UK Oil Industry At The “Edge Of A Chasm”

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By Nick Cunningham

Oil production from the North Sea could plummet over the next decade, an outcome that will largely result from the inability of oil companies to invest in upstream exploration today.

Oil & Gas UK, an industry trade group, said in a new report that the North Sea is entering a period of “super maturity.” The North Sea has been a source of sizable oil production for decades, but it is long past its prime.

The UK’s offshore sector is already a shadow of its former self. Consider this: three decades ago the UK produced twice as much oil from its offshore sector than it does today, and that oil came from one quarter of the number of fields. That was possible because the fields of yesteryear were large – on average five times the size of new discoveries today. The industry is now merely picking over the remaining scraps of the North Sea, most of which comes at great expense.

Maturing and high-cost oil fields had significant challenges before the oil price downturn. But at current prices, half of the UK’s North Sea oil fields are not recovering even their operating costs. The number of fields expected to be shut down between 2015 and 2020 increased by 20 percent since last year. The worrying thing from the industry’s perspective is that as fields cease production, the cost of maintaining infrastructure – often shared among producers – stays the same, raising the costs for the remaining players. That could lead to a “domino effect” that spread to other companies. In 2015, 21 oil fields shut down because of low oil prices.

If companies are not able to even cover their operating costs, investing in new fields makes no sense at all. Oil & Gas UK estimate in their report that the sector will see less than £1 billion in investment in 2016. The average annual investment in upstream exploration over the past five years was eight times that level. The sharp fall in spending on new exploration could lead to production from Britain’s offshore sector to fall by half over the next decade, down to just 800,000 barrels per day.

The predicament has become a growing worry for the British government. Last year, the government slashed taxes when it became clear that the industry was suffering. In January of this year, the UK and Scottish governments promised a £250 million aid package for northeastern Scotland, with a focus on the oil and gas industry. Prime Minister David Cameron also chipped in £20 million for seismic surveying. The government assistance was criticized by Scottish politicians for its paucity, likening it to “peeing on the towering inferno.”

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The industry wants more help. Oil & Gas UK wants a permanent tax cut for both old and new oil fields.

The report does say that all is not lost for the industry. Production actually slightly increased in 2015 as several oil fields came online, projects that were greenlighted when oil prices were in triple-digit territory several years ago. That was the first annual increase in production since 2000, halting a decade and a half of decline. Also, average unit operating costs have declined significantly along with the price of oil, down from $30 per barrel of oil equivalent (boe) in 2014 to $17/boe in 2016. More cost reductions are possible, although not much more.

But Oil & Gas UK did not mince words in its new report. It said that oil and gas development in the UK’s North Sea was an “industry at the edge of a chasm.” Drilling activity in 2015 was at its lowest level in 45 years. Only 13 exploration wells were drilled over the course of the year, which is basically an industry at a standstill. It wasn’t just low oil prices. The “inability to access funds at a time of global capital constraint was cited as the main reason preventing companies from drilling new prospects.” Only about seven to ten new exploration wells are expected to be drilled in 2016, along with six to nine appraisal wells.

The North Sea is clearly fading as an important region for oil and gas production. By 2020, the cost of decommissioning old oil fields will likely match the level of capital expenditures. The industry argues that an overhaul in taxes could make the region competitive. But only a sharp rise in oil prices will really create the conditions for much higher levels of investment in the aging North Sea.

By Nick Cunningham of Oilprice.com

 

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