North Sea oil and gas | The long goodbye | Economist.com
North Sea oil and gas The long goodbye Economist.com
Mar 16th 2006 ABERDEENFrom The Economist print edition
High oil prices have helped slow the North Sea's decline. Government flip-flopping could accelerate it again
NOBODY disputes that Britain's part of the North Sea is past its prime. Oil and gas production peaked at 4.5m barrels a day in 1999 and has fallen steadily ever since, to 3.3m now (see chart). Yet in Aberdeen, Britain's main oil town, talk of an old “province” in decline is not tolerated. “The North Sea is enjoying a vibrant middle age,” insists one oilman. “I think I'd describe it as mature rather than declining,” muses another. Indeed, most of the industry's problems seem to be the sort associated with a boom, not a bust. Oil bosses complain about a shortage of skilled labour and the astronomical price of rig rentals, which have doubled since 2003.
A combination of high oil prices and some new government policies have made it profitable to keep working in what is an increasingly difficult and expensive place to drill for oil and gas. Investment has risen by 30% this year, and more exploration and appraisal wells are being drilled than at any time since 1997. The UK Offshore Operators Association (UKOOA), a trade body, thinks that the rate of decline will slow markedly next year. By 2007, production should be slightly higher than last year.
That will be music to the ears of a government determined that the North Sea should still be pumping 3m barrels a day in 2010. The petrochemical wealth off Britain's eastern shores supports a quarter of a million jobs and has helped to insulate the country from the vagaries of the international oil market for decades. Were the decline to continue at historic rates, production would be all but finished in 20 years.
There is no shortage of hydrocarbons: although 34 billion barrels have been produced, some 23 billion barrels are thought to remain. But many of the big, easily accessible fields are running down, and what is left is much harder to reach. That is changing the character of the industry.
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One way to keep production up is to explore the waters off northern Scotland, the Shetland Islands and the deep Atlantic to the west of Scotland, where little exploration has so far been done. Two of the biggest recent finds—Buzzard (with around 500m barrels of oil and gas) and Lochnagar (perhaps 250m barrels)—were found off the beaten track. But developing them can be difficult. Rhum, a big gas field in the northern North Sea, was first discovered by BP in 1977, but the high pressure and temperature in the field meant that gas was not produced until December of last year. “A decade ago, a lot of this stuff would have been literally impossible to extract,” says Mike Tholen, UKOOA's economics director. “But technology has moved on.”
Another option is to scrounge every last drop of oil and gas from existing fields. Finance, not geology, determines when an oil company quits a field, and it may leave behind substantial amounts of oil that are technically (but not economically) recoverable. The dregs of the big fields are often of only marginal interest to the big firms, which prefer chasing bigger and easier finds in other parts of the world such as the Gulf of Mexico or west Africa. Smaller, leaner companies are often able to pull the remaining oil out at a profit.
With all that in mind, ministers have been changing the rules to encourage smaller and more innovative firms. New licences allow companies to explore patches of ocean before they have finance arranged, and to hold on to difficult areas for six years instead of four. New rules prevent companies from sitting on unexploited discoveries for years at a time. And changes to the code of practice on access to pipelines (which are often owned by big oil companies) ensure that smaller companies can get their oil to market.
The new rules have proved popular. The latest licensing round, held in the summer of 2005, was the most successful in years. A total of 152 licences were offered to 99 companies, many of them in the frontier areas around northern Scotland and the Shetlands. A quarter of the companies were new to the North Sea.
But government can hinder as well as help, and not all its policies are so popular. The oil industry's relations with the Treasury have been poisoned by a series of sudden tax changes.
The first came in 2002, when Gordon Brown, the chancellor of the exchequer, raised the corporation tax for oil firms to 40% (most companies pay 30%). In November last year, he bumped it up to 50%. Furious oilmen accused the chancellor of risking the North Sea's future. UKOOA says that the changes create uncertainty, threatening future investment, and that they will do the most harm to the small firms that the government wants to attract. In its defence, the Treasury points to record oil company profits and insists that its only aim is “a fair deal for the taxpayer”.
“The new taxes will probably bump the North Sea a few notches down the competitiveness ladder,” says Geoff Gillies, an analyst at Wood Mackenzie, an energy consultancy. “But at today's oil price, the impact on development will be minimal.” The danger will come if prices start to slip, as Wood Mackenzie thinks they will do over the next few years. Kieron McFadyen, a director at Shell UK, says that if expensive oil justifies higher taxes, then cheaper oil ought to bring tax cuts to compensate.
The death of the North Sea has been predicted many times before, points out Melfort Campbell, the head of the Scottish branch of the Confederation of British Industry. Yet technological advances have always confounded the gloom-mongers. The region will be even more dependent on innovation in its old age than it was in its youth. Most of the government's reforms reflect that. It would be a shame to see them undone by another tax grab.
