By Nick Cunningham
Oil production from the North Sea posted gains in 2015 for the second year in a row, but the recent uptick in output could be a blip in the region's long-term decline.
Oil companies added 160,000 barrels per day last year from North Sea projects in the UK and Norway, according to the IEA. However, those gains came from projects that were planned years ago when oil prices traded above $100 per barrel. With Brent crude declining by more than 60 percent from mid-2014, North Sea oil producers have slashed spending, scrapped projects and are looking to sell off assets.
The IEA summed it up in its latest monthly Oil Market Report: "North Sea projects fall victim to oil price slump."
For example, Det Norske (OTCPK:DETNF), a Norwegian oil producer, is "shopping cheap assets" and is contemplating scrapping its Vette project, which it purchased from Premier Oil just last year. The project would have seen a floating production and storage offloading unit, but it could soon be killed off. Royal Dutch Shell (NYSE:RDS.A)(NYSE:RDS.B) is also looking to sell off its "old and mature" assets as part of its $30 billion divestment program over the next few years.
Even existing oil fields that are actively producing oil could be shuttered earlier than planned because of low oil prices. Statoil (NYSE:STO) announced recently that it could shut down its Veslefrikk oilfield much earlier than it originally had planned. That follows a previous decision to shut down its Volve field by the end of 2016, several years earlier than anticipated.
Several similar decisions are under consideration from other operators. In another example, Repsol (OTCQX:REPYY)(OTCQX:REPYF) shut its Varg field, a small 5,000 barrel-per-day field, five years earlier than it expected.
The problem with the North Sea is that the closure of one project can affect the economics of another as they share the costs of infrastructure. The result can be a domino effect. For instance, Exxon Mobil (NYSE:XOM) is set to shut down its Jotun field in October, five years earlier than expected, but that means that Det Norske's Jette field will also have to shut down because it was tied back to the Jotun B platform.
Many of these fields are small, but add up to more than 33,000 barrels per day of lost output, potentially leading to 65 million barrels of oil equivalent that won't get produced. Oil & Gas UK, an industry trade group, warns that more than 100 oil fields could be shut down over the next five years, a 20 percent increase over the past year.
The financial return on capital invested in the North Sea is now at its lowest level in nearly two decades, according to the UK's Office for National Statistics. In the fourth quarter, the return on capital invested in the North Sea fell to 0.6 percent, down from 2 percent in the third. For the full-year, the rate of return on capital invested was 3.5 percent, the lowest return since data collection began in 1997. Contrast that to the 65 percent return on investment the North Sea provided in 2007.
Sir Ian Wood, who authored an authoritative review of the British oil and gas industry, said that the North Sea could shed 45,000 workers in 2016, which follows the loss of 65,000 jobs last year.
The contraction in the North Sea has been supercharged by low oil prices, but over the long-term the industry may not be able to turn things around. A February report from Douglas-Westwood, a consultancy, concluded that the British North Sea could see 150 oil platforms scrapped in just the next ten years. The report believes that decommissioning will take place in British waters much sooner than in Norway's section of the North Sea. Wood Mackenzie found that one barrel out of every seven produced in the UK's North Sea today is being produced at a loss. Another report found that half of the companies in the North Sea are also operating at a loss.
Earlier this year, Oil & Gas UK said that the oil industry in the North Sea was "at the edge of a chasm." Higher oil prices will help stop the bleeding, but long-term growth appears to be off the table.
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