London (Platts)--25Feb2013/1154 am EST/1654 GMT

UK offshore oil and gas investment has risen to its highest level in 30 years, thanks to changes in the tax regime introduced over the past four years, industry association Oil & Gas UK said Monday.

Investment soared to GBP11.4 billion ($17.3 billion) in 2012 from GBP8.5 billion ($12.9 billion) in 2011, and is expected to rise to at least GBP13 billion ($19.7 billion) this year, the group said in its annual activity survey.

The investment increase of at least GBP1.6 billion this year will be directed at new developments, expansions to existing fields and refurbishment and life extension of facilities. The Department of Energy and Climate Change has approved 33 projects involving investment of GBP13.4 billion ($20.2 billion) since January last year.

OGUK still expects production to reach some 2 million b/d of oil equivalent in 2017, as forecast this time last year, although this will be below the 2.3 million boe/d produced in 2010.

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But, despite the increased investment, instead of rising to 1.85 million b/d in 2012 from 1.8 million b/d in 2011, output actually fell to 1.55 million boe/d last year and could fall to as low as 1.45-1.5 million boe/d this year. A year ago, OGUK forecast that production would rise to 1.85 million boe/d in 2012.

Oil and liquids production is expected to average around 860,000 boe/d this year, down from 940,000 boe/d in 2012 and from 1.1 million boe/d in 2011.

"Taking into account the two-to-three-year average time lag between investment decisions and first production, much of this fall can be attributed to the damage done to investor confidence by the numerous adverse tax changes in the mid-2000s with new developments reaching a low point in 2008/9," OGUK chief executive Malcolm Webb said.

Over the past four years, the government has introduced targeted tax allowances to promote the development of a range of difficult projects, OGUK noted. It said certainty about tax relief for decommissioning is critical for investors and that there are positive signs government proposals to resolve this issue would be enacted in this year's budget.

The tax changes have prompted companies "to take another look at the UK as an investment destination and resulted in a new wave of investment," Webb said.

Drilling low

OGUK warned that exploratory drilling was low and, as a result, reserves were not being replaced, but said an increase in the number of drilling wells forecast for the next few years suggested that the number of barrels being discovered should rise.

"While sanctioned reserves rose at the start of 2013 to 7.4 billion boe, the highest level for six years, the total reserves on companies' plans fell by half a billion boe," Webb said, noting that only 21 exploration wells had been drilled annually over the past three years.

"As a result, in 2012 not enough barrels were discovered to replace all those produced."

However, Webb continued, "there is real cause for encouragement as the survey results lead us to forecast 130 exploration wells over the next three years which, alongside the use of new and improved subsurface technology, should result in many more barrels being discovered."

But OGUK said that while investment this year was expected to be the highest for more than three decades, development costs per barrel had risen rapidly and were now five times what they had been 10 years ago. In 2012, the cost of developing a barrel of oil was $21.50 compared with $18 in 2011 and $15.50 in 2010.

The group expects 35 to 40 exploration wells to be drilled this year, the highest since 2008, with 80% having already secured rig slots. In 2014, expectations are for 53 exploration wells to be drilled.

"It appears that the increase in exploration activity is in part being driven by pressure from license rounds to meet commitment dates. Access to finance may also be easing slightly, though access to drilling rigs remains a serious constraint on activity," it said.

Current plans for decommissioning over the period to 2040 indicate a total spend of GBP35 billion in 2012 money, GBP31.5 billion of which will be needed to decommission existing installations and GBP3.5 billion to decommission new developments yet to be approved, said OGUK, which expects decommissioning spending over the rest of the current decade to average GBP1 billion.

--Margaret McQuaile, margaret_mcquaile@platts.com
--William Powell, william_powell@platts.com
--Edited by Alisdair Bowles, alisdair_bowles@platts.com

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