A REGIONAL MODEL OF OIL AND GAS EXPLORATION IN THE UKCS
| DOI | http://doi.org/10.1111/j.1467-9485.2006.00376.x |
| Date | 01 May 2006 |
| Published date | 01 May 2006 |
A REGIONAL MODEL OF OIL AND GAS
EXPLORATION IN THE UKCS
Alexander Kemp and Sola Kasim
n
Abstract
Existing exploration–discovery models are generally characterised by equations
describing the behaviour of exploration, success rates, and discoveries. The present
paper adds two equations describing the behaviour of finding costs and exploration
efficiency. The model was disaggregated along regional lines. Applying the model
to UK Continental Shelf data over the period 1964–2002 produced results that
supported the new approach. Analysis of the model dynamics and simulation
forecast reveals similarities, but also important differences in the responsiveness
of activity in the regions to policy multipliers, implying that uniform policy
instruments will produce unequal responses in areas with different levels of
maturity.
I Intro ductio n
The exploration effort in the UK Continental Shelf (UKCS) has fallen
dramatically since the all time peak level attained in 1990, when no less than
224 exploration and appraisal (Eand A) wells were drilled. In 1996, 112 were
drilled, but in 1999, only 36. The activity remains relatively low with only 44, 45,
and 63 wells being drilled in the respective years between 2002 and 2004, in spite
of the relatively favourable oil price.
The balance between exploration and appraisal wells has also changed. Until
recently, exploration wells dominated, but since 1999, this relationship has been
reversed. In 2004, there were 29 exploration wells and 34 appraisal ones. The
number of discoveries has also fallen substantially. In the early 1990s, an annual
average of 20 significant discoveries was recorded. From 1998 onwards the
annual average has been less than 6.5.
1
Related to the above, there has been a
significant change in the relationship between depletion of reserves through
production and their replacement through new discoveries. Since the mid-1990s,
remaining reserves of both oil and gas (proven, probable and possible) have
fallen continuously (DTI, 2004a). Oil and gas production have been falling since
n
University of Aberdeen
1
For detailed information on the Eand Aeffort, success rates, and discoveries see DTI
(annual) (2004b).
Scottish Journal of Political Economy, Vol. 53, No. 2, May 2006
rScottish Economic Society 2006, Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK
and 350 Main Street, Malden, MA 02148, USA
198
1999 and 2000, respectively. But the remaining potential is still large. Remaining
total recoverable reserves have recently been estimated by PILOT, the UK
Government-industry consultative body, to be in the 27–29 billion barrels of
oil equivalent (bn boe) range, of which 9 bn boe are in the yet-to-find (YTF)
category (PILOT, 2005).
In recognition of the serious nature of the problem, the Chancellor of the
Exchequer instigated a review of the issue in the Budget of 2003. This involved
consideration of both tax and non-tax measures (such as licensing terms relating
to fallow acreage and tariffs for infrastructure use), which might be employed to
enhance the Eand Aeffort in a cost-effective manner. The results included a tax
incentive relating to Eand Acosts for new investors without tax shelter,
a reduction in the tax applied to third-party tariff income on new contracts, and
a new Infrastructure Code of Practice. The present paper makes a detailed
investigation of the dynamics of oil and gas exploration in the UKCS in order to
provide a rational basis for policy making.
II An Overviewof the Literature
Broadly speaking, there are two schools of thought on the subject of the
fundamentals driving reserves discovery. Thus, Hubbert (1967), Reynolds
(2002), and Arps (1958) focus on the (long-run) physical determinants of
discovery. Others such as Pesaran (1990), Cleveland and Kaufman (1991, 1997),
Iledare (1995), Forbes and Zampelli (2000, 2002), Kemp and Kasim (2003), and
Managi et al. (2005), augment the physical determinants with economic and
technological explanatory variables within short- and long-term frameworks.
Within the two schools, there are further sub-divisions along the lines of authors
who (a) focus on the depletion or maturity effects on discovery, or (b) consider
both maturity and maturity-off-setting effects. Reynolds, Cleveland and
Kaufman, Forbes and Zampelli, Kemp and Kasim, and Managi et al. all stress
the importance of identifying and incorporating the role of information and the
opposing effects of depletion and technology on the time path of the discovery
decline phenomenon.
2
In general, authors
3
whose works focus on depletion effects tend to use
cumulative drilling as an index of maturity. But, so too do authors who take a
more holistic view, using models that claim to integrate the effects of depletion
with those emphasising technology, economics, infrastructure, or information.
Notable examples are Cleveland and Kaufman (1997), who modelled the
depletion and technological change effects with a single variable (cumulative
drilling), but stressed that future research should use separate variables to
capture the two effects. Reynolds (2002) also used a single variable to model the
2
There are definitional problems as well. The authors differ in their interpretation of the key
explanatory variables and specification of the discovery equation. Thus, while Hubbert (1967),
Pesaran (1990), Cleveland and Kaufman (1991), and others interpreted cumulative drilling as a
measure of depletion, Uhler (1979) interpreted it as a measure of the province’s state of maturity
and the amount of accumulated knowledge.
3
See Pesaran (1990), and Cleveland and Kaufman (1991), for examples.
OIL AND GAS EXPLORATION IN THE UKCS 199
rScottish Economic Society 2006
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