The New North Sea Oil Rush

When Sarah Palin, the former US vice-presidential candidate, told the oil companies to "drill, baby, drill" it is unlikely that she had the North Sea in mind. But research published this week suggests exploration companies are flocking to the area, taking advantage of stable oil prices and promising to fill Britain's empty coffers.

A report by the consultancy Deloitte shows that exploration activity in British waters and other parts of the North Sea is booming. According to its analysis, drilling on the UK's continental shelf rose by 86 per cent in the second quarter of the year, compared with the same period in 2009, as companies' access to capital improves and their appetite for risk hardens.

The Deloitte report was published a day after Oil & Gas UK, the body which represents the industry's interests in Britain, revealed that members were preparing to spend up to £6bn on new developments this year, and that capital expenditure could reach as much as £60bn in the next decade as companies look to tap somewhere in the region of 70 new oilfields.

"The North Sea is not by any means the easiest place for exploration firms to operate," said Graham Sadler, the managing director for petroleum services at Deloitte and author of the report. "But the market has stabilised in recent months and strong demand from places like China and the other BRIC countries has continued.

"The figures in the report have certainly been boosted by last year being so weak and we will need some more figures before we can really say that the market is booming, but so far it looks promising."

The stars have been aligning for the UK oil industry for some months. Earlier this year, the Department of Energy and Climate Change (DECC) received bids for 365 blocks in the 26th licensing round for exploration, the biggest show of interest from the industry since 1964.

"There are basically two things that have happened in recent months that have given a fillip for the oil industry in this country," said Peter Bassett, an analyst at Westhouse Securities. "The terrible financial crisis of 2008 and 2009 has clearly eased, and that has given firms access to the capital that they've largely been starved of, and also the oil price seems to be stabilised at around $70 or $75 a barrel, which provides the confidence to invest in new projects."

It is easy to see why the North Sea is particularly attractive. The troubles facing BP (BP) in the Gulf of Mexico have, for many, highlighted the dangers of deep-water exploration. While some projects, like those off the US, have huge potential gains, analysts agree the cost of chasing such reserves is high and evidently fraught with danger.

By contrast, the risks associated with drilling in the North Sea have steadily declined. "Twenty or 25 years ago, you could expect to find oil in one in 10 or one in 12 wells you drilled, and that was considered a success," said Mr Bassett. "Now, because of better understanding and analysis, the risk has been cut to one in four or five."

Earlier this week, Premier Oil (PMOIY), the biggest partner in the four-field Catcher complex located about 100 miles south-east of Aberdeen, said the site may contain up to 300 million barrels of oil. Premier has been steadily increasing estimates of the amount of oil it believes it can recover – raising it this week to 100 million barrels from its previous bet of 80 million.

While Premier's upbeat prediction will give a boost to its shareholders, its estimates are a drop in the ocean compared to how much oil still lies beneath the seabed. It is a common perception that the North Sea is finished, but while some 40 billion barrels of oil and gas have been produced so far, an estimated 25 billion more barrels are still to come.

Analysts believe this could generate £2bn in extra revenue for the Exchequer. The previous Labour administration was criticised for making the North Sea by far the most highly taxed part of the economy with its own special rate of 50 per cent, rising to 75 per cent on production from older fields.

The regime was created when the North Sea was still gushing with oil, and is in danger of choking the technically difficult – and more expensive – exploration and drilling required to make the most of what is left.

On June 7, a spokeswoman for the DECC said that the greater exploration and production was a "good thing, leading to greater numbers of jobs and increased tax revenues."

However, the new administration has refused to explicitly offer the industry action on taxes. "The Government recognises the importance of a stable and fair UK oil and gas tax regime that provides certainty for businesses. It will take forward discussions with the industry to ensure the regime encourages continuing investment and the exploitation of remaining resources," she said.

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