Challenging times for North Sea operators

A collapse in exploration activity, rising costs, and lack of co-operation between operators are damaging the North Sea oil and gas industry. Peter McCusker reports

Danny Lawson/PA Wire A North Sea oil rig
A North Sea oil rig

New technologies, Government tax breaks and oil at $100 a barrel have prompted a major splurge of investment in the United Kingdom Continental Shelf.

£13.5bn was spent in the North Sea in 2013 leading to a 44% rise in new starts, and this is set to continue with around £10bn being spent and 14 new fields coming on stream this year.

The Government’s latest licensing round, which closed in December, also demonstrated an increasing level of interest, with 217 offers made, it was the most subscribed for 50 years.

However, 2013 also saw the postponement of two major projects in the North Sea, worth a total of £8bn, due to rising technology, equipment and manpower costs.

Many of the smaller operators are struggling to raise capital and activity has fallen dramatically with just 15 exploration wells started in 2013, compared to 44 in 2008.

Those drilled did not produce as anticipated, and there is growing concern that lack of collaboration between exploration and production companies could leave reserves stranded.

Neil Kirkbride, managing director of Bel Valves in Newcastle, one of the industry’s leading oil and gas supply chain companies, also sits on the board Oil & Gas UK.

He said: “In the last few years there has been renewed investment in some major projects helped by Government tax breaks.

“These tax breaks and advances in technology, along with the price of oil are making previously sub-economic fields attractive and there is a lot of work going on in this area.

“But the North Sea is a very mature basin and the opportunities for big finds are reducing. There has been a collapse in the level of drilling and we have to find a way of making the basin attractive to explore in, as well as increasing co-operation between the production and exploration companies.”

More than 40 billion barrels of oil equivalent have already been produced from the North Sea and estimates of remaining reserves are between 12 billion and 24 billion, based on what may be viable to extract at the prevailing oil price.

Last week business advisory firm Deloitte released its 2013 review of the North Sea industry and reported that the increased investment had resulted in a five-year high in the number of fields starting production.

In early January industry analysts Wood Mackenzie published its 2013 review. Lindsay Wexelstein, head of UK Upstream Research for Wood Mackenzie said: “We anticipate £21.3bn will be spent on capital investment across 2013 and 2014.

“Due to poor exploration performance in recent years, capital investment is unlikely to be sustained at the current high levels beyond 2015.”

Oil & Gas UK chief executive Malcolm Webb said: “Deloitte’s latest report, together with latest figures from Wood Mackenzie’s annual review and data released by the Department of Energy and Climate Change (DECC), demonstrates the parlous state of exploration in the UK continental shelf (UKCS).

“We are not drilling enough wells in UK offshore waters and those that we are drilling we are not finding enough oil and gas. Contrast this against the 41% uplift in drilling activity on the Norwegian side of the shelf and it’s clear to see now is the time for concerted action by DECC, HM Treasury and the industry if we are to maximise economic recovery of our offshore oil and gas resources and sustain future production.

“Our members tell us that drilling rig availability and the ability of smaller companies to secure equity capital are major hurdles. 

“The paradox is that in 2013, the UK saw a record level of capital investment at over £13bn. We now have a two speed North Sea. On the one hand we have seen tremendously strong development activity from a small number of large, highly robust projects plus a greater number of smaller ones only made commercial by targeted reductions in unsustainably high tax rates, ranging from 62% to 81%.”

Last year’s £13.5bn capital investment was driven by a small number of very large developments with Statoil investing £4bn in the Mariner heavy oil field, BP investing in Clair Ridge, and the Schiehallion redevelopment, and Total investing £3 billion in Laggan & Tormore.

These projects have been encouraged by a range of tax allowances which are making marginal investments possible.

These include tax breaks for projects West of Shetland, brownfields, small fields, HPHT (high pressure and high temperature), and deep and shallow gas.

George Rafferty, chief executive of Durham-based NOF Energy, which looks after the interest of hundreds of North East oil and gas supply chain companies, acknowledges the current challenges but says its members are benefiting from the record investment levels.

He said: “In spite of the difficulties relating to drilling activity as highlighted in Deloitte’s annual North West Europe Review we remain positive about the future for the North Sea oil and gas sector and the many opportunities it will bring to our members. 

“Elements of the record investment in the UK Continental Shelf are starting to feed down to the supply chain, which is having a positive effect on businesses operating out of this region.

“However, it is essential that this flow is maintained and the industry is not faced with blockages as a result of challenges such as low drilling activity and cost increases, which if they begin to spiral can cause projects to be cancelled. 

 “In addition, we have to make sure Government and the industry work in parity, which is the core message of Sir Ian Wood’s Oil & Gas Review encouraging a collaborative approach between the UK sectors, the Department for Energy and Climate Change and the Treasury.

