It emerged this week that the drilling of wells in the North Sea has crashed by around 50% this year, compared to the year-ago period. The reason for this is simple: the cost of extracting oil in North Sea has quintupled over the last decade, discouraging companies from investing within the region.
As a result, production from the region has slumped and is likely to hit 800,000 barrels of oil per day this year, down from a peak of 2.9m barrels per day as reported during 1999. Actually, this is the lowest level of production reported since the 70s.
The US Energy Department has blamed the government’s tax policy for this decline. According to Washington, Britain’s petroleum revenue tax of 81% on profits for old fields, and 62% for newer ventures has sent producers running for the hills — it’s easy to see why.Â
Running for the exit   
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Tullow Oil (LSE: TLW) is one of the firms fleeing the North Sea region. Tullow has been active within the region since 2000, when it paid £200m for some of BP’s gas assets. These assets have been key to Tullow’s growth over the years, funding exploration and development costs across the company’s African portfolio.
However, these assets are now considered non-core as the company realigns its focus on light oil assets in places like Ghana. At present, Tullow has an interest in around 30 North Sea blocks and revealed earlier this month that it was, “making good progress” selling the remainder of its UK and Dutch North Sea assets.
Unfortunately, Tullow’s management also revealed that efforts to sell stakes in North Sea assets were taking longer than initially expected.
Struggling to find a buyer
Small-cap oil exploration company Xcite Energy (LSE: XEL), owns the undeveloped Bentley oil field within the North Sea and the company is trying to find a partner, with little success. The estimated value of oil contained within the Bentley field is in the region og £2.1bn after tax, although it would appear that even this vast untapped resource is not enough to attract buyers.
Indeed, Xcite has been struggling to sell itself or find a joint venture partner for months now, but no parties appear interested. Nevertheless, there is the possibility that a decision could be made after the Scottish referendum, although even then the cost of the project is likely to be an issue.
Making progress
Still, one project that has been given the go ahead and it progressing is Premier Oil’s (LSE: PMO) Catcher filed. The project expected to boost UK output by 6% and cost a total of $2.3bn.
Premier acquired its interest in Catcher following its takeover of Oilexco in 2009 but the project is not started to start production until 2017. Luckily, the project will attract small field tax allowances, which make it commercially viable. It’s unlikely that without these allowances the field would have been unviable.Â