The oil and gas industry's outlook in 2004 looks positive, say energy analyst Andrew Reid and partner in merger and acquisitions Alec Carstairs, both of the oil and gas centre of excellence at Ernst & Young in Aberdeen.
Throughout 2003, sustained high oil prices have generated healthy returns for the operating community,
stimulating increased merger and acquisition activity for new independent exploration and production companies keen to
gain a share of the UK's vast oil and gas reserves.
Expectations point to oil prices remaining in the high 20s in 2004 - a healthy price to sustain confidence and investment
in the sector.
But it has not been a productive year for all parties.
The oil service sector has faced challenging times, as activity levels have declined and firms have struggled to achieve
sustainable activity levels.
Although a boom in activity is not on the cards, early indications suggest the UK sector will see increases as Buzzard,
among other development programmes, progresses.
Industry analysts estimate capital expenditure, excluding exploration and appraisal, may rise as much as 14% to £4billion,
with a significant proportion allocated to drilling-related work programmes.
The distressed drilling market should take some comfort from this. An increase in activity will help overcome the low
utilisation of drilling rigs in the region, which currently stands at 77%, translating into low demand and pricing for
most drilling-related goods and services.
According to the Lehman Brothers Spending Survey, drilling costs may rise as much as 10% in 2004.
The North Sea will see a continuation in the transfer of UK oil and gas field ownership as major E & P firms continue to
rationalise their portfolios.
Earlier this year Ernst & Young identified more than 30 fields that were prime for disposal. Only a fraction of these have
been divested to date.
At a corporate level, it is likely some smaller UK independent companies will go up for sale. These transactions will have
a short-term impact on activity as new owners take time to review their options for development programmes on
Yet, those assets that were disposed in 2003 are starting to see increased activity.
Apache may drill as many as 18 new wells in 2004 following its entry into the North Sea through the acquisition of the
Forties field earlier this year.
Efforts by the industry and the Government to tackle the lack of exploration and appraisal activity in the UK Continental
Shelf have yielded disappointing results for the vast majority of the industry.
The DTI's role in promoting the region to new entrants and lowering some of the barriers to gaining offshore licences in
2003 has made a difference, but it still seems unlikely that any fiscal incentives for increasing activity will come from
the Government in 2004.
The recent pre-Budget report, despite announcing that tax relief on exploration and appraisal would be given to new
entrants, missed the opportunity to announce specific tax measures that would have benefited all companies, and
potentially stimulated exploration and appraisal activity in the region.
If anything, the Government pre-Budget report decision suggests that it will be necessary to work harder to promote the
industry in 2004.
Tackling issues such as decommissioning, funding exploration, and overcoming the inappropriate tax regime will force
everyone to work harder at making the North Sea a sustainable environment and ensuring the maximisation of the
24-32billion barrels of oil equivalent still underground.
Source: Press & Journal