The triple battles of energy security, sustainability and sovereignty have come head-to-head in recent weeks over a commodity whose use everyone should be working to minimise but whose exploitation everybody is eager to maximise. Jon Herbert considers the future of oil under the seas around Britain.

The commonly held wisdom is that North Sea oil is a resource that is running out quickly. Remote satellite reserves that were once too uneconomical to exploit for technical and financial reasons are now viable energy sources. However, the scale of any future, and until quite recently hard-to-explore, major new reserves is the subject of an intense debate that has political as well as economic and engineering dimensions.

South of the border, oil and gas are seen as a depleting asset that will be gone by the middle of the century. However, they are essential to the nation’s energy mix for as long as they last. We remain heavily dependent on hydrocarbons, which meet 70% of our energy needs. Half come from the North Sea. Boosting production levels is also tied in with two pilot carbon capture and storage (CCS) programmes to mitigate emissions to the atmosphere.

North of the border, oil reserves that could lie deep under Scotland’s enormous coastal water area stretching up towards the Arctic Circle and half way to Scandinavia are viewed more optimistically. Operating depths of 2km and lower oil field pressure problems in some areas caused by earlier exploitation are major challenges that modern technology, so far, has been able to overcome. Economic extraction costs are a key issue that could limit output in some cases. However, north of the border there is also a perception that these are neglected assets that now deserve more much investment and attention.

Of late, that viewpoint has been shared in both London and Edinburgh. Production peaked just before the millennium and has fallen off steeply since. It is time to act, irrespective of politics.

Carbon-based black gold

Over the last 40 years, the oil industry has brought Britain great wealth, both as profits and taxes. Today, the industry is much more fragmented, with many smaller, but innovative, companies having taken over the remaining assets first exploited by the big oil conglomerates. Oil, one of nature’s carbon-based fossil fuels, is seen by the Government in Whitehall as essential to the UK’s mixed energy policy. This is designed to ensure access to secure, affordable energy until something better comes along — renewables, second-generation nuclear power, or fracking.

This feeling of vulnerability has been acerbated by international political instability. It is unsettling when the nation’s energy users have to rely on liquefied natural gas (LNG) tankers from the Gulf periodically calling into Milford Haven to top up the country’s fuel supplies. To find out exactly how Britain’s oil resources can best be exploited in future, in 2013 the Government commissioned the Wood Review, conducted by Sir Ian Wood, who was chairman of the Wood Group from 1982 to 2012, and CEO from 1967 to 2006.

When Energy Secretary Ed Davey requested the first review of its kind for 20 years, he noted that the sector was facing “unprecedented challenges that require new thinking”. He also said that the country had to take advantage of the “huge opportunity” to make the most of its remaining fields.

Review recommendations

Early in 2014, Sir Ian reported his findings and made a series of suggestions. He wants to see much better collaboration between the energy industry and the Government — wherever that is seated after the independence referendum. A new regulator — the Oil and Gas Authority (OGA) — will also be established, based in Aberdeen to oversee the industry’s future. His full recommendations include a drive to revitalise exploration to make sure that all recoverable oil and gas reserves are found and fully exploited. Another priority is to find new ways of ensuring that operators maximise recovery from fields for which they hold licences.

Meanwhile, developing reserves on a regional geographical basis, rather than as individual fragmented fields, is also seen in the review to be a priority if their full value is to be realised. Existing infrastructure needs attention, too. Investing to prolong the life of facilities, treatment plants, pipelines and other ancillary equipment is essential. Finally, the best use of technology must also be made to maximise extraction.

Sir Ian calculates that his total package of incentives will add at least £200 billion to the British economy over the next two decades. He is reported as saying that “If we don’t get it right, history will rightly judge us harshly, and particularly Aberdeen and the north east of Scotland.”

London-centric

Prime Minister David Cameron says the UK Government is best placed to support the industry and make it profitable to extract increasingly hard-to-reach oil and gas. The Government estimates that implementing the recommendations will add an extra three to four billion barrels of oil to the long-term total and boost output by a third. It will also help to boost the industry’s existing 450,000 jobs. Current investment levels stand at a record £14 billion. Decommissioning costs are also a major issue. Decommissioning relief certainty for old wells introduced in October 2013 is said to be worth up to £20 billion.

