BBC News

Spending on North Sea equipment break-up 'to rise'

By Douglas Fraser
Business/economy editor, Scotland

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Industry spending on the break-up of old North Sea equipment is expected to rise by 60% this year, to nearly £2bn.

That is according to the energy industry consultancy Wood Mackenzie, in a new analysis of Britain's offshore industry.

The company foresees a drop in other capital expenditure of 30%, to reach $5.7bn (£4.7bn).

In recent boom years for investment in major projects, it was more than double that amount.

The forecast for this year is for a continued low level of exploration, but production from existing fields rising for a third consecutive year.

Meanwhile, deal-makers are expected to be busy as major oil and gas producers exit the North Sea, and private equity firms buy assets at low valuations.

The Wood Mackenzie report, published on Tuesday, follows a global report on the exploration and production of oil and gas, which was upbeat about new investment this year, though much of it in North American fracking.

Fiona Legate, from Wood Mackenzie, told BBC Radio's Good Morning Scotland programme: "Exploration and appraisal drilling hit a 50-year low in 2016, but volumes discovered were the highest since 2008.

"And in 2017 we believe there's still appetite for companies to drill in the UK sector. We're forecasting 15 exploration wells this year."

Ms Legate said the consultancy was predicting a 30% decline in development this year - largely because the UK was already a "very mature" sector.

But she added: "We're forecasting about £1.8bn in decommissioning spend this year and it does provide other business opportunities, for service companies for example."

Tax treatment

Wood Mackenzie's estimates for decommissioning of older, disused equipment follows years of high expectations being met with lower results, as the industry continued to sweat assets, and then put off scrappage until its tax treatment became clearer.

With the cost of maintaining older equipment remaining high, that is expected to change in the next eight years. Last year is thought to have seen £1.1bn spent on decommissioning, up from less than £800m in each of the previous two years.

Shell and Exxon Mobil are expected to be the main spenders, as that rises to £1.8bn during 2017. Fields to watch include Brent, operated by Shell, CNR's Murchison, BP's Miller field, the Janice area operated by Maersk, and MacCulloch which is owned by Conoco.

The UK offshore report suggests there is "still an appetite to drill" for new fields in 2017, much of that linked to locations where there is already infrastructure in place to develop new finds. Statoil, the oil major which is part-owned by the Norwegian government, is on course to be a leading player in that.

There is an estimate that production will rise to a daily 1.9m barrels of oil, or its gas equivalent, up from 1.4m barrels three years ago.

That rise is linked to recent projects which were approved before the end of 2015, when the oil price was much higher than it has been over the past two years. Fourteen fields are expected to come onstream during 2017.

But there are very few projects reaching the stage where they will get Final Investment Decisions. Wood Mackenzie analysts highlight only three such projects, with total reserves estimated at 171m barrels of oil or its gas equivalent. At current levels, that represents less than 100 days of production.