reserve base, it is now critical that industry finds new ways to commercialise those discovered unsanctioned volumes and accelerate the path to development. There are signs of progress here; the 30 th Round contained a number of discoveries which were further progressed and, as a result, 14 licences containing around 320 million boe are earmarked for further appraisal and accelerated field development. Improving the Competitiveness of Exploration on the UKCS Whilst exploration drilling has faced serious challenges, there are a number of initiatives in place aimed at encouraging exploration activity which are reflected in the MER Exploration Strategy. 30 The UKCS now offers a much more attractive exploration proposition as a result of the combined efforts of the industry and the leadership of the OGA through the MER Exploration Taskforce. Smaller discoveries can be quickly brought to market and larger discoveries can be rapidly developed with the support of the UK’s world leading supply chain. A more competitive mature basin – Improved operational and capital efficiency of projects and a more suitable and reflective fiscal regime have ensured that the UKCS remains an internationally competitive basin to invest in. A greater number of smaller discoveries go on to be developed in the UK in comparison to other basins because of the higher value in terms of return on investment per boe that can be generated. This demonstrates that the current fiscal and regulatory regime is appropriate for the level of maturity of the basin. Both need to continue to adapt in a predictable and certain manner as the basin evolves and progresses in maturity. Improvements to the licence system – The Innovate Licence was introduced in the 29 th Round, replacing the traditional Promote and Frontier Licences. By allowing applicants to propose the duration of licence terms there is increased flexibility compared to traditional licences. The new licence also supports the more rapid turnover of licences, with the introduction of decision gates, where licensees can exit the licence earlier. Due to the lower licence fees, the Innovate Licence also provides more opportunity to newer players and smaller companies with less financial backing at the time of licence award to acquire acreage. There is additional opportunity for companies to develop prospects with less cost exposure, and the option to waive the remainder of the licence fee if initial work programme results are disappointing. Improved access to infrastructure – The UKCS has a relatively high density of infrastructure, access to which is a key element in the commercialisation of any discovery. As is shown in Figure 34, 75 per cent of licensed acreage on the UKCS is within 50km of a processing facility. However, negotiating access to key infrastructure has in the past been a lengthy and challenging process. The Infrastructure Code of Practice (ICOP) , developed by Oil & Gas UK’s Commercial Manager’s Forum, outlines good practice for negotiating third-party access. It aims to ensure that negotiations are completed in a timely manner and that resulting terms are fair and reasonable.

30 www.ogauthority.co.uk/media/2835/exploration_strategy_master.pdf

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