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.