2013-02-25 09:56:34 - Recently published research from Business Monitor International, "United Kingdom Oil & Gas Report Q1 2013", is now available at Fast Market Research
BMI View: The pick-up in drilling activity in the UK's offshore sector will continue on the back of high oil prices and tax reforms that support gas production and development. The clarification of budget rules related to the decommissioning of defunct infrastructure in the North Sea will sustain a trend of smaller independents or newcomers in search of safe, producing assets taking up the mature assets that existing players have decided to offload. This will slow the rate of decline, especially in UK gas production.
The main trends and developments we highlight in the UK Oil and Gas sector are:
* Data released by the US Energy Information Administration (EIA) show that oil and gas production fell precipitously in 2011 -
a 17.1% decrease to 1.16mn barrels per day (b/d) for oil and a 23.1% fall to 43.3bn cubic metres (bcm) for gas.
* Tax allowances could spur project development, particularly in gas. In the 2012 budget, announced in March 2012, the following reforms were introduced: (1) Tax allowances for companies engaged in greenfield exploration and development; (2) Support for brownfield investment; and (3) Clarification of decommissioning tax relief. This was followed by a waiver of Supplementary Tax Charge for shallow water gas fields, announced in July 2012.
* These government initiatives will further encourage investment, especially in gas projects - slowing the decline in UK gas production. Not only has new investment paid dividends (such Chevron's investment in the Rosebank gas project in 2012), it has also encouraged brownfield investment from Talisman and Shell in mature assets. The 27th licensing round, which closed in May 2012, also enjoyed a good reception.
* For 2012, we estimate that high oil prices slowed the rate of oil production decline to 9.9% and output averaged at 1.04mn b/d; unexpected outages at major fields such as Buzzard, along with the natural rate of decline from mature fields, negated production gains made by companies pumping more oil in order to maximise their profits. Although the long-term output trend is a downward one, we forecast that fiscal incentives will see a gentler fall in production as drilling activity picks up; in 2017, we expect output to average at 852,500b/d, and 761,000b/d in 2021.
* As the European banking crisis continues to loom over Western Europe, we forecast weaker domestic demand for oil: domestic consumption is estimated to have fallen to 1.58mn b/d in 2012. Still, along with an expected (albeit slow) recovery, oil consumption will lift slightly to 1.62mn b/d by 2017, racking up an import bill of US$26.1bn.
* Gas production is also estimated to have fallen to 40.7bcm in 2012, owing to a natural rate of decline and from the unexpected loss caused by stoppages at Total's Elgin gas platform due to a gas leak. As with oil, tax incentives should lead to a deceleration in output declines. Gas output is forecast at 35.3bcm in 2017 and 32.6bcm by 2021.
* A cold snap in the first half of 2012 and an early winter in Q412 made it very likely that gas consumption increased more than proportionately to GDP growth in 2012. We assume gas demand has recovered slightly to 80.6bcm in 2012 from 79.8bcm in 2011. Should demand rise to 86.2bcm in 2017, as our forecasts suggest, gas imports would hit 50.9bcm, costing the country US$23.6bn at oil-indexed prices.
* We continue to expect companies to find partners ready to take up the assets they have offloaded in the North Sea, as the latter look to de-risk their portfolios with safe producing assets in the UK. BP is reported to be looking to divest its assets in the North Sea to focus on the less-explored West of Shetlands. Cairn Energy acquired another North Sea player, Nautical Petroleum in June 2012, while Chinese national oil company Sinopec farmed into Talisman's UK North Sea assets for US$1.5bn in July 2012.
* Hydraulic fracturing (fraccing) has been given the green light in a report commissioned by the DECC. Pending public consultation and a final decision by the DECC, shale gas exploration could restart in the UK. However, the following factors make BMI doubtful about the UK replicating the US in the commercial production of shale gas in the next decade: (1) concentration of known shale gas resources in the populated Bowland Basin raising the risks of public opposition; (2) an underdeveloped onshore oil and gas sector increasing production costs; (3) control of mineral rights by the Crown reducing the scope for speculative purchasing, which was the key driver of the US's shale gas revolution; and (4) scepticism by the Liberal Democrats junior partner in the ruling coalition of boosting the role of gas in the UK's energy mix.
Full Report Details at
- www.fastmr.com/prod/541193_united_kingdom_oil_gas_report_q1_2013 ..
At the time of writing we assume an OPEC basket oil price of US$99.10/bbl for 2012, falling to US$96.20/ bbl in 2013 and US$93.30/bbl in 2017. Global GDP in 2013 is forecast at 2.9%, reflecting a faltering recovery in the US and uncertainty with regard to the eurozone debt crisis.
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