High commodity prices and Russia’s invasion of Ukraine have thrown energy security into the spotlight. In response, the UK government launched an energy security strategy, introduced investment allowances, and announced a new oil and gas licensing round.
Wood Mackenzie believes that exploration could deliver another 2 billion boe but only if there are willing explorers to find it.
UK discovered resources have improved in recent years, but 2022 could be the first year without discovered volumes since 1965.
According to Woodmac, opportunity does exist as there are strong fundamentals for more UK exploration. Overall, the UK is a net importer of oil and gas. That won’t change – particularly in the case of gas – in any energy transition scenario.
What’s more, UK exploration performance has improved. Abundant infrastructure and relatively quick lead times have supported recent returns while a favourable fiscal environment and high prices could boost value creation even further.
Also, a barrel discovered in the UK, under the current fiscal regime, has one of the highest values globally. New investment allowances offering 85% tax relief should stimulate activity.
The fiscals are broadly favourable. In May 2022, the UK Government introduced the Energy Profits Levy, a 25% tax – applying until the end of 2025 (for now) – that brings the total marginal rate to 65%. To sweeten the move, new allowances have been introduced to incentivize further investment. E&Ps could receive 85% relief on exploration and appraisal spending and potentially pay only 40% tax on new field profits. This will make exploration attractive to taxpayers, though non-taxpayers are still hindered.
But even with all these incentives, there’s little sign of a resurgence so far. Willing explorers are thin on the ground. Most companies that could take full advantage of the EPL allowances have shown little appetite to explore. IOCs have retreated, hastened by high political risk as new projects come under increased scrutiny and that resulted in drilling activity being at historic lows.
“UK discovered resources have improved in recent years, but 2022 could be the first year without any discovered volumes since 1965,” Neivan Boroujerdi, Director of Upstream Oil and Gas Research at Woodmac, said.
A new licensing round is unlikely to deliver material volumes if past performance is to be any indication. The number of applicants and license awards in mature rounds has stayed relatively flat in recent years. Drilling commitments have fallen sharply and the 27th round in 2012 was the last to deliver commercial volumes.
Woodmac stated that the UK needs to embrace its energy super basin status. The world’s need for sustainable energy is changing the upstream oil and gas industry. New projects can – and indeed must – reduce emissions intensity.
The UK must embrace its energy super basin potential with developments intertwined with renewables. Advantaged resources – both low cost and low carbon – are the future of upstream.
•By Bojan Lepic|Rigzone Staff
To contact the author, email bojan.lepic@rigzone.com