To state that the years 2015 and 2016 have been difficult for activity in the North Sea oil sector would be a gross understatement.
The severity of the downturn and its effects on the North East economy have probably exceeded the consequences of the price collapse in 1986 to $10 (c. $30 in today’s money). In that earlier period, while investment in new fields fell substantially, the exploration effort held up comparatively well. Annual numbers of wells drilled in the period 1986-1989 were in the 75-90 range compared to 14 in 2014, 13 in 2015 and less in 2016. The UKCS is now a much more mature petroleum province with the average size of new discovery around 20 million barrels of oil equivalent (mmboe). Back in the second half of the 1980’s a field of 100 mmboe was considered relatively small.
In present market conditions only a relatively low exploration effort by historic standards can be expected next year.
Investment in new field developments has a major effect on overall activity levels. There are very many underdeveloped discoveries in the UKCS, but the great majority have potential reserves less than 20 mmboe. Even after the major cost reductions painfully achieved over the last 2 years the majority of these are uneconomic at an oil price of $50. At a $60 price a significant number could become viable if investors believe that this price is likely to be sustained. In turn, to a large extent this will depend on how successful OPEC and its collaborators are in restricting output along the lines of the agreement reached on 30th November.
There is much uncertainty over this. In the past agreed quotas have often been broken. The market makers (traders) are very well aware of this, and will be carefully watching the emerging evidence from both OPEC and the collaborating non-OPEC producers. If the evidence is convincing the price could move up to around $60. But, in turn, this could trigger enhanced drilling and production in the shale oil sector in the USA, which in turn could moderate any price increase.
The good news from the UKCS has, of course, been the increase in production from c. 1.44 million barrels of oil equivalent per day (mmboe/d) in 2014 to over 1.6 mmboe/d in recent months. This has reflected increased production efficiency from 60% in 2012 to around 71% recently. If this achievement can be bettered in 2017 then, given that further new fields will also come on stream, total production could even increase further by a modest amount. To some extent this will depend upon what happens to safety critical and other maintenance work which do affect production levels.
The pursuit of maximum economic recovery (MER) by the regulator, OGA, and the willingness of the industry to collaborate to a greater degree should bear more fruit in 2017. The initiatives to enhance asset integrity, and to collaborate further on cost reduction initiatives relating both to ongoing operations and to field developments (such as cluster arrangements), should bring more noticeable benefits than have been achieved to date. The necessary culture change should become more obvious.
For the longer term health of the industry further technological innovation is necessary. During 2017 it can be expected that the work of the new Oil and Gas Technology Centre (OGTC) will become noticeable. While the fruits of R and D will be reaped in the medium and longer term a resurgence of R and D activity could help to revitalise the sector.
Government policies can help but not transform the position of the industry. In Budget 2017 a technical tax change to permit the tax history of the seller of a mature asset to be transferred to the buyer could help to facilitate such transactions which could then result in an increase in late field investment and thus MER. The North Sea sector is still taxed at headline rates well above those applicable elsewhere, even when profitability is currently low and overall cash flows are negative.
Professor of Alex Kemp of the University of Aberdeen.
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