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Biggest challenge for North Sea in 50 years

INVESTMENT in the UK North Sea will remain near record levels in 2014 and oil and gas production will pick up, but the industry faces its greatest challenge on the exploration front for 50 years, an industry body has said.

CRITICAL: Oil & Gas UK predicts some £13bn will be invested in new and established fields in 2014. Picture: Reuters

Oil & Gas UK has highlighted the challenges facing the industry in the North Sea where firms are making massive investments in developing new fields but exploration drilling has slumped to the lowest levels in the history of the basin.

With the costs of production soaring, the industry body warned a number of fields could be uneconomic if there is a prolonged fall in oil and gas prices.

The results of the latest activity survey by Oil & Gas UK, however, suggest the short-term prospects for the UK North Sea are bright.

Oil & Gas UK predicted firms will invest £13 billion in developing new fields and extending existing assets in 2014 amid strong demand for energy around the world.

Investment reached a record £14.4bn in 2013, as majors like BP worked on schemes to bring giant finds off Shetland onstream.

Oil & Gas UK held out the prospect that the long decline in production in the mature North Sea will start to reverse this year as a series of new fields come onstream.

But it warned the boom in spending on developments could be short lived unless the industry finds new fields to replace the output of those that are in decline.

With billions of barrels reckoned still to be discovered in the North Sea, Oil & Gas UK voiced serious concerns about the slow down in exploration activity in the past three years.

In 2013, only 15 exploration wells were drilled. That compared with 22 in 2012 and 44 six years ago.

"The rate of drilling is still too low to recover even a fraction of the estimated six to nine billion barrels yet to be found," said Oil & Gas UK's chief executive Malcolm Webb. He added: "It is critical we find the means to turn the current state of exploration around."

Mr Webb noted rigs were in short supply in the North Sea, while firms could find it hard to raise funding for exploration. But he said the industry and government needed to take a bolder approach to exploration.

He welcomed the publication on Monday of an investigation into maximising the potential of the North Sea by oil services heavyweight Sir Ian Wood.

This recommended a new regulator be established with a brief of promoting collaboration between the industry and the Treasury and removing barriers to maximising the recovery of oil and gas.

Asked if Oil & Gas UK had any concerns a vote for independence for Scotland in September could cause complications, Mr Webb said the organisation was "completely neutral" on the constitutional question.

"So far this process has not damaged the industry," said Mr Webb. "It would be difficult to pretend that when we have got record levels of investment going in."

He added: "Whatever the result, we expect to see the governments north and south of the Border ... continuing to facilitate our industry getting about its business and not doing anything that would obstruct that. If they did that would be serious; you can't take a couple of years out of the North Sea."

Oil & Gas UK highlighted a 15% increase in the total firms spent producing oil and gas in the UK North Sea in 2013, to £8.9bn, from £7.7bn in 2012.

But production fell by 8% annually, to 1.43 million barrels oil equivalent daily.

North Sea tax revenues fell to £5bn in 2013, from £6.5bn in 2012.

With Chancellor George Osborne due to deliver his next Budget on March 19, Oil & Gas UK called for an overhaul of the tax regime.

It said tax breaks in recent years had encouraged investment but the overall fiscal regime "is increasingly seen to be overly complex, burdensome and uncompetitive".

Investment in the United Kingdom Continental Shelf is expected to remain above £10bn a year until 2015. It is expected to drop to around £7bn to £8bn by 2016 to 2017 as big projects off Shetland come onstream.

Production is expected to rise to up to 1.5 million boed in 2014 and around 1.7 million boed by 2018.

The wells drilled last year discovered just 80 million barrels. Some 25 exploration wells are planned this year.

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