Features editor
North Sea oil is facing a critical period, with low oil prices coinciding with falling production in older fields. Industry and government must tread carefully to ensure the industry, and its associated skills base, does not decline prematurely.
Oil and gas has been one of the most important props for the UK economy since the mid-1970s, when oil started flowing ashore from what’s now known as the Montrose field. But the volatility of oil and gas prices has continually changed the way that industry handles the oilfields, with cycles of investment tracking rising prices. Now, the industry is faced with two difficult situations running in parallel: hydrocarbon prices are low, and the older oilfields are beginning to run dry.
This doesn’t mean by any means that we are out of oil and gas. There are many fields on what’s known as the UK Continental Shelf (UKCS), which extends from the North Sea in the east to the West of Shetland Zone in the west and even beyond that; some of these areas, particularly in the west as we have reported before, have barely been exploited yet (although conditions there are extremely arduous). But Shell earlier this year announced that it is to start decommissioning one off the North Sea’s emblematic fields, Brent, which gives North Sea crude oil its trading name.
This, says a report from the industry body Oil & Gas UK (OGUK), could be a cause for alarm. Declining revenues resulting from low prices might make it difficult to attract investment into UKCS fields, it says; plus, as reserves decline, it becomes more expensive to get the remaining hydrocarbons out. The nightmare situation, it says, is that this leads oil companies to decide to decommission prematurely, while there are still reserves present that could be profitable to extract if the oil price rises again — which is far from implausible although difficult, if not impossible, to predict.
One reason this is such a serious problem is that North Sea infrastructure is often shared, so if one field is decommissioned it can have knock-on effects right across the region, which again might require difficult-to-obtain investment to overcome (such as installing equipment to bypass ‘dead’ wells so that functional ones can still access pipelines). This, the report states, means that the industry has to urgently revise the way it manages the UKCS; protecting critical infrastructure, improving the efficiency of production; and creating a competitive cost base.
It’s the last of these which may prove the trickiest and most controversial, as it is largely in the hands of the Treasury. When the background for its energy policy has for the past decade or so revolved around reducing the use of, and the country’s dependence on, fossil fuels; and encouraging the development of low-carbon alternatives, it’s hard to see how further tax breaks and assistance for dirty old oil and gas could be spun as anything other than a climb-down. Considering the cost of building nuclear power stations and how much assistance the government has had to promise to get that done (to the extent of being accused of providing illegal state aid) it could even be asked whether it’s affordable at all.
There are moves the industry can take, the report says. Drilling efficiency can be improved, for example by extending the reach of existing wells. But companies are trying to reduce costs at the same time; they must take great care to ensure that this does not lead to impact on safety or the loss of key skills. Meanwhile, it’s vital that exploration doesn’t come to a halt; seismic studies in the less-explored regions such as West of Shetland and the fringes of the Central North Sea Basin must continue (although this might require government support, which OGUK calls for).
Meanwhile, there has to be an increased focus on know-how in decommissioning. This is a huge, complex task and an industry in itself; all fields are finite and the UK has an opportunity to become the world’s centre of expertise in decommissioning, creating a new industry sector and source of income. But there has to be cooperation here: between companies and countries operating in the region and beyond. Finding ways to decommission fields in such a way that they could be reactivated economically may be one way to proceed; but this would require careful stewardship of skills and maintenance of the oil and gas supply chain, as will most of the options. We will look at the technological issues surrounding decommissioning in an upcoming cover feature.
The current situation shows once again the folly of allowing the market speculators to set the prices, unrelated to costs. Establishing speculative markets was initially thought to be a good idea of stabilising the fluctuating prices of commodities, but in reality they have been responsible for the excessively inflated prices we have witnessed for years.
The cost of production from even the deepest wells in the sea are around $24 so even the lower prices now being seen are enough. But of course, the oil companies have been having a bonanza that they have become accustomed to.
The second mistake was to sell off the UK’s oil fields to the private companies, unlike Norway that has been able to see the benefits of their oil revenues for their own purposes.
Current price levels are about what they should be, and are still possibly too high. The high prices have allowed the Gulf States to waste $billions on useless investments to the long term benefits of no one.
“the industry and its associated skills base” should be switching to marine renewables. That’s exactly what off-shore wind, wave, tidal and BGES needs to give UK plc a massive stake in the sustainable industries of the future. (jobs for life) Can’t they see the writing on the wall?
Those yards that built oil rigs should now be building a completely new industry, based on many of the same skills.
Why not pump ALL the fumes from coal plants into the depleted wells? It costs more to separate out the CO2, doesn’t it?
Time was when ‘England’s bread hung on Lancashire’s thread’. As the retail trade (rise of multi-site stores) became greedier and greedier (and Cathay Pacific made it as cheap & easy to fly to Bangkok as to take the train to Bradford…) UK manufacture of textiles became less and less profitable. Unless I am mistaken, I do not recall any textile begging bowls being rattled at HMG -(perhaps its only bankers and retailers who are so essential to the economy that they have to be protected from their in-ability to plan for the future?
Best
Mike B
In the meja today: reports that Mr Putin intends to ‘switch-us-off’ by stopping the flow of gas to Ukraine and thence the ‘flow-through’ effect of gas destined for the rest of Europe. Perhaps one of the supporters of whoever it was who decided to ensure that the indigenous energy supply our nation has (that black soft-rock-like stuff we have been able to rely upon for the majority of our needs since the Industrial revolution) would be discarded and actually in effect (mines allowed to deteriorate to ruin) destroyed… could explain that logic to me.
Yes I know King Arthur was a problem: but at least he was our problem. We appear to have traded dealing with a fellow citizen (who in the end the Labour movement could appeal to the good nature of and contain) for an overseas demigod who no-one can contain?
In the early 80s I was asked to help design a very large structure, to be ‘set’ somewhat like the sails on a massive boat that was to surround a vast burm? of imported coal to be located at a large port/city in the N Nest with two very famous football teams.: (incidentally the coal was imported from S America and allegedly mined by child labour)
The specification was simple “keep the coal dust in when the wind blows, and keep King Arthur’s merry man out!”
This pile of coal was supposedly the largest bargaining chip ever: and used by the power generation firms: ie “British Coal, you must sell us coal at a price of XXXX (even though we both know you will lose money doing so…but that is from another budget!) or we will import it.” This, like the comment above does appear to be the economics and planning of the mad house.
Mike B
Point taken: as other bloggers are also pointing out: whereas we seemed to have offered the profits from our share of N Sea reserves to pay vast amounts to somewhat undeserving recipients…Norway had the good sense to retain ‘theirs’ under Government ownership, building up a massive fund for investment in the future, when the gas and oil runs out! Ah, how wonderful that we opted for so-called free enterprise and they for financial prudence. Just like a grocer.
I do agree with all the comments to date and I could get up on my Scottish high horse once again to denounce that mad woman Thatcher……but I won’t ( honest!).
This debate is just to get us all riled up as the outcome we have absolutely no control over! We have a political system that is based on patronage and nothing the “electorate” does will change this……or maybe there will be a sea change in opinion….but UKIP hasn’t got any better idea of what to do so that’s a non-starter!
What to do with decommissioned fields, well how about a conversion to wind farms, half a dozen wind generators per platform perhaps. I also see a mega sculpture to rival the Tour de Eiffel made from the remnant structures should they be moved to land, The gateway in Inverness, at least keeping some artists employed.