“While the relationship between the industry and Government is better than it was two or three years ago, there are still concerns, which are not in the spirit of Sir Ian’s recommendations.  

“Improvements in the relationship between the industry and Government will play a part in building the momentum of operations in the North Sea, which will ensure that the UKCS can fulfil its core role at the heart of the UK’s energy requirements.”

North Sea operators have raised concerns over next year’s Scottish Referendum. They want clarification on what the future might hold for the sector on tax, the position of Scotland in the EU, regulatory issues and access to finance for banking.

Richard Cockburn, a partner at Bond Dickinson law firm, is based in Aberdeen and is a regular visitor to its Newcastle offices. He said: “There will undoubtedly be uncertainty about independence until everyone knows what the outcome of the referendum will be and, accordingly, there will be a chill in some investment.

“However it won’t be a major reason driving investment decisions because the majority of oil and gas companies which operate in the North Sea are used to working in much more difficult environments and won’t necessarily be put off by the prospect of a vote for independence.

“What might be worrying operators a little bit is the possibility of a new independent regulatory and licensing regime which would increase costs.

“With that in mind if a development is marginal at the moment there might be a preference to wait but on the whole for most operators it is business as usual.

“What I think may be chilling investment is that the North Sea can be a much harsher and more expensive regime to operate in than other parts of the world. Many of these oil and gas companies have a global portfolio and if they are looking for the most cost-effective way to add to their reserves then the North Sea is not always the most competitive place to win that contest.”

Statoil’s postponement of its £4bn Bressay heavy oil field last year was blamed on the high costs of the projects as was Chevron’s Rosebank scheme. This comes as almost all of the oil majors are looking closely at their capital expenditure with the cost of recovering oil rising steeply across the globe.

Kirkbride said: “Costs pressures are a considerable challenge for North Sea companies. It is one of the most expensive offshore provinces in the world. The unit costs per barrel have risen fourfold over the past decade.

“Declining production and production efficiency has exacerbated the situation, as has fierce global competition for resources – both people and equipment.

He added: “Current levels of activity are very good news for businesses in the supply chain up and down the country. It’s good for jobs, energy security of supply and for Government revenues. However, we need to see more development projects being brought forward quickly if we are to sustain capital expenditure in future years. There is concern that such development plans are not maturing fast enough.”

With over 60,000 North East people employed in the industry and hundreds of North East businesses benefiting from the recent boom in the industry, all will be hoping the Government and the industry can work together to ensure its long-term survival.

Total expands its North Sea operations

French oil giant Total is stepping up production in the North Sea as it looks to increase its world-wide production levels by 50% to 3m barrels a day by 2017.

It is currently spending £3bn in its Laggan & Tormore field. This field west of the Shetland Isles is one of the most challenging fields ever developed on the United Kingdom Continental Shelf and will open up later this year

Jeremy Cutler, head of technology innovation for Total, said: “This is a big, pioneering project, which demonstrates audacity and boldness in entering into an area of the North Sea which has not been opened up before. This field had been looked at previously in 1985 and 1995 but the technology has moved on since then to allow us to develop the project.

“At 600m it is the deepest project to ever be brought forward in the North Sea. It’s a harsh environment with wind, waves and high temperatures.”

Total has further plans to develop the Tobermory field, which is almost 200km north of Laggan & Tormore, in a subsea tie-back arrangement.

Cutler added: “This is where the North Sea has got to. It’s a high-cost basin and the operators have a major challenge to make the developments work.

“Costs are being driven down, but we have to be choosier and drill for smaller targets in an effort to squeeze out the last hydrocarbons.”

Total says it has created spare capacity in the infrastructure it has developed for this field to allow new operators to take advantage. The pipelines feed back to a processing terminal on the Shetland Isles.

Greater co-operation between operators needed

Earlier this year the Coalition appointed Sir Ian Wood founder of Aberdeen-based oilfield services giant the Wood Group to look at how to maximise the potential of the UKCS.

His full report is due out this month but his interim findings condemned current industry practises which balk at sharing infrastructure, whilst criticising the prevailing attitudes of mistrust that exist between oil companies.

The travails of London-based Serica Energy, which discovered the Columbus gas field in the UK sector of the North Sea in 2006, demonstrates this problem.

Serica is still trying to figure out how to get the gas ashore as it has not been able to reach agreement to use the pipelines run by BG to an online terminal. Consequently its share price has plummeted by almost 90%.

This is believed to be one of 20 similar examples in the last three years on the UKCS.

The majors, who launched the North Sea industry, still control much of the infrastructure – the big platforms, pipelines and terminals – but many recent discoveries are being made by the smaller and more recent entrants such as Serica.

And the fields they find are often too small to justify standalone developments, so need to be linked to existing production hubs.

Sir Ian is recommending the appointment of a new regulator with powers to encourage greater collaboration between operators.

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