Oil and gas exploration falls to lowest level in five years

Harsh taxes are stunting activity in the UK's North Sea, but in Norway it is booming

North Sea oil and gas exploration dropped by 35 per cent last year, taking it back to levels last seen five years ago, according to figures published by Deloitte yesterday.

Only 78 new wells were drilled in 2009, compared with 121 in 2008. Exploration activity was down by almost half, appraisals by a quarter. Meanwhile, new drilling in the Norwegian North Sea shot up by 18 per cent last year thanks to a more generous tax regime.

In Norway there is a 78 per cent tax benefit on wells that turn out to be dry, which considerably reduces the risk of exploration. Although there were some changes to the UK fiscal regime in the 2009 Budget, the measures are too narrowly targeted to make a real difference. Once up and running, oil production is also by far the most highly taxed part of the British economy, with its own special rate of 50 per cent, rising to 75 per cent for older fields.

"The North Sea is in decline as a source of hydrocarbons and although there are companies out prospecting for more, Britain has no real incentives to encourage them and slow down the decline," Graham Sadler, the managing director of Deloitte's Petroleum Services Group, said. "There has been some tinkering, but only incremental adjustments, nothing like the sweeping changes that would bring the UK in line with Norway."

The structure of the UK sector does not help either. In Norway, activity is dominated by the state-controlled Statoil, which has deep pockets to fund its activity. In the UK, the industry is made up of an array of companies – some so small they only have a single well. Many have had only the recession-battered Alternative Investment Market to rely on for finance.

Active explorers also had difficulties getting hold of rig equipment. "A lot of rigs were mothballed because companies could not pay the same prices as the year before at the height of the oil price boom," Mr Sadler said.

Despite the signs of recovery elsewhere in the economy, there are no green shoots in UK Continental Shelf (UKCS) exploration activity so far because of the long lead times of the oil and gas industry. Some improvements are expected in 2010.

The danger is that lower exploration rates now will lead to a market dip in production in the future, as the oil and gas industry's long lead times feed through. "We've got to keep things going year on year or production will drop back, the decline will be accelerated, and we will not make the most of what we have," Mike Tholen, the economic director at industry group Oil and Gas UK, said.

There are also worrying implications for Britain's oil and gas industry. "If companies providing resources to the UK see the market starting to shrink they will move their resources elsewhere in the world and then the decline will snowball," Mr Tholen said.

35 per cent

Fall in exploration in the North Sea last year as just 78 new wells are drilled.