Mar 16th 2006 ABERDEENFrom The Economist print edition
High oil prices have helped slow the North Sea's decline. Government flip-flopping could accelerate it again
NOBODY disputes that Britain's part of the North Sea is past its prime. Oil and gas production peaked at 4.5m barrels a day in 1999 and has fallen steadily ever since, to 3.3m now (see chart). Yet in Aberdeen, Britain's main oil town, talk of an old “province” in decline is not tolerated. “The North Sea is enjoying a vibrant middle age,” insists one oilman. “I think I'd describe it as mature rather than declining,” muses another. Indeed, most of the industry's problems seem to be the sort associated with a boom, not a bust. Oil bosses complain about a shortage of skilled labour and the astronomical price of rig rentals, which have doubled since 2003.
A combination of high oil prices and some new government policies have made it profitable to keep working in what is an increasingly difficult and expensive place to drill for oil and gas. Investment has risen by 30% this year, and more exploration and appraisal wells are being drilled than at any time since 1997. The UK Offshore Operators Association (UKOOA), a trade body, thinks that the rate of decline will slow markedly next year. By 2007, production should be slightly higher than last year.
That will be music to the ears of a government determined that the North Sea should still be pumping 3m barrels a day in 2010. The petrochemical wealth off Britain's eastern shores supports a quarter of a million jobs and has helped to insulate the country from the vagaries of the international oil market for decades. Were the decline to continue at historic rates, production would be all but finished in 20 years.
There is no shortage of hydrocarbons: although 34 billion barrels have been produced, some 23 billion barrels are thought to remain. But many of the big, easily accessible fields are running down, and what is left is much harder to reach. That is changing the character of the industry.
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One way to keep production up is to explore the waters off northern Scotland, the Shetland Islands and the deep Atlantic to the west of Scotland, where little exploration has so far been done. Two of the biggest recent finds—Buzzard (with around 500m barrels of oil and gas) and Lochnagar (perhaps 250m barrels)—were found off the beaten track. But developing them can be difficult. Rhum, a big gas field in the northern North Sea, was first discovered by BP in 1977, but the high pressure and temperature in the field meant that gas was not produced until December of last year. “A decade ago, a lot of this stuff would have been literally impossible to extract,” says Mike Tholen, UKOOA's economics director. “But technology has moved on.”
Another option is to scrounge every last drop of oil and gas from existing fields. Finance, not geology, determines when an oil company quits a field, and it may leave behind substantial amounts of oil that are technically (but not economically) recoverable. The dregs of the big fields are often of only marginal interest to the big firms, which prefer chasing bigger and easier finds in other parts of the world such as the Gulf of Mexico or west Africa. Smaller, leaner companies are often able to pull the remaining oil out at a profit.
With all that in mind, ministers have been changing the rules to encourage smaller and more innovative firms. New licences allow companies to explore patches of ocean before they have finance arranged, and to hold on to difficult areas for six years instead of four. New rules prevent companies from sitting on unexploited discoveries for years at a time. And changes to the code of practice on access to pipelines (which are often owned by big oil companies) ensure that smaller companies can get their oil to market.
The new rules have proved popular. The latest licensing round, held in the summer of 2005, was the most successful in years. A total of 152 licences were offered to 99 companies, many of them in the frontier areas around northern Scotland and the Shetlands. A quarter of the companies were new to the North Sea.
But government can hinder as well as help, and not all its policies are so popular. The oil industry's relations with the Treasury have been poisoned by a series of sudden tax changes.
The first came in 2002, when Gordon Brown, the chancellor of the exchequer, raised the corporation tax for oil firms to 40% (most companies pay 30%). In November last year, he bumped it up to 50%. Furious oilmen accused the chancellor of risking the North Sea's future. UKOOA says that the changes create uncertainty, threatening future investment, and that they will do the most harm to the small firms that the government wants to attract. In its defence, the Treasury points to record oil company profits and insists that its only aim is “a fair deal for the taxpayer”.
“The new taxes will probably bump the North Sea a few notches down the competitiveness ladder,” says Geoff Gillies, an analyst at Wood Mackenzie, an energy consultancy. “But at today's oil price, the impact on development will be minimal.” The danger will come if prices start to slip, as Wood Mackenzie thinks they will do over the next few years. Kieron McFadyen, a director at Shell UK, says that if expensive oil justifies higher taxes, then cheaper oil ought to bring tax cuts to compensate.
The death of the North Sea has been predicted many times before, points out Melfort Campbell, the head of the Scottish branch of the Confederation of British Industry. Yet technological advances have always confounded the gloom-mongers. The region will be even more dependent on innovation in its old age than it was in its youth. Most of the government's reforms reflect that. It would be a shame to see them undone by another tax grab.
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