The Fuse

North Sea Revival Likely to Be Temporary

by Nick Cunningham | September 21, 2017

The North Sea oil industry has pulled back from the brink, averting a worst-case scenario that appeared likely a few years ago. When oil prices fell from $100 per barrel down to $50, high-cost North Sea production looked to be the most vulnerable to the market downturn. Already suffering from a nearly two-decade decline in oil production, the North Sea had to deal with plunging oil prices and the rising cost of decommissioning. This mix threatened to set off a cascading series of shutdowns.

The North Sea is seeing a revival, thanks to lower production costs, new investment, a slight uptick in output, and newfound optimism.

The North Sea, however, is seeing a revival, thanks to lower production costs, new investment, a slight uptick in output, and newfound optimism. Nevertheless, the long-term prospects for the North Sea still appear grim, with aging fields and only a few new sources of oil supply.

The North Sea comeback

North Sea oil fields have been in production for decades, and many have seen much of their output erode over time. Output in the UK’s North Sea peaked in the late 1990s at over 3 million barrels per day (mbd), and has fallen by more than two-thirds to just 900,000 barrels per day (b/d) in 2014.

The UK’s production has climbed modestly since then, rising to 1.06 mbd in 2016. The increase can be attributed to a handful of projects that came online, most of which had been planned years earlier when Brent crude traded above $100 per barrel. The production gains did not come as a surprise, and they did not do much to dispel the belief that the North Sea was essentially in permanent decline.

In early September, however, the chief executives of two oil majors said that the North Sea outlook was no longer as dismal as before. BP’s CEO Bob Dudley told an industry conference that his company was “back to growth” in the North Sea, a region that was still “one of the crown jewels” for the British oil giant. BP’s production costs in the North Sea have declined by half, falling from $30 per barrel in 2014 to just $15 today. BP hopes to further chip away at those costs, with an objective to reach just $12 per barrel by 2020. Against this backdrop, the company has several projects in the North Sea in the works: BP’s Quad 204 project, a redevelopment of its Schiehallion field with new technology, came online earlier this year and will continue to ramp up to production levels of 130,000 b/d. The oil giant will also add another 100,000 b/d next year with from its Clair Ridge project.

North Sea oil producers have postponed the decommissioning of 17 old projects over the past year, having successfully extended the life of aging oil fields.

Ben van Beurden, CEO of Royal Dutch Shell, echoed his counterpart’s optimism. In the last few years, he noted, the North Sea faced a “death spiral” due to the prospect of large-scale infrastructure decommissioning, which would force producers to leave oil in the ground, but “that big risk…looks to have been averted.” According to Oil & Gas UK, an industry trade group, North Sea oil producers have postponed the decommissioning of 17 old projects over the past year, having successfully extended the life of aging oil fields.

In fact, interest in the North Sea has picked up. The North Sea has seen an estimated $16 billion in deals so far this year, putting it third behind U.S. shale and Canadian oil sands in total energy deal activity, according to Wood Mackenzie, reinforcing the argument that the area is not dead yet. The most significant of the bunch was the August announcement that Total SA would purchase A.P. Moeller-Maersk, a Danish oil company. The $5 billion deal is widely seen as a major bet on the North Sea, and it will turn Total into the second largest producer in the North Sea after Statoil.

Long-term decline

Despite the optimistic comments from the executives of BP and Shell, the recent production increases will likely be only a brief respite in the North Sea’s long-term decline. Catherine MacGregor, the president of drilling for Schlumberger, says that the UK “faces a big cut in production post-2020” without new upstream investment, according to the FT.

The uptick in output over the last two years are the fruits of projects planned with $100 oil in mind. While the oil majors boast about the profitability of the North Sea at $50 oil, very few new projects are moving forward. According to Oil & Gas UK, only one new project sanctioned in the first half of 2017, compared to 22 in 2012.

The region still remains a costly place to produce oil. Even the projects under development, such as BP’s Quad 204, are aimed at squeezing more oil out of existing fields that have been in production, sometimes for decades. Oil explorers are not discovering new giant oil fields.

Moreover, the recent comments from Shell’s CEO, for instance, are not as bullish as they might seem. Despite the company’s cost savings, Shell decided earlier this year to sell off a series of fields to a Chrysaor, an independent oil and gas company backed by private-equity. The $3.8 billion transaction will reduce Shell’s North Sea production by 40 percent. Shell said that it plans on spending $600 million to $1 billion annually on the North Sea in the years ahead, but that amount will only keep the company’s production in the area flat at 150,000 barrels of oil equivalent per day.

Instead of an oil and gas production revival occurring, the North Sea’s growth market will come from decommissioning.

Instead of an oil and gas production revival occurring, the North Sea’s growth market will come from decommissioning. Over the next ten years, the oil industry will remove more than 100 platforms from the North Sea, plug and abandon over 1,800 wells, and shut about 7,500 kilometers of pipeline, according to Oil & Gas UK. In the UK alone, the industry will spend more than £17.6 billion between 2016 and 2025 on decommissioning.

A new study from the University of Edinburgh’s School of GeoSciences finds that the UK only has about 10 percent of its original oil and gas reserves remaining, and that the industry is entering its final decade of production. Oil & Gas UK, the industry trade group, only vaguely disputed these findings, issuing a statement that trumpeted the recent uptick in production. Oil & Gas UK published a dire report in early 2016, warning that low oil prices and lack of investment put the North Sea oil industry “at the edge of a chasm.” The oil market has rebounded since then and the North Sea has become more competitive, but it is not clear that the region’s reversal of fortunes will last.

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