North Sea projects might need government support

Deepsea Delta oil drilling rig in the North Sea. Photo: Erik Christensen.
Deepsea Delta oil drilling rig in the North Sea. Photo: Erik Christensen.

North Sea drilling activity is expected to pick up in the second quarter if better weather continues but concerns over high costs continue and government support might be needed to make projects financially viable, according to Deloitte’s Petroleum Services Group.

 

A Deloitte quarterly report, Drilling and Licensing Review, says a recent tax increase on bareboat chartering at a time when operating costs are at an all time high is causing concern among operators as they fear it will be passed on to them and could discourage drilling.

 

Deloitte’s Derek Henderson said the tax was a blow for industry, especially as there had been some evidence of a slight decline in rig rates during Q1 2014. Activity has been running at a low level, with only two gas fields starting production in the first quarter and one condensate field approved for development.

 

He said: "There are positive steps being taken to encourage more activity and investment in the North Sea over the longer term, not least the recommendations in Sir Ian Wood’s Review.

 

“The tax to bareboat chartering has caused some real concerns, however. While it doesn’t affect operators directly, many expect that the cost will be passed on to them and could discourage drilling.

 

There was a much reduced level of deal activity compared with the same period last year, with 10 reported in the first quarter compared with 19 a year ago and 18 in the last quarter of 2013. Farm-ins, where one company takes a stake in another company’s field to spread costs and risks, remained the most prevalent type of deal, making up 50% of the total for offshore UK.

 

Graham Sadler, managing director of Deloitte’s PSG, said: “Operators are definitely showing more caution, indicating, again, that incentives from Government may be the only way to make the economics more viable.”

 

Deloitte says the sector is in for a long haul back to anything like the performance of the peak years and a concerted effort needs to be made by government and industry to restore confidence in the sector in the short term, and to ensure maximum recovery from the UKCS in the long term.

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