The recent announcement by Shell that it would be putting some of its assets up for sale is typical of the way mature basins such as the UKCS are developing and should come as no surprise to the industry. The decision has received some negative press questioning the level of Shell's commitment to the UKCS. In reality however, the decision will in fact be good news for the UK offshore scene, potentially creating more jobs and acting as a catalyst for more exploration.
This announcement seems to embody much of the news surrounding the UKCS – often writing the industry off when in fact it is still very lively. Indeed, despite fears that the majors such as Shell had lost interest in the UKCS amidst the many challenges facing the industry, E&P activity in this mature province remains buoyant.
The challenges faced by operators in the UKCS are numerous – for instance, a deep sea basin from which reserves are increasingly difficult to retrieve, scarcity of available rigs and a tax regime which is more burdensome than in previous years.
On the other side of the equation however, a high oil price (which several commentators expect to stay above $50 in the medium term), increased use of - and better – technology, allowances for exploration costs and a wave of lean new entrants (especially from North America) have ensured that E&P activity levels remain high. A record number of oil and gas licences was announced in the UK government's latest licensing round. In 2006, government figures revealed the highest level of oil and gas discoveries since 2001, with around half a billion barrels having been discovered. New entrants, and smaller independents, are also using the UKCS as a launch pad into other provinces and in particular Norway and West Africa.
Similarly the future looks equally as promising for the oil and gas service sector. Despite increased costs continuing in the longer term, particularly in mature basins, the sector shows no sign of slowing capex growth. Project economies remain robust and the need to find new reserves and new production is more compelling than ever. In the UKCS, capacity constraints are likely to ensure margins remain high and technology, which enables the E&P companies to maximise production, is likely to be sought after. As a result merger and acquisition activity over the last year has been extremely high and showing no sign of slowing down - investments are being made not just from the UK players but also from North America, Norway and the Middle East.
The increase in acquisitions is driven by ambitious growth strategies which are mainly designed to short-cut organic growth and to plug geographical, product or technical gaps. Internationalisation remains critical to these growth plans with the UK being a preferred 'hub' for expansion into the UK and Norwegian continental shelves, West Africa and the Middle East. Prices being sought are also ambitious but are being achieved consistently particularly by trade players able to maximise future growth by combining economies of scale and cutting costs in overlapping business units.
The UKCS may not be as commercially attractive for majors such as Shell, and there are indeed may challenges for companies operating there. Shell's decision does however allow commentators to take stock of where the industry is going. Indeed, rather than a reduction in investment, there is evidence of buoyant activity levels in the E & P and service sector, and the UKCS industry overall continues to show strong signs of activity.