New research by Professor Alex Kemp and colleague Linda Stephen at Aberdeen University points to just how sensitive future production from the UK North Sea has become to oil&gas price fluctuations, a situation exacerbated by the cost of finance.
They show that, with the most optimistic scenario, there is plenty of life left in the province through to 2040, but that a collapse in prices would lead to dramatic and rapid decline to low output levels. In the low-price case – $45 per barrel for oil and 30p per therm for gas (equivalent to $26 per barrel oil equivalent) – Kemp and Stephen calculate that investment “falls off dramatically” and that the production decline is very steep.
“Over the period, only 230 new fields and incremental projects are developed out of a possible total of 634. In consequence, the aggregate volume of hydrocarbons recovered over the period 2009-40 is relatively small, at 10.8billions of barrels oil equivalent.”
Shifting up a gear to the medium-price case – $60 per barrel for oil and 50p a therm ($46 per boe) – the duo anticipate that near-term investment would be sustained, but then drop “noticeably”. Not only that, production decline would be persistent. Over the whole period 2009-40, 479 new fields and projects are developed out of a possible total of 661. Cumulative production over the period would be in the order of 16.7billion boe.
Under the high-price case – $80 and 70p per therm ($65 per boe) – field investment is predicted to stay very buoyant for some years ahead.
“A large number of new fields and projects are developed, the total over the period being as much as 616 out of the possible total of 677,” say Kemp and Stephen.
“Consequently, cumulative production over the whole period to 2040 is as much as 20.9billion boe.
They warn that their findings highlight the “extreme” sensitivity of investment, and thus production, to a range of oil&gas prices plausibly employed for long-term capital investment decisions.
Moreover, they say the range of cumulative production in the period to 2040 can be compared with Government (DECC) estimates of ultimate recovery of 11billion boe (low case), 21billion boe (central case) and 37billion boe (high case).
Kemp told Energy: “The three scenarios were designed to reflect the cautious attitudes taken by investors in making long-term capital expenditure decisions.
“It is well known, for example, that BP are employing $60 as a central case. Gas prices have generally been below oil prices on a barrel oil equivalent and I have reflected this. However, I also reflect the view that the current very low gas price is temporary and the market should change noticeably in two to three years.”
However, Kemp and Stephen do not model the current situation where oil prices are at the high end while gas is at the low end of the scale. Oil prices are currently well above $70 per barrel, versus about $30 per boe for natural gas.
They do, however, take account of the current shortage of capital due to the credit crunch. This means the cost of capital is high, at least for some investors, and capital rationing is correspondingly more stringent.
Under the $45/30p price case, with weighted cost of capital of 12.5% and capital productivity index of 0.5, only 146 new fields and projects would go ahead in the period 2009-40 and cumulative production would be just 8.1billion barrels boe. Under the $60/50p case, the corresponding number of new field developments and projects under the more stringent capital rationing is 349 and cumulative production in the period to 2040 is 13.6billion boe. Under the $80/70p case, the number of new field developments and projects under the more stringent capital rationing is 548, with cumulative production in the period to 2040 being 18.2billion boe.
Kemp and Stephen: “The findings highlight the importance not only of the cost of capital, but the problem posed by the relatively low materiality of the returns from the fields in the UKCS, which are relatively small compared to the prospects in some other petroleum provinces which are competing for capital funds.
“In the current circumstances of the UK, the case for tax reliefs applied to incremental projects in mature PRT-paying fields remains a live one as the current tax rate of 75% significantly reduces the materiality of returns.”
They add: “It should be emphasised that the projections of activity levels in the study depend on the ongoing success of the various initiatives by PILOT and DECC.
“The main initiatives relate to fallow blocks and fields; access to infrastructure, and stewardship of mature fields. The continued availability and integrity of the main infrastructure network is also a precondition for the activity levels postulated in the study.”
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