The North Sea’s high vulnerability to low oil prices is putting platforms and livelihoods at risk. However, wringing out every economic drop, stepping up the search for replacement reserves and exporting the UK’s depleted well decommissioning expertise are key to the Government’s secure energy strategy. Jon Herbert looks at ideas that could draw in small innovative firms.
The North Sea oil and gas basin is ageing; serious measures are needed to keep it from its dotage. The figures are grim. Last year, £1 billion was invested to replace depleted wells compared with £8 billion five years ago, according to industry body, Oil and Gas UK. In 2015, exploration rates were the highest for 10 years.
Yet despite lower costs, and higher productivity and efficiency, the number of fields expected to end output by 2020 has risen by a fifth. Unless the oil price rises above $30 a barrel during 2016, some 40% of UK Continental Shelf (UKCS) oil fields expect to operate at a loss. This in turn works against further exploration and investment.
The “super-mature” North Sea will need a super-human effort if it is to turn the corner. However, with 40 years of experience in one of the most stable parts of the world, the North Sea has some things going for it. Oil and Gas UK CEO, Deirdre Michie believes “the prize is worth fighting for”.
In January, the Government announced steps to tackle some of the underlying problems. Ironically, output rose by 10% last year. Average costs for exploration wells fell from £44 million to £30 million in a year.
The Government says that “the broad shoulders of the UK are 100% behind our oil and gas industry”, and wants to maximise the basin’s economic life. To its £1.3 billion tax package introduced in the March 2015 budget, it is adding other financial incentives. One will reward innovative SMEs with or without previous energy-related experience that can bring new solutions to old problems.
In parallel, as part of what Energy and Climate Change Secretary Amber Rudd has described as “a bridge to the future”, exporting the UK’s highly-regarded decommissioning expertise is seen as a major business opportunity that could target many other parts of the world which are likely to spend more on depleted well shut-ins (closures) than new facilities.
While some 150 production platforms are seen to be at serious risk in the next decade, first gas is now flowing from the new Lagan and Tormore fields 125km northwest of Shetland in the stormy north Atlantic. Described as the largest UK construction programme since the London Olympics, the project, which will supply 8% of the UK’s gas needs, has been in the pipeline for several decades. Adverse weather delayed the project by more than a year, adding millions to its costs.
However, similar rich reserves could be waiting on near the lip of the UKCS where the seafloor plunges from circa 120m to more than 600m. West of Shetland is thought to hold a fifth of the UK’s remaining oil and gas reserves. Developed as a £3.5 billion investment by French-based Total, Laggan and Tormore will produce 90,000 barrels of oil equivalent a day. This will be piped to the mainland and the national gas grid to meet the needs of two million homes. The Shetland Gas Plant is next to Sullom Voe’s oil terminal.
Total’s UK Managing Director Elisabeth Proust says the project will require “extremely good performance in production” and will be “extremely strict on cost”. However, importantly she adds that while high costs are a big investment issue in British water, the UK remains attractive because of its established working practices and the reliability of its skilled supply chain. As she puts it, “there is still prospectivity”.
Total has also announced that it will drill an exploration well east of Shetland during 2016 on a project called Sween.
Prime Minister announces incentive package
Joined-up action between companies is seen as one key to North Sea longevity. The Oil and Gas Authority (OGA) was formed recently as regulator responsible for improving industry collaboration and productivity, attracting investment, creating jobs and reinforcing global competitiveness.
The Petroleum Act 1998, amended by the Infrastructure Act 2015, requires the secretary of state to produce a strategy or strategies designed to “maximise economic recovery of our offshore oil and gas reserves” for Britain’s energy security and long-term economic outlook. The first MER (maximise economic recovery) strategy was put before Parliament in January and should come into force in April. It is seen as a legal document that the OGA will have powers to implement.
Meanwhile, speaking in Aberdeen, Prime Minister David Cameron recently announced a series of further measures, including steps to boost exploration activity. The Government is putting £20 million into a second round of new seismic surveys. The data is to be made public, backed by an extra £1 million for innovative data use to unlock new fields.
A new Oil and Gas Ambassador is also being appointed to improve UK company access to overseas export markets. His or her brief will be to promote the North Sea’s potential globally and encourage inward investment. Challenging targets will be set.
Decommissioning — new world opportunities
The second fact of life the Government hopes to address is that “pulling up stumps” is inevitable in maturing oil and gas basins. Therefore, during the summer, the OGA will publish a UKCS Decommissioning plan designed to put the Aberdeen-based service sector, worth an estimated £15 billion, in pole position to capitalise on huge international opportunities. The Natural Environmental Research Council will also invest £1 million in new projects supporting UK decommissioning and environmental management expertise development.
To involve progressive SMEs, Innovate UK’s “Energy Game Changer” will make £1.5 million available to micro-businesses and SMEs outside the energy sector that can bring radical solutions and disruptive technologies.
Problems undermining longevity in harsh metocean conditions include subsea corrosion, its detection and prevention. There are also opportunities in the innovative use of sensor technology, and the analysis and application of data gathered, including insights from big data. Funding is also being given to 3D visualisation facilities and to finance PhDs. In late January, Ms Rudd chaired a new oil and gas ministerial group that will co-ordinate the UK’s response to oil price falls, and exports, skills and investment issues. A new UK Oil and Gas workforce plan will be released during spring.
UK platforms face early decommissioning peak
The high cost of North Sea production platforms make them extremely vulnerable. A decommissioning peak is expected between 2019 and 2026. In comparison, Norway’s decommissioning peak will be between 2030 and 2040. Consultancy Douglas-Westwood estimates the number of UK platform decommissioning projects will be circa 150. Wood Mackenzie finds that 1 in 7, or 220,000 out of circa 1.5 million, UK barrels of oil are produced daily at a loss.
Another assessment, commissioned by the Financial Times from Company Watch, suggests that 50% of North Sea operators are now working at losses that totalled £6.4 billion during the last year.
However, high decommissioning costs could be cut by an estimated £5 billion using a “super-heavy-lift vessels” that can heft entire platform topsides, or steel jackets beneath, for shipping, breaking and recycling ashore. This is less expensive than at sea. Pioneering Spirit, the UK’s first super-heavy vessel weighing in at 48,000 tonnes is being fitted with lifting gear in Rotterdam and is expected to prove itself to the industry during 2016.
Redundant platforms must still meet health and safety regulations. Costly annual maintenance bills make closure an attractive option. By one estimate, the full cost of shut-ins could be £54 billion a year for the next 50 years.
Hanging in there and expanding
Many operators are hanging on in the hope or expectation that prices will recover in the foreseeable future. Royal Dutch Shell’s CEO, Ben Van Beurden, is among them. He predicts a doubling of world oil prices over the next few decades. This is important to the takeover he has driven of the giant BG Group, which had been discussed for many years. The deal was finalised on 16 February. His logic is that because BG has moved out of its investment phase and into production and cash flow, it will make Shell more resilient to oil price changes.
Analysts and shareholders are more sanguine. But the Shell boss is adamant that oil demand will eventually rise and more supply will be needed again. Questioned on diverse predictions that future oil prices will dip to $20 a barrel or rise to $120, he notes that both figures will be right eventually.
Meanwhile, many hard North Sea decisions will have to be taken.
Last updated 14 March 2016