Economic Report 2000 Index

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Meeting the Challenge Returns to Exploration The small discovery size is a major factor influencing the economics of exploration, a recent assessment of which is summarised in Box 3. Figure 16 illustrates the full cycle economic returns to all exploration activity in the UKCS since 1996. Box 3 - Full Cycle Economics The true profitability of the UKCS is frequently overstated because of the tendency to ignore the cost of exploration, both the successful and the dry well costs. An evaluation that incorporates all the costs associated with North Sea activity is referred to as "Full Cycle Economics". In a study by Wood Mackenzie, all exploration costs incurred in the period 1996-1999 were aggregated with the projected cashflow from all the developments ensuing from discoveries made by that exploration effort. Figure 16 illustrates the result of this analysis. Based on those discoveries which Wood Mackenzie assess to be commercial and likely to be developed in the next 3-5 years, the analysis indicates a nominal return of around 2% at an assumed oil price of $15/bbl, and 8% at $20/bbl. However almost half of the reserves discovered from 1996-1999 were assessed by Wood Mackenzie to be non-commercial (referred to as "Technical Reserves") due to their small size or remoteness from infrastructure. If all these technical reserves could be commercialised with costs comparable to recent developments on the UKCS ($4/bbl) returns could approach more respectable levels. However this is an extreme assumption. More realistically, given a reasonable degree of success in the various industry initiatives, returns in the range of 3-4% at $15/bbl, and 9-10% for a long term price of $20/bbl, could be expected. The significance of the potential contribution of technical reserves is clear, and confirms the wisdom of PILOT focussing its efforts on commercialising underdeveloped discoveries and lowering extraction costs. The analysis adds weight to the results of earlier studies undertaken by Alex Kemp, Professor of Petroleum Economics at Aberdeen University, reported in UKOOA's 1999 Economic Report, which concluded that UKCS exploration remains attractive but fragile against a backcloth of increased exploration success in provinces outside the UKCS. Figure 13 - UKCS oil and gas reserves Figure 14 - UKCS exploration discovery rates Figure 15 - UKCS declining discovery size Figure 16 - Full cycle econmics (1996-1999)