OREANDA-NEWS. The UK oil and gas industry is likely to approve less than ?1bn ($1.4bn) of investment in new projects this year compared with the average ?8bn/yr over the last five years, raising questions about future production, according to industry group OGUK.

"If the oil price remains at around $30/bl for the rest of 2016, nearly half — 43pc — of all UK Continental Shelf (UKCS) oil fields are likely to be operating at a loss, deterring further exploration and capital investment, and making additional cost improvement imperative," OGUK said today in its annual Activity Survey of exploration and production companies operating in the region.

"The impact of new start-ups is so great that over 40pc of total production in 2018 is expected to come from fields that have started production or seen significant redevelopment since the start of 2013," OGUK said. "In spite of this wave of new start-ups, production is likely to halve between 2015 and 2025 if fresh investment opportunities are not realised".

The fields unprofitable at current prices produce only a sixth of total oil output offshore the UK, but they "collectively provide a significant proportion of the infrastructure used to transport oil and gas ashore", the report said. "Were a number of these fields to cease production, their interconnectivity would mean many more could become sub-commercial."

Unit operating costs offshore the UK dropped to $20.95/bl of oil equivalent (boe) last year from $29.30/boe in 2014 and are expected to decline to around $17/boe in 2016, representing a 42pc fall since 2014, OGUK said. But with oil prices halving last year and the average daily gas price dropping by 20pc, oil and gas companies' revenues from offshore UK operations fell by 30pc to ?18.1bn in 2015.

Production rose by 9.7pc to 1.64mn boe/d in 2015, the first rise in 15 years, and is likely to increase by 2.3pc this year, to about 1.68mn boe/d — but only if "reservoir decline rates within existing fields continue to be carefully managed and the anticipated new field start-ups this year materialise with minimal slippage".

The report forecasts production at 1.74mn boe/d by 2018, "provided new fields come on-stream as planned and currently approved brownfield investment is sustained".

But exploration remains at an all-time low with no sign of improving, the industry body said. Only 13 exploration and 13 appraisal wells were drilled in 2015 — the lowest in 45 years — and this year as few as 7-10 exploration wells and 6-9 appraisal wells are expected to be drilled, OGUK said.

Total capital expenditure (capex) fell to ?11.6bn last year from ?14.8bn in 2014, and the report forecasts a further drop this year, to around ?9bn. "Previously sanctioned capital investment that was being spent over a period of several years is tailing off," OGUK said. "?38bn of capital was sanctioned in new development projects between 2010 and 2014. Around one fifth of this money is yet to be spent."

Meanwhile, lower oil prices have made more potential future projects uneconomic, with reserves reported by companies as potentially recoverable dropping to 8.8bn boe in 2015 from 10bn boe a year earlier. The number of fields likely to be decommissioned in 2015-2020 increased by about 20pc over the last year, to total more than 100.

OGUK called for adjustments to the tax regime, including a "significant permanent reduction in headline tax rates for old and new assets" and "additional measures to help unlock the late-life asset market and encourage exploration".