North Sea operators rise to challenges facing the industry

Despite record levels of investment, the North Sea oil and gas industry is facing some major challenges. Peter McCusker reports on efforts to secure its long-term future

Oil barrels
Oil barrels

By the end of the year over £13bn will have been spent developing new infrastructure to recover the North Sea’s remaining oil and gas reserves creating thousands of new jobs in Aberdeen and North East England.

The OGN group on Newcastle has created 600 jobs on the back of a string of platform fabrication contracts and subsea companies like BEL Valves on Tyneside have dramatically increased job numbers.

Industry body Oil & Gas UK estimates by the end of the decade over £100bn will be spent on the United Kingdom Continental Shelf (UKCS) with production set to rise from 1.2 million barrels of oil equivalent a day (boe) up to 2 million boe by the end of the decade.

The annual Aberdeen and Grampian Chamber of Commerce industry survey released last week highlighted the impact of this rapid expansion, with 98% of contractors looking to recruit staff.

This is mirrored in the region with offshore group Subsea North East and NOF Energy reporting significant skills shortages being one of the main drawbacks to further growth.

This staff shortage is having a knock-on impact on salaries which increased by 6% over the last year – more than three times the national average.

And these wage pressures are feeding into a general picture of rapidly increasing exploration and production costs.

A new report from accountants and business advisors Ernst & Young finds that the cost to find a barrel of oil equivalent jumped nearly 30% in 2012, to $21.83 (£13.30) per boe from $16.90 (£10.33) per boe in 2011.

North Sea operators are also raising 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.

All this comes amid signs of a downward pressure on the price of oil following the recent nuclear agreement with Iran and the easing of sanctions.

These strengthening headwinds have been blamed for the postponement of two major North Sea new field developments – equating to over £10bn of investment – in the last two weeks (see panel).

Kenny Paton, oil and gas partner at Bond Dickinson law firm, said: “The Chamber of Commerce report, on the face of it, points to a buoyant industry but when you scratch beneath the surface a number of significant challenges are revealed.

“Production has fallen, exploration is worryingly low and rising costs may impact those developments which it was hoped might soon replace some of the diminishing fields.

“In the last week alone Statoil and Chevron have announced delays to the development of the Bressay and Rosebank fields in which more than $15bn was to be invested.”

George Rafferty, chief executive of Durham-based NOF Energy, which represents the interests of almost 500 supply chain companies said: “Our members are still extremely busy, but some are sounding a note of caution as projects are being delayed due to rising costs.

“Some of our board members say the major operators are looking closely at their capital expenditure and there seems to be a bit of a slowing down, but, as yet there are no signs of the bursting of the bubble.

“A lot of costs are increasing, but the supply chain companies are still very busy.”

Paton and Rafferty believe more needs to be done to encourage further exploration and are supporting the recommendations from the interim findings of the Wood Report.

Over the last two years the Coalition Government has taken a close interest in the fortunes of the UK oil and gas industry.

This closer working relationship has led to a number of new initiatives and included a series of tax breaks to encourage further recovery activity on the UKCS.

The Government’s ‘heavy oil’ tax breaks led to Statoil’s £4bn development of the Mariner oil field, about 125km east of the Shetland Islands. This alone will support more than 20,000 jobs during its construction phase, and around 1,000 jobs a year during its 25-year lifespan.

Earlier this year the Coalition went a stage further and appointed Sir Ian Wood founder of Aberdeen-based oilfield services giant the Wood Group to plot a secure way forward.

Last month Sir Ian published his interim findings and said the Government and industry should pursue a new strategy, called Maximising Economic Recovery for the UK.

In it he condemns current industry practices which balk at sharing infrastructure and criticised the prevailing attitudes of mistrust that exist between oil companies.

He also recommended the appointment of a new regulator with powers to encourage greater collaboration between operators.

Paton added: “The basic problems which the industry is facing may need fundamental solutions including a much more active role for the Government via a regulator.

“It will be very important to attempt to encourage exploration and a more powerful regulator could engender significantly more co-operation between operators and between operators and service companies than currently exists.”

A spokesman for Oil & Gas UK said: “A new level of collaboration will be required in the future. The catalyst for that will be the proposed arm’s length regulatory body to take on the stewardship role for this new era. 

“We welcome this proposal as an opportunity to build on the existing regulatory regime and take it to a new level. The creation of a well-resourced arm’s length regulator will, we believe, provide the single-minded focus required to deliver the maximum economic benefit for the industry and the country in this critical next phase of the UKCS’ life.”

To date 40 billion boe reserves have been taken from the UKCS with an estimated 15-24 billion still in situ. The Government says that by 2030 the North Sea will still be providing 70% of UK energy needs.

But the remaining reserves in the North Sea are harder to get at, and require new skills and technologies, which is leading to rising costs in the basin.

The North East is at the forefront of efforts to develop these new technologies and this was recognised by Government’s support for a new £30m subsea technology centre on Tyneside earlier this year.

Andrew Hodgson, chief executive officer of Wallsend-based subsea remotely-operated vehicle company SMD, says the Government support for the industry is essential.

“The North East has a significant number of world-leading subsea technology companies. The decision to site the Neptune National Centre for Subsea and Offshore Engineering on Tyneside is a welcome step in allowing companies and universities to address the challenge, but we need to build a long-term programme supported by the government in order to keep the region and the UK in its leading position.”

Hodgson is also chairman of industry body Subsea North East and both it and NOF Energy have launched drives to attract more skilled engineers and technicians into the industry, particularly those from the declining ranks of the armed forces.

Rafferty concluded: “The industry is facing a number of challenges and we are looking at innovative ways of overcoming these.

“It is important for the North East and UK economy that we continue to do all we can to maximise recovery of the oil and gas reserves from the North Sea

“We need a strong regulator to ensure we operate the North Sea to the benefit of UK plc and not just the oil companies.”

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