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Gas Production from the UK Continental Shelf: an Assessment of Resources, Economics and Regulatory Reform

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Gas Production from the UK Continental Shelf: an Assessment of Resources, Economics and Regulatory Reform July 2019 Gas Production from the UK Continental Shelf: An Assessment of Resources, Economics and Regulatory Reform OIES PAPER: NG 148 Marshall Hall The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its members. Copyright © 2019 Oxford Institute for Energy Studies (Registered Charity, No. 286084) This publication may be reproduced in part for educational or non-profit purposes without special permission from the copyright holder, provided acknowledgment of the source is made. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from the Oxford Institute for Energy Studies. ISBN: 978-1-78467-141-9 DOI: https://doi.org/10.26889/9781784671419 i Abstract The outlook for oil and gas production on the UKCS has improved dramatically since 2015 due to the industry’s successful commissioning of large-scale projects, its efforts to reduce costs and to improve its operational performance, the bold reduction in tax rates in 2016 and the adoption in law of a new statutory objective to achieve the maximum economic recovery of UKCS resources (MER UK). The new regulator, the Oil and Gas Authority (OGA), has so far acted mainly as a behavioural regulator, without using its formal regulatory powers, but it has signalled its willingness to intervene more actively to overcome the obstacles to MER UK. The hard economics of UKCS investment (costs, prices and taxes) are likely to be the main determinants of future investment and resource recovery since the UKCS will remain a relatively high-cost producing province. Maintaining a competitive, stable tax regime and rigorous industry cost control will be essential for MER UK. The OGA may be able to influence the course of future oil and gas production through prudent use of its powers, especially in less mature regions such as West of Shetland, but preventing ‘premature’ decommissioning of gas infrastructure in mature areas and the ‘stranding’ of known resources will be a constant challenge. Promoting a sustained recovery in exploration activity from recent lamentable levels is perhaps the most urgent task facing the OGA. An estimated 10-20 billion boe of oil and gas remains to be produced from the UKCS. The improved industry outlook has led to upward revisions in the last four years of estimates of both future production and ultimately recoverable resources (URR). However, future production and URR remain highly sensitive to the course of oil prices, the development of unsanctioned, marginal discoveries and future exploration in the 2020s. The prospects for UKCS gas production are intimately linked to those of oil since two-thirds of UKCS gas production is now associated gas. In recent years, UKCS gas production (41 bcm in 2018) has exceeded short-term projections by the OGA. Following the start-up of the Culzean field in 2019 and the recent discovery of Glendronach and Glengorm, output is expected to remain at about 40 bcm per year until 2021 before resuming its long-term decline. Gross production is expected to fall to about 33 bcm in 2024. The current range of published estimates of output in 2035 (8-20 bcm) reflects the geological and economic uncertainties over future exploration and investment rather than conventional cost-based competition with imported gas. MER UK is compatible with the UK’s ‘net zero emissions’ target in 2050 providing the UKCS does not in future incur policy-related emissions costs not faced by imported supplies. ii Units of Measurement mcm million cubic metres mcm pa million cubic metres per annum bcm billion cubic metres bcm pa billion cubic metres per annum bbl barrel (1 cubic metre = 6.29 barrels) mboe million barrels oil equivalent mboe/d million barrels oil equivalent per day bn boe billion barrels oil equivalent bcf billion cubic feet $/mBTU US dollars per million British Thermal Units MJ/m3 megajoules per cubic metre iii Contents Abstract .................................................................................................................................................. ii Units of Measurement .......................................................................................................................... iii Contents ................................................................................................................................................ iv Figures .................................................................................................................................................. iv 1. Introduction ....................................................................................................................................... 1 2. Background: A Short History of UKCS Gas Development ........................................................... 2 3. Gas Production, Offshore Gas Use and the Loss of Swing ......................................................... 6 4. Economics of UKCS Production: Profitability, Costs and Taxation ............................................ 8 5. MER UK, Regulatory Reform and the Role of the OGA ............................................................... 14 6. Projections of Future UK Gas Production .................................................................................... 18 7. Gas Resources and Reserves ....................................................................................................... 22 8. Licensing Policy and Exploration Activity ................................................................................... 27 9. Gas Processing and Transportation Infrastructure .................................................................... 32 10. Gas Production Prospects by Region ........................................................................................ 35 Southern North Sea (SNS)................................................................................................................ 36 Irish Sea ............................................................................................................................................ 38 Central North Sea (CNS) .................................................................................................................. 38 Northern North Sea (NNS) ................................................................................................................ 39 West of Shetland (WoS) .................................................................................................................... 40 11. Conclusions .................................................................................................................................. 42 Sources and Bibliography .................................................................................................................. 45 Figures Figure 1: UKCS Oil and Natural Gas Production 1970–2018 ............................................................ 3 Figure 2: UK Natural Gas Production and Gas Demand 1960–2018 ................................................ 4 Figure 3: UKCS Gross Gas Production by Region 2000–2018 ......................................................... 5 Figure 4: Monthly Production of Associated and Dry Gas Jan 2010–Dec 2018 ............................. 8 Figure 5: Indicative Profitability of UKCS Industry 1Q 2000–4Q 2018 ............................................. 9 Figure 6: UKCS Unit Operating Costs (UOC) and Brent Oil Price 2005-18 ................................... 10 Figure 7: Government Tax Revenues from the UKCS 2004–2018.................................................. 12 Figure 8: OGA Projections of UK Net Gas Production to 2035 ...................................................... 19 Figure 9: National Grid’s UKCS Gas Supply Projections (FES 2018) ............................................ 20 Figure 10: Projections of UKCS Oil and Gas Production 2015–2050 ............................................ 21 Figure 11: Projections of Cumulative UKCS Production to 2050................................................... 22 Figure 12: Composition of UKCS Gas Resources 2015-2017......................................................... 24 Figure 13: Cumulative UKCS Gas Production and Remaining Reserves 1973–2017 .................. 24 Figure 14: Distribution of UK Gas Reserves and Resources at End of 2017 ................................ 25 Figure 15: Gas Reserves and Resources by Field Type at End of 2017 ....................................... 26 Figure 16: UKCS Exploration and Appraisal Wells Drilled 1965–2018 .......................................... 29 Figure 17: Exploration and Appraisal Wells Drilled by Region 2000–18 ....................................... 29 Figure 18: Discovered Resource Additions through Exploration 2005–18 ................................... 30 Figure 19: Main UK Offshore and Onshore Gas Infrastructure ...................................................... 31 Figure 20: UKCS Gross Gas Production Projections by Region 2010–2024 ................................ 35 Figure 21: Central North Sea Gross Gas Production 2010–2024 ................................................... 39 Figure 22: West of Shetland Oil and Gas Resources ...................................................................... 41 iv 1. Introduction The UK offshore industry has recently been through an exceptional period of legal and regulatory reform following the publication in 2014 of
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