UK Drilling Slumps to Lowest Level Since 1970s: OGUK

Industry association Oil & Gas UK (OGUK) has called for an urgent transition deal for the UK North Sea, warning in a report that drilling activity this year is "almost certain" to fall to a level not seen since the 1970s.

Only 54 wells were spudded in the first 10 months of the year, versus 112 for the whole of 2019. A mere six exploration wells have been sunk and it is possible there will be no more this year, OGUK warned. Production levels have been relatively strong despite operational challenges, OGUK said, hailing this as a "significant achievement." Output so far this year is down 3% versus the average in 2019. Oil output has fallen 5%, while gas is 2% higher.

Production got a boost earlier on in the year from operators delaying maintenance and repair work due to coronavirus restrictions, but some of this postponed work was rescheduled for August and September, hitting output. The easing of maintenance could lead to higher numbers in the fourth quarter, but current market conditions will weigh down on production levels in 2021 and 2022.

It could take three years for projects lost during the market crisis to be restarted, OGUK said. Investment levels will take two or three years to recover, projecting that overall industry expenditure would fall to £10-11bn  ($13.2-14.5bn) in 2020 from £14bn in 2019. Capital spending is expected to plunge 30-40%, while operational spending will slide 25-30%.

"Increasing activity and investment levels from those seen this year will be important from a reserves progression perspective but also vital in providing new opportunities for the supply chain," OGUK said. "However, it will take time for the activities lost this year to be recovered and it is not simply a case of moving everything into 2021."

Companies' sentiment is weak, "reflecting the levels of uncertainty in the market and reinforcing the fact that current challenges are likely to persist," the association explained.  All this bodes ill for the North Sea's competitiveness versus other basins across the world. “Decisions that companies are being forced to take now will have a lasting impact on the capabilities across the industry,” OGUK said. “It is important that activity levels on the UK Continental Shelf [UKCS] keep pace with those in other basins to ensure it remains a competitive place for supply chain companies to anchor and invest in resources.”

OGUK also flagged up the distressed state of drilling and rig companies needed to implement new projects. Many are undergoing US Chapter 11 bankruptcy proceedings, it said.

The association said its report "reinforces that a North Sea transition deal for this sector is essential in meeting the need for secure, affordable energy to be produced with fewer emissions and to position the UK as a leader in developing low-carbon solutions." The purpose of the deal is to help the industry through the downturn and move from oil and gas and into renewables. The government committed in September only to publishing the deal within this parliament, although OGUK has expressed hope it will arrive soon, possibly by the end of this year.