A new research study produced by Professor Alex Kemp and Linda Stephen from the University of Aberdeen highlights enhanced prospects for long-term activity from the UK Continental Shelf (UKCS) compared to previous studies, indicating that the ambitious targets in the OGA's Vision 2035are achievable in the context of (1) recent oil and gas prices, and (2) the cost reductions and productivity increases effected over the past few years being maintained.
Employing financial simulation modelling including the use of the Monte Carlo technique for assessing key exploration and development risks the study finds that, using $60 per barrel and 55 pence per therm in real terms for screening new investments, cumulative hydrocarbon production from 2018 to 2050 could be 14.8 billion barrels of oil equivalent (bn boe). This is consistent with the achievement of the total production figure in the OGA's Vision 2035, and higher than previous projections made by the authors. Attainment of the recovery of 14.8 bn boe by 2050 is subject to significant downside risks. In particular, it depends on the continuous development of substantial numbers of fields classified as technical reserves. This means that they are not yet at the full development planning stage. Many are quite small with high unit costs. Thus the continuation of the policies initiated by the OGA regarding the priority to be given to MER, including collaboration on cluster developments and use of infrastructure are necessary. Similarly, adoption of new productivity enhancing technologies as being promoted by the OGTC and OGIC are also required to prevent unit costs from rising. This would jeopardise the development of many smaller fields.
The study shows that, if the above conditions hold, field development expenditures could increase above recent levels and, while inevitably falling over the longer term, could accumulate to £124 billion by 2050 at today's prices. Operating expenditures could accumulate to £147 billion by 2050 and decommissioning expenditures to £53 billion. These expenditures generate very substantial supply chain opportunities.
When prices of $70 and 60 pence in real terms are used for investment screening purposes long-term activity is significantly higher. Cumulative hydrocarbon recovery from 2018 to 2050 exceeds 17 bn boe. Field development expenditures accumulate to £158 billion, and field operating expenditures accumulate to £172 billion. Clearly the danger of cost inflation is also greater in this scenario. This could endanger the economic viability of some projects despite the higher oil and gas prices.
A further analysis of prospective activity involved the use of a more demanding hurdle return by investors reflecting severe capital rationing. Key results of the modelling are that with $60, 55 pence screening prices cumulative hydrocarbon production 2018-2050 becomes 12.9 bn boe, somewhat below the OGA's Vision 2035figure. Cumulative field development and operating expenditures are then significantly below those with the lower investment hurdle.
With $70, 60 pence screening prices and the very high investment hurdle rate cumulative hydrocarbon production to 2050 becomes 15.6 bn boe. Field development expenditures cumulate to £133 billion and field operating expenditures sum to £159 billion.
There is thus a significant sensitivity of long-term activity to both plausible (1) oil and gas prices and (2) investment hurdle variations.
Professor Alex Kemp
Professor of Petroleum Economics
Director, Aberdeen Centre for Research in Energy Economics and Finance (ACREEF)
University of Aberdeen Business School
Edward Wright Building
Aberdeen AB24 3QY
Tel: (0) 1224 272168
Fax: (0) 1224 272181