The North Sea is one of the premier oil provinces of the world, producing some 10 million barrels of oil equivalent (BOE) per day. About 40% of this production flows from licenses owned by the U.K. However, U.K. production is in decline. A recent report, "The U.K. North Sea: 2003 A Year of Transition?" by Simmons & Co. International notes that U.K. oil production peaked at 2.8 million barrels per day in 1999, and totaled 2.4 million barrels per day for 2001. Natural gas, which comprises 40% of the country's total production, reached above 10 billion cubic feet per day during 2000 and 2001, but is expected to plateau shortly. The problem is twofold: production from the smaller discoveries that are currently being developed cannot offset falling volumes from the giant fields found two and three decades ago, and the smaller fields also suffer much steeper decline rates than the old heavyweights. Nonetheless, a great deal of oil and gas remains to be found and produced. Government estimates hold that 15 billion BOE of gas and 19 billion barrels of oil fall into the categories of proven, probable, possible and yet-to-find reserves. The drawback? Many of the opportunities remaining in the U.K. sector are smaller than those developed in the past, and others are more technically challenging. The major oil companies seem convinced that the U.K. no longer offers the mega-size projects they prefer. Indeed, as the major firms have focused on development of existing discoveries, exploration drilling has steadily declined. In 1990, Simmons notes that 124 development wells were drilled in the U.K., and that total jumped to 249 development wells in 2002. However, exploration activity plummeted from 159 wells in 1990 to just 16 wildcats in 2002. Still, the majors have been slow to divest assets in the U.K. because many of the fields are very profitable. Three firms- 1BP ' , 1Shell ,Ÿ and 1ExxonMobil `ƒ -controlled production of 2 million BOE per day in 2001, and the top 10 producers accounted for 81.2% of all U.K. production. The majors enjoy low per-barrel costs, thanks to their economies of scale, depreciated assets, the relatively low tax environment, and their minimal exploration expenses, says Simmons. The majors also control the pipeline infrastructure in the region. Clearly, the long-term future of the U.K. will depend on moving mature assets into the hands of independents, says Simmons, much like the movement that revitalized the Gulf of Mexico nearly a decade ago. (See "Welcome to the U.K. North Sea" in this issue.) For independents, perceived impediments are the bureaucratic complexity and the high cost of North Sea operations. Access to capital may be a problem, and companies cannot over-pay for properties. To be successful, independents will have to control costs while maximizing volumes, seek out plays that leverage existing infrastructure, and develop a North Sea expertise. The U.K. government has been tinkering with its tax regime, adjusting it to the new reality of an aging North Sea. Since the 1980s, it has been lowering taxes placed on the industry. Recently, the government made some controversial changes that could favor independents willing to invest in the North Sea. It introduced a supplementary 10% corporation tax on oil and gas profits, but companies can offset the tax increase with investments. At the same time, royalties were abolished. "The U.K. government is therefore trying to maximize overall investment while reducing the profitability of producing companies who underinvest in the U.K.," says Simmons. Seemingly, North American independents can find amenable conditions in this mature area, and such firms as 1Talisman È9 , 1Kerr-McGee Corp. œW , 1Canadian Natural Resources Ç , 1Petro-Canada Äd and 1EnCana Corp. 3A are already active in the North Sea. This group should expand in the coming months: "We expect more opportunities for smaller companies to buy U.K. assets from the super-majors in 2003." The transition to greater participation by independents will also benefit oil-service companies that have a U.K. presence. The smaller producers are likely to work their assets harder, says Simmons. Independents tend to focus on creating value, and are aggressive in bringing discoveries and developments onstream. Also, they are more reliant than the majors on the expertise of oil-service providers.

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