At the beginning of this year, discussion of the North Sea was dominated by the joint industry government initiatives to ensure the area had a future in a market where depressed oil prices were luring investment dollars to less developed regions with larger reserves and lower costs.
Since then, oil prices have risen to over $30 a barrel, and prospects for the North Sea are looking as good now as at any time in the past decade, because oil companies have boosted their investment plans in the interim.
The UK Offshore Operators’ Association (UKOOA), which represents the North Sea oil firms, conducted a survey of its members’ investment intentions in September, which indicated that capital expenditure in the UK sector next year could exceed £4bn. This would represent a £1bn increase over this year’s levels — and a £900m improvement on what the firms anticipated they would spend on projects in 2001.
The two biggest operators in the North Sea, BP and Shell, are leading the way. ‘Our aspiration is to invest $4bn over the next four years, whereas previously we were talking about $650m a year,’ says a BP spokesman in Aberdeen. ‘There is more confidence to invest and take commercial risk.’
While he stressed that all new projects would continue to be assessed for commercial viability against a long-term benchmark oil price rather than the current elevated levels, over the past year BP has raised this from $14 to $16 a barrel.
The projects that will account for next year’s expenditure include the Magnus enhanced oil recovery scheme, which will pipe gas from the Foinaven field in the Atlantic via the Shetlands to inject into the Magnus reservoir. The scheme is intended to recover up to 100 million additional barrels from the Magnus field, the most northern in the North Sea, and also fuel a new power station in Sullom Voe.
The spokesman adds that the company will also be spending money on drawing up a development plan for the giant Clair field, west of Shetland, a number of small gas fields in the southern sector and a second phase of development in Foinaven.
Over the four-year period, BP is also looking at a number of projects that could change fundamentally the way in which operations are conducted in the North Sea.
These include providing power to offshore platforms from land — which would dispense with the need for gas turbines and associated equipment on the structures — and laying a broad-band fibreoptic cable to clusters of installations to bring them online. This has the potential for truly revolutionary change: it would theoretically enable the drilling of a well in the North Sea to be controlled from an office in Houston.
Meanwhile, Shell announced in September that it would raise spending on North Sea projects to $1.2bn in 2001, a 50% increase on its original budget for the year, and a 20% rise on what it will spend this year. The company said it would target the expenditure on six projects and identified four of them: Golden Eye, Mandarin, Goosander in the central region of the North Sea and Penguins in the northern sector.
The surge in investment will provide a welcome boost to employment in the industry. The UKOOA said next year’s expected increase in spending should create an additional 25,000 jobs on top of the 270,000 supported by the present level of activity and investment (including expenditure on operations and exploration).
Danny Carrigan, the national officer with the Amalgamated Engineering and Electrical Union, who sits on the 21-member Industry Leadership Team (ILT), says: ‘It is impossible to overestimate the importance of this investment being realised, just for its effects on employment alone. We have been looking at a gloomy situation over the past couple of years, but now we have some real signs of an upturn and turnaround in job prospects.’
While high oil prices have undoubtedly been a key factor in the upturn, leading industry figures also attribute the improvement in outlook to recent initiatives to reduce costs through improving efficiency and developing new technologies. Many of these emerged from the workings of the Oil and Gas Industry Taskforce, set up by the then industry secretary Peter Mandelson in 1998 to devise strategies for the North Sea’s survival in an era of low oil prices, and are now being coordinated by its successor body Pilot.
Malcolm Brinded, managing director of Shell UK Exploration and Production, admits that the high oil prices have made a difference to the company’s decisions to invest in short-term projects, but also stresses that technological advances and reductions in operating costs have been important contributory factors.
Brinded, who is also co-chairman of the ILT, says that although it has taken some time for confidence to return to the UK Continental Shelf following the oil price collapse in 1998,’the work of Pilot and the combined efforts of firms throughout the supply chain are beginning to bear fruit.
Brinded comments: ‘The improving competitiveness of the UK is allowing operators to increase capital investment in the face of tough global competition. I am increasingly confident that Pilot’s long-term aspirations for sustained investment and employment in the UK oil and gas industry will be realised.’
The BP spokesman points to two of the initiatives taken forward by Pilot which are already having a positive impact on North Sea investment. The first is Pilot’s website for asset trading, which enables small niche operators easily to identify and acquire ‘acreage that will never meet a major’s investment criteria’.
He says BP has been one of the biggest users of the site to date. The second is the technology facilitator, the forum that has allowed operators to invite companies to come up with ideas for the viable development of marginal reserves. BP is now assessing a number of proposals it has received through the facilitator for a ‘difficult’ reservoir that could nevertheless yield up to one billion barrels.
From the perspective of one of the leading engineering contractors in the industry, Sir Ian Wood, chief executive of the Wood Group and co-chairman of the ILT, stresses the importance of the UK’s constantly developing skills base in securing the investment.
‘We have the latest technology and skills to respond rapidly and efficiently to new projects,’ says Wood. ‘For example, the UK holds the world record for the fastest subsea tieback to a satellite development. These skills allow us to remain competitive and are the basis of us winning export orders.’
David Smith, UKOOA president, says swifter development times, allied with the benefits of established infrastructure and fiscal stability, provide compelling reasons to invest.
So, while there is a general consensus in the industry that the present oil price is unsustainable — most of the big names are anticipating a severe correction next year — there is nevertheless a growing confidence that the North Sea is now on course to meet Pilot’s target of producing the equivalent of roughly three million barrels of oil a day by 2010.