Does North Sea oil and gas have a future?

For almost 50 years the North Sea has been a reliable source of oil and gas reserves. MARK GOODALL, who is area manager for Aker Solutions, which provides oilfield products, systems and services for customers in the oil and gas industry, a board member and former chairman of East of England Energy Group (EEEGR) and a private sector board member of the New Anglia Local Enterprise Partnership (LEP), explains why they still have a future despite the focus on wind and nuclear

THERE has been much in the media lately regarding the scale of planned new energy developments both on and off the East of England’s coastline, particularly in offshore wind and new nuclear at Sizewell.

For almost 50 years the North Sea has been a reliable source of oil and gas reserves, so does North Sea Oil & Gas still have a future with such an apparent focus on wind and nuclear?

In my opinion, it does. The low hanging fruit may have gone but there are still several significant new field developments coming on stream with others still in the planning and pre-development phases. We are also seeing the redevelopment of some existing fields with new investment in facilities upgrades to extend the viable operating field life.

The North Sea is classified as a mature oil and gas region, which has passed peak production, however, as technology improves, operating companies are able to extract a far higher percentage of hydrocarbon from the reservoirs than was ever thought possible in the early years.

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I think it’s fair to say that even the early pioneers who first started exploration in the North Sea in the 1960s would never have imagined that the region would still be producing significant volumes of oil and gas today.

In the early 70s the then Head of Shell commented on the humongous 3 billion barrels of oil that had been discovered in the North Sea. In actual fact, the industry has now extracted some 39 billion barrels and conservatively estimates there are another 24 billion barrels still under the seabed.

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There are a number of factors, which will enable and influence this extended viability:-

n Sustained high oil and gas prices

n Emergence of Oil & Gas companies that specialise in the operation of mature fields and field life extension.

n Marginal field development

n Technological advancements in drilling and production methodologies

n Supportive Government and a stable fiscal environment

n A sustainable supply of qualified and competent resources

We have had a long period of higher oil and gas prices which fuels confidence and encourages companies to further invest in mature regions such as the North Sea. However, every decade so far has seen a crash in the oil or gas price at some point.

In this regard and particularly for the Southern North Sea which is 100% gas, the future influence of expanded shale gas production in the US and liquid natural gas (LNG) becoming more easily tradable could impact negatively on the gas price. Gas is typically priced at around 50% of the oil price.

However, on the basis that oil and gas is a finite global resource, it would be a real surprise if there was to be a crash similar to that around the year 2000, when the oil price fell to $20 - $25 a barrel. Fortunately, circumstances in today’s global market are different to what we saw back then.

We have recently seen a significant amount of divestment and acquisition of oil and gas assets from some of the established Oil and Gas majors to new and emerging companies in the region. Some specialise in extending the life of more mature fields while others look to develop the many, more marginal fields which are less attractive to the big majors to develop. There are over 300 known fields still remaining undeveloped.

These newer operating companies have proved that oil and gas fields thought too unattractive to develop or reaching the end of their commercial viability, can, by implementing a different business model and applying a number of different processes, methodologies and new technology, continue investing and operating for several more years.

Obviously, while the oil price and the gas price remain high, this helps to sustain longevity and encourages further investment. If there was a crash in prices, this would undoubtedly cause companies to review investment plans, however, virtually all new developments factor in a lower average oil price to their commercial models to counter peaks and troughs over field life.

The advancement in new technology is also a fundamental contributor to improving production and extraction efficiencies. Apart from the obvious benefit of having new technologies for use in new developments, the ability to retrofit and apply the benefit of new technology to ageing assets is also advantageous. Similarly, advancement and innovation in drilling techniques have enabled drilling companies to reach and access hydrocarbon reservoirs more effectively.

The contribution that the oil and gas sector has made to the UK treasury in the last 40 years or more is significant, running into many billions of pounds. It is the most heavily taxed industry in the country. How the UK’s economy would have faired without this income stream does make you realise the importance of ensuring we maximise the extraction potential from all of the UK’s oil and gas fields. To make this possible, significant investment is still required and needs a stable and predictable fiscal regime to give confidence to investors.

Unexpected tax raids on the industry do nothing to encourage further investment. Such measures only stall or remove investment, as was the case in 2011 when, as a result of an unexpected tax hike in the Chancellor’s budget, a number of planned developments were taken off the table. Fortunately this year’s budget introduced some beneficial tax breaks, which put some developments back on the Oil Companies agendas.

To realise all the potential new developments and extend the field life of existing fields will of course require a sizeable pool of suitably qualified and competent people to take them forward. Having under invested in new resources in more uncertain times, the industry is now facing another challenge in sourcing the quantity and quality of skilled engineering and technical personnel, not only to replace those retiring, but to compete with the attraction of large new overseas projects, while not forgetting the growing demand towards the offshore wind industry in the North Sea.

In the East of England we are going to see this challenge for skilled resources compounded further with the likely development of Sizewell C, later this decade.

The industry led “Skills for Energy” programme in the region and the commitment of Norfolk, Suffolk and Essex to work collaboratively in support of skills development will help to ensure that the skills gap is managed and populated accordingly.

However, putting matters into perspective, compared to many other industries in the current economic climate, the oil and gas industry can be thankful that the challenges it faces are positive and I’m sure the envy of many.

In summary, there is much to be enthused about with regard to the North Sea’s Oil and Gas industry, as a significant contributor to UK plc and the East of England’s economy for many years to come. We should also recognise that the invaluable experience gained in the North Sea can also exported to other global regions.

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