This will be a critical year for the UK sector of the North Sea (UKCS). Output is currently declining at worrying rates. The latest statistics from the Department of Energy and Climate Change (DECC) show UKCS oil production falling at an annual rate of minus 5% and gas production at a massive minus 16%.
It is certain that output will continue to decline. Production from most of the existing fields is falling and there have been few significant discoveries recently to give any realistic hope of a recovery. The remaining oil reserves are estimated at only six times current annual oil production and the gas reserves at only five times. The comparable figures for the world as a whole are 42 and 72, respectively.
The latest forecasts from the DECC show UKCS oil production falling by 22% over the next five years to 50.1million tonnes, which would be just over a third of the 137.4million tonnes peak in 1999.
UKCS gas production is also predicted to fall by 22%, to 42.5billion cu m, in 2015, which would be 40% of the 108.4billion cu m peak in 2000.
These forecast declines average about 5% per year, but could prove to be optimistic.
They have massive implications for the UK economy because they would result in large falls in oil&gas revenue for the UK Treasury, creating a period of severe constraints on public expenditure.
The UK Government has done very well from the industry in recent years because of the relatively high oil prices. In the last financial year, the industry paid £12.9billion in taxes, which was 28% of total corporation-tax receipts.
Regardless of who wins the forthcoming general election, there will have to be massive cuts in public expenditure. Falling revenues from the oil&gas industry will inevitably exacerbate the crisis in public finances.
The level of oil prices will be a very important factor, but regardless of that, I believe there will be big falls in UKCS production, investment and tax revenues. Falling output will result in rising operating costs and lower profitability.
What will be the implications of that for the oil&gas industry in Scotland?
Oil & Gas UK, the industry’s representative body, recently published its 2010 Activity Survey. It states that “a year ago, it was forecast that capital investment would continue to fall, following a trend seen over the preceding three years.
As it is, this latest survey reveals investment in 2009 held up better than expected and, at circa £4.7billion, was similar to that seen in 2008. It appears that this was because, one, much of the investment was already committed in the short term, and two, the oil price recovered during the second half of last year while drilling and development costs began to fall”.
Oil & Gas UK’s base-case forecasts show a small increase in UKCS capital expenditure to just under £5billion in 2010, but then big falls to £4billion in 2011 and £3billion in 2012. These forecasts seem realistic to me. The result must be a substantial loss of work for the supply chain.
There are a few major projects under way, mainly concentrated in the West of Shetland area. They include Total’s £2.4billion development of the Laggan and Tormore gas-condensate fields.
Most recently, BP announced plans to invest £4billion in the Clair Ridge project and £1.3billion in the Schiehallion field. These projects will generate a lot of work over the next two years.
However, most other current and forthcoming developments are very small. They are mainly gas fields in the Southern North Sea. The others include Athena (Ithaca), Causeway (Valiant), Cheviot (ATP), Jasmine (ConocoPhillips) and Solan (Chrysaor). Once work on these is completed, there is little else on the horizon.
I have been surprised that the West of Shetland fields were not developed earlier, but the companies involved must have had their reasons. Laggan and Tormore required major tax concessions from the Chancellor, but the scope for more in the future must be reduced.
Recent exploration results on the UKCS have been disappointing. The DECC website lists only 10 “significant” discoveries in 2009, and none appear to be large. There have also been large falls in the number of exploration and appraisal wells.
Thus, 2010 will almost certainly be the last year of large-scale capex on the UKCS.
The Scottish supply chain has done much better in diversifying into overseas markets than I expected a few years ago. It will have to do even better after 2010 to compensate for the decline in the domestic market.
Tony Mackay is MD of economists Mackay Consultants
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