However, tax revenues for the whole of the UK in 2012/13 from oil and gas were £4.7 billion lower than the previous year — a sharp decline of some 40%. Efficiency has also fallen by 60%, costing the economy £6 billion.

Lies, damned lies and statistics

This is where it all begins to get a bit tricky, with widely differing estimations of what still lies below the seabed, what is extractable, and what it is worth.

In Sir Ian’s estimation, between 15 and 16.5 billion barrels are left, which could create a future income of between £1 trillion and £2 trillion. The UK Office for Budget Responsibility (OBR), founded as an impartial body, recently reduced its predicted tax revenues from £82.2 billion down to £61.6 billion between 2013/14 and 2040/41. It gave a maximum and minimum range of £82.2 billion and £40 billion, depending on achieved production levels.

The Scottish Government also lowered its own estimates of tax revenues for the next five years in May 2014, but not as low as the OBR. First Minister Alex Salmond called into question the OBR’s estimates of reserves, pointing out that Oil & Gas UK predicts a much higher level, and other sources, such as Aberdeen University, predict potential reserves of more than 30 billion barrels. Oil & Gas UK, which describes itself as the voice of the offshore industry, believes that “there is a broader range of possible outcomes and we remain of the view that there could be up to 24 billion barrels of oil and gas to recover”.

Another body disputing the assessment and saying that future reserves could be six times larger, is N.56. Describing itself as an “apolitical business organisation”, it says revenues could reach £365 billion if recommendations are implemented. N.56 wants a more competitive North Sea tax regime and the transfer of taxation decision-making and regulations to Aberdeen.

What could limit the exploitation of these resources, however, is economic cut-off costs.

Second coming

The prospect of a second oil boom for Scotland has also been predicted, centred on geological basins to the west of Shetland where exploration has been more difficult than in the North Sea. Exploration began in the 1970s, with the Clair field discovered in 1977. Drilling in the Faeroe-Shetland Basin continued unsuccessfully in the 1980s and early 1990s until the Foinaven and Schiehallion fields were discovered in 1992 and 1993. Interest peaked in 2004.

Professor John Howell of Aberdeen University forecasts huge development potential in the area, which could lead to a second oil boom, albeit one with challenges and uncertainty. He points out that Total and BP are investing in the likelihood of more finds west of Shetland. He adds: “All areas were once frontiers, at the limit of what the engineers could manage and what the geologists could understand.”

Evidence that Scotland’s oil fields may be extensive is backed by recent news that the new Bentley Field, east of Shetland, could be one of the North Sea’s biggest untapped resources. From 2015 until 2050 it will produce oil from reserves estimated to total up to 777 million barrels at a rate of 57,000 barrels of oil a day. Enhanced oil recovery techniques will be used from the outset.

Chief executive Rupert Cole of drilling company Xcite Energy said: “With the industry beginning to recognise what can be achieved with an enhanced partnership model and the collaboration initiatives noted from the recently published Wood Review, I am very pleased that the efforts of the team are translating into commercial agreements to develop the Bentley field.”

SNP MSP Maureen Watt added, “The record levels of investment that oil and gas companies have been making in the waters off Scotland have not happened by accident.” She also said: “It is also particularly pleasing to see that oil companies have taken Sir Ian’s recommendations to heart and are making an effort to collaborate more closely.”

Energy fund

Alex Salmond has also called for a Norwegian-style approach if Scotland becomes independent, whereby roughly a tenth of oil and gas tax revenues would be invested in a two-part oil fund, similar to Norway’s national energy fund. Totalling about £1 billion a year, this would create a £30 billion sovereign wealth pot over a generation, he said. The First Minister added that an independent Scotland would “run oil and gas a great deal better” than Westminster, and needed “the Norwegian approach to things as opposed to the Westminster approach”. This would comprise a short-term “stabilisation” fund to buffer against oil market volatility, and a long-term savings fund to benefit future generations.

Norway’s oil fund, created by the Norwegian Government in 1990, is now worth around £500 billion. The fund is said to own 1% of the entire world’s stocks and is big enough to make every Norwegian citizen a kroner millionaire. Most Norwegians are seemingly very content with this arrangement, which calls for great trust in their Government.

That is where the debate lies. How big are Britain’s reserves, where do they lie and what will they cost? Who will control them and who will invest in them? How far can technology provide the answers?

First published by Croner-I on 18 September 2014