Britain’s oil and gas fields in the North Sea became a central topic of contention in the recent referendum on independence for Scotland.
Scotland’s first minister, Alex Salmond, had chided London for what he said had been poor stewardship of these resources, which mostly lie off Scotland. But oil executives had warned that a change of sovereignty could curtail investment in what was already a critical phase in the life of the oil fields.
Scottish voters rejected independence in September, but the issues raised during the campaign are likely to remain a matter of public debate and become even more acute as oil prices fall.
Many industry executives say that, after nearly 50 years of production, Britain’s oil sector has reached a crucial point. To put it bluntly, Britain’s offshore oil industry has entered old age. The size of discoveries has tailed off sharply, a classic sign of maturity. Production has fallen 37 percent from 2010 levels, while costs, thanks in part to the need to maintain creaky infrastructure, have soared.
All of this adds up to sharply reduced profitability of the oil and gas fields, to a point where some of them lose money. Executives say that unless the British government and energy companies adjust to the new realities, the industry could find itself in deep trouble.
“We are starting to run out of time,” said Gordon Ballard, a senior oil services executive who is co-chairman of the British Oil and Gas Industry Council, an advisory body. Mr. Ballard said the industry needed to keep putting money into aging infrastructure like pipelines and production platforms or risk having to shut them down.
Already, there are signs of stress in the industry. Some companies, including Chevron, the American giant, are cutting staff in Aberdeen, the Scottish oil city that has boomed in recent years, while the salaries for some contract personnel are being reduced.
About 43 billion barrels of oil and gas have been produced since the first North Sea fields came online a half-century ago. While some optimists say the industry could still pump out more than 20 billion barrels — much of it still undiscovered — a more subdued assessment comes from the Edinburgh-based consultants Wood Mackenzie, who estimate that the combination of economics and geology means that only about eight billion more barrels are likely to be produced. “That is the amount we believe to be commercial,” said Erin Moffat, a Wood Mackenzie analyst.
How long the North Sea reserves last depends on many variables. These include geology, the development of new technology, oil prices and how well oil companies and the government adapt to a less bountiful world.
Recent trends are not helping the picture. The number of exploration wells drilled in British waters has fallen to an average of 20 per year in the past five years, compared with an average of 35 a year from 2004 to 2008, the Oil and Gas Council said. Those wells have had little success, with fewer than 100 million barrels of oil and gas discovered over the past two years — about 20 percent of what British waters are now producing in a year.
Some analysts say the higher profile that the industry gained in the Scottish independence campaign could help turn things around. “People now realize what is at stake in terms of the economic contribution and the number of jobs supplied by the industry,” said Bob Keiller, chief executive of Wood Group, a global oil services company based in Aberdeen.
Thanks in part to the criticism of Mr. Salmond and pressures from the oil industry, the British government, which some executives say has mainly viewed the business as an automatic provider of several billion pounds of revenue to the Treasury each year, is trying to do something about the declines in exploration and other symptoms of malaise in the sector.
The government is setting up a stand-alone regulator called the Oil and Gas Authority. Headquartered in Aberdeen, the agency is expected to be more proactive than the Department of Energy and Climate Change, which now regulates the business.
More important, in the view of some oil executives, is a government review of a tax system that they say is burdensome, complex and unpredictable. “There are not so many countries in the world that have a worse regime,” said Patrice de Viviès, senior vice president for northern Europe at the French oil giant Total. “In risk and reward balance the U.K. is not well placed.”
Not only are taxes on oil production high in Britain, at about 81 percent of profit from older fields, but rising costs are also a problem. Operating expenses per barrel produced have risen 62 percent since 2011.
Such high costs mean that with production falling some older fields lose money and are shut down permanently, while some projects to develop new fields have been put on hold, including a large project led by Chevron, called Rosebank, on the frontier west of the Shetland Islands.
Lower oil prices may further discourage investment in expensive new projects while accelerating the trend of closing down old fields.
Some contractors are already responding to a slowdown in activity and higher costs. Wood Group, for example, has cut pay by 10 percent for its contract personnel. “Over all, we are talking about several thousand people from Wood Group alone,” said Mr. Keiller, the company’s chief executive.
The concerns about the health of the British oil and gas business are occurring in the late stages of what has been a boom driven by high oil prices and the ability to use new technology to develop several big discoveries.
Last year, the level of investment in offshore oil and gas was the highest in three decades, at £14.4 billion, or about $23 billion, according to Oil & Gas UK, an industry group, and the spending is expected to generate substantial new output. Oil & Gas UK estimates that the industry supports about 450,000 jobs in Britain, many of them in Scotland and northern England, and generates close to £15 billion a year in exports of equipment and services.
But the big investments mask less sanguine trends like poor exploration results and increasing shutdowns related to the need for maintenance.
Continue reading the main storyContinue reading the main storyContinue reading the main story
Analysts say there could be a slight lift in British output over the next few years because of the recent rise in investment. But the increase is unlikely to last and production may fall to below one million barrels a day by 2023, less than a fourth of the peak level in 1999, according to Wood Mackenzie.
Many of the big new fields in British waters have been known about for years but developed only recently because of advances in technology.
The frontier zone in British waters is the margins of the Atlantic Ocean, west of the Shetland Islands, where severe weather and other challenges raise the costs. Total, for instance, is developing a group of gas fields called Laggan-Tormore about 70 miles west of Shetland. Laggan was discovered in 1986.
Though Total is a big investor in new fields, Mr. de Viviès said that simply having the right economic incentives for companies to keep old fields in production and to drill into new small fields near existing ones might be more effective in extending the industry’s life than any other measures.
While executives would like to see taxes reduced, they also acknowledge that at a time of high prices, the industry has allowed costs to rise more than they should have.
Mr. de Viviès noted, for example, that nearly identical scaffolding for maintenance work costs twice as much at offshore facilities as it costs at the company’s onshore refineries. That has to change, he said. “The issue is not to make haute couture,” he said. “We need to have more standardized equipment.”
By Stanley Reedoct
