During the past three years, several factors have fundamentally reshaped business activity in the U.K. North Sea. That reshaping has resulted in a brisk and brutally competitive market, according to Hannon Westwood, an advisory firm that specializes in the U.K. upstream.

Hannon Westwood's 2006 year-end E&A forecast highlights three elements that have underpinned this change: huge swaths of acreage have been released to industry by the government, the number of companies that own acreage has doubled and well activity has ballooned.

Indeed, the government's campaign to attract small companies to the North Sea has been an impressive success. At present, 143 companies hold licenses offshore the U.K., compared with 77 in 2001. Another 10 or so firms are expected to jump into the region after licenses are awarded in the 24th round, which has 1,411 offshore blocks on offer.

Nonetheless, while many more companies now hold impressive acreage portfolios, reserves remain concentrated in the hands of a few majors. The top dozen companies hold some 84% of U.K. offshore reserves; the next 28 hold 15%; and 13 companies have just 0.5% among them. The remaining 87 companies have no production.

"This reveals the unstable condition of the U.K. market at the lower end, with too many small companies chasing too few reserves," Hannon Westwood reports.

While new entrants and start-up companies struggle to convert opportunities into bookable reserves, the companies sitting on the barrels of oil and cubic feet of gas have their own issues. In the past, a major could hold vast acreage inventories for up to 40 years with little effective challenge.

Today, the U.K. Department of Trade and Industry (DTI) forces companies to work licenses actively or forfeit them. As brief a time as three years with no activity can place a property in the queue for third-party investment or relinquishment.

The DTI has already listed 447 blocks, part blocks or discovery wells as fallow, and it is just beginning the process. Hannon Westwood estimates more than 900 working interests owned by the top 12 companies are not yet fallow but are under the three-year clock. An astonishing volume of work must be initiated on these properties or they will be lost to their present license-holders.

Not surprisingly, with a plethora of new firms struggling to drill their licenses, and the old guard under the gun to evaluate multiple at-risk blocks, drilling activity will be at full bore.

More than 180 wells are planned for 2006, 2007 and 2008, historically very high levels of activity for the region. The forecast includes only planned wells and excludes speculative proposals, according to Hannon Westwood, so it is conservative. At an average well cost of US$16 million, dry hole costs will require investments of US$1 billion per year.

The plentiful opportunities could support even more drilling, but the 60-well-per-year pace sucks up just about all known rig slots. "When we overlay companies' ambitions on timing, it tells us that there are too many prospects chasing too few slots," the firm reports.

In addition to rigs, lots of these prospects are also hunting funds. Given the global investment priorities of the major firms, budgets allocated to their North Sea divisions are not robust. And, small independents are scrambling for money, pushing newer investment vehicles, such as strategic alliances with private investors and single-purpose deals that bring stranded discoveries onstream. Most of the funds in these innovative structures are coming from North America.

Some exploration capital is also flowing into the region from U.S.-based E&P companies, mainly in the form of farm-in deals. Certainly, the presence of U.S. companies in the region is expanding, as companies see the North Sea as an area that can provide a stock of drilling opportunities. But participation levels are still low.

Fundamentally, there are plenty of promising blocks and rafts of eager companies now working the U.K. offshore. But, drilling capital is in short supply, and there aren't enough rigs and seismic vessels dedicated to the U.K. to drill the many opportunities available.

Some 50 of the companies without current production will likely disappear, and their collapse might take place during the next few years, predicts Hannon Westwood.