While the UK has seen considerable growth in upstream spending recently, the dropping oil price could see this trend reversed. That’s according to analysts Wood Mackenzie’s annual UK upstream review.

After years of steep decline, UK production seemed to finally be stabilizing. UK’s offshore sector totaled $19 billion last year,This kept the UK in the top 10 countries for upstream spending globally.

However, the UK continental shelf (UKCS) also experienced rising costs, poor exploration results, and a plunging oil price squeezing already tight project economics.

Erin Moffat, UK upstream senior research analyst for Wood Mackenzie, said: “The high cost environment in the UK meant that project returns were already subject to increased scrutiny during 2014…

“The UK government reduced the tax rate by 2% in December 2014, but we expect growing pressure to reduce it further. At an oil price of $60/bbl, 95% of pre-sanction oil and gas reserves in the UK generate less than a 15% return on investment. This has intensified concerns over future UKCS investment as further cuts or delays to projects are likely.

“A low oil price could also impact producing fields with high operating costs, with the potential for shut-ins. We estimate $3.2 billion of spend associated with pre-sanction projects could be at risk over the next two years as a result of current oil prices. Without this, UK upstream spend in 2016 would be around $10 billion – just over half of 2014 levels.”

Moffat added: “UKCS exploration and appraisal activity continued to fall in 2014, with the number of exploration wells decreasing by 18% to just 23 wells. 2014 drilling was considerably lower than the previous 10-year average of 81 wells per year, due to restricted access to finance for some players, high costs, a stretched service sector, and a focus by some companies on progressing large, capital intensive development projects.

“The current oil price means 2015 will unsurprisingly bring further budget cuts – with exploration spend top of the list.”

 

Source: Offshore