Economics of Oil Exploration and Production in the U.K. North Sea

Abstract

This paper was prepared for the Second Annual European Meeting of the Society of Petroleum Engineers of AIME, to be held in London, England, April 2–3, 1973. Permission to copy is restricted to an abstract of not more than 300 words. Illustrations may not be copied. The abstract should contain conspicuous acknowledgment of where and by whom the paper is presented. Publication elsewhere after publication in the JOURNAL OF PETROLEUM TECHNOLOGY or the SOCIETY OF publication in the JOURNAL OF PETROLEUM TECHNOLOGY or the SOCIETY OF PETROLEUM ENGINEERS JOURNAL is usually granted upon request to the Editor PETROLEUM ENGINEERS JOURNAL is usually granted upon request to the Editor of the appropriate journal provided agreement to give proper credit is made. Discussion of this paper is invited. Three copies of any discussion should be sent to the Society of Petroleum Engineers office. Such discussion may be presented at the above meeting and, with the paper, may be considered for publication in one of the two SPE magazines. Abstract The cost of finding oil in the U.K. Sector of the North Sea was estimated to be comparable to that of Africa and Venezuela, while development costs are about 1 1/2 times those in Venezuela but only one half of those in the States. Government take from the North Sea is comparable to the Middle East Governments. A simplified model was constructed and used to obtain financial yardsticks - present value of net cash flow and discounted rate of return - to measure the profitability of individual discoveries. At present levels of development costs a reservoir of about half a billion barrels or more can produce a discounted rate of return of 20 percent produce a discounted rate of return of 20 percent or more before tax. Introduction The year 1966 proved the southern North Sea to be a gas province of significant proportions, and the past two years proved the Northern North Sea to be an oil province of even greater importance. Interest in the North Sea built up quickly and was maintained at a high level. The difficult environmental conditions, the high cost of exploration, the expense associated with building huge production structures at greater depth of water and the controversy over the profitability of the oil industry, prompted us to profitability of the oil industry, prompted us to study the whole question of the economics of exploration and production in the North Sea (UK), the subject matter of this paper. To achieve this objective we proceeded in the first place to obtain, by coordinating and interpreting information from published data, the cost of exploration (finding cost) published data, the cost of exploration (finding cost) and development in the United States, Venezuela, Africa and the Middle East, comparing it with the record so far of the North Sea. Secondly we carried out a static approach, with all its known limitations to the analysis of the profitability of the oil industry in the United Kingdom, Norwegian and Dutch sectors of the North Sea, and compared the results with the profitability of the Middle East (Gulf) crudes, before and after the 1970 Teheran Agreement. Thirdly and lastly we carried out a number of cash flow analyses for typical North Sea discoveries obtaining the standard financial yardsticks including the present value of the cash flow stream and the discounted rate of return.