North Sea industry leaders have issued a pessimistic near-term outlook for the ageing basin, which they said will be “really difficult and challenging” amid a slump in exploration drilling to record lows.

Trade body Oil & Gas UK (OGUK) projected this week that, while 2021 is expected to see more development and exploration activity than 2020, it could be two to three years before many of the investments put off because of the Covid-19 pandemic start to re-emerge onto company spending plans.

North Sea operators are coming towards the end of business planning cycles for the coming year, and a clearer view of the expected work for 2021 should emerge soon, OGUK officials said.

Difficult year ahead

“Certainly... 2021 is going to be a really difficult year again for the industry,” said Ross Dornan, market intelligence manager at OGUK.

Some activities and investments that had been planned for 2020 could be moved directly into 2021, Dornan said, but added, "It's not going to be a direct bounce back."

“We think it will take time to recover the investment decisions, the final investment decisions, the activities, the wells and the projects that have been deferred from this year," he said. “I think it could take two to three years to re-phase and reposition these activities.”

Lasting effects

Dornan added: “We are going to see the effects of the pandemic and of low oil and gas prices endure for some time, and 2021, I think, will be a challenging year for the industry.”

Despite the warning, OGUK said in its annual economic report, published on Tuesday, that production this year from the UK continental shelf is expected to remain around 2019 levels of almost 1.7 million barrels of oil equivalent per day.

However, this was partly due to decisions by many operators to continue producing and to defer maintenance work.

This included the major three-week maintenance shutdown of the Forties Pipeline System (FPS) by operator Ineos FPS.

The shutdown was originally planned for June this year, but Ineos warned in April it would delay the work until spring 2021, following mounting pressure from customers in the wake of the pandemic.

The plan involves closing the pipeline, which carries about 450,000 barrels per day of oil from about 80 fields, forcing operators whose facilities rely on the pipeline for exports also to shut in production.

Exploration at record lows

A major concern for the basin has been a slump in exploration drilling to record lows.

Coming into 2020, OGUK had said it anticipated relatively stable levels of activity across the basin, including exploration.

However, the impact of Covid-19 meant only six exploration wells were spudded this year, as companies faced with low cash-flow generation and market uncertainty preserved capital.

Five of these wells were spudded by Apache in the Beryl area of the northern North Sea, including three geological sidetracks, alongside the high-impact Finzean well spudded by Total E&P in the central North Sea.

OGUK noted there is still a strong pipeline of opportunities within company plans, with more than 135 exploration and appraisal projects at varying stages of maturity identified through to 2025.

Of these, 10% had finance and rigs in place.

The recent 32nd Offshore Licensing Round demonstrated a continued appetite from companies to explore on the UK continental shelf.

The round saw 113 licences offered to 65 companies across all four key basins, ranging from supermajors extending their presence to new entrants picking up acreage for the first time.

OGUK estimates about 8000 jobs have been lost so far this year in the basin, but a more thorough assessment is due to be carried out early in 2021.

Referring to OGUK's report, Michael Burns, energy partner at law firm Ashurst, said: "The report highlights the fact that the short-term outlook for the oil and gas industry looks to remain challenging across the globe, but, in the UK at least, the government's 'green revolution' plan offers an opportunity for the industry to diversify and utilise existing technical expertise and infrastructure."