The oil majors issued a vote of confidence for the North Sea in recent days, citing precipitous declines in the cost of production.
The North Sea has long been a costly place to produce oil.
Even when oil prices were high, production was falling.
By Nick Cunningham
The oil majors issued a vote of confidence for the North Sea in recent days, citing precipitous declines in the cost of production, which they say will revive the region’s oil and gas production.
At an oil industry conference in the North Sea’s oil capital, Aberdeen, the chief executives of BP (NYSE:BP) and Royal Dutch Shell (NYSE:RDS.A) (RSA.B) both offered bullish assessments for the turnaround underway off the coast of Scotland. BP’s Bob Dudley said the North Sea is “back to growth,” according to the FT.
The North Sea has long been a costly place to produce oil. And as the aging oilfields in the North Sea suffer from declining output – a decline underway since the late 1990s – investing in a high-cost basin for the oil majors has slipped down on the priority list, especially when shale has emerged as an alternative in an uncertain market.
Even when oil prices were high, production was falling. When prices started to crash in 2014, the North Sea looked like a dead man walking.
But things are looking a little better than they were a few years ago. The oil majors say they have overhauled their cost structures in the region, making production profitable in today’s $50 market, even when the region struggled to be profitable with a $100 oil price a few years back. BP says costs of halved to just $15 per barrel.
Shell’s CEO Ben van Beurden told the FT on the sidelines of the conference that the industry managed to avoid the “death spiral” that they were facing in 2014. At the time, a growing number of key pieces of infrastructure looked like they might have to shut down. As the industry planned on taking old oil fields offline, the ones remaining in operation would have to shoulder the burden of keeping certain pipelines and other infrastructure online, raising the cost for everyone left standing. At some point, the costs would become too great, and analysts worried that a tipping point would be reached, leading to cascading closures.
But because some oil companies have achieved significant cost reductions, “that big risk . . . looks to have been averted,” Ben van Beurden told the FT.
BP’s chief executive echoed that sentiment. “We like the North Sea. It has been an important hub for us for a long time and it will remain one,” BP’s CEO Bob Dudley said, according to Reuters. “This year we will be drilling six exploration wells in the UK North Sea. That’s more than we drilled in decades.”
The acquisition of Maersk Oil by Total SA (NYSE:TOT) is also seen as a bet on the North Sea. The purchase will instantly make Total the second largest producer in the North Sea after Statoil.
Still, the North Sea is hardly the most competitive place to produce oil. Production has been declining for years, and the recent uptick in output pales in comparison to the region’s decline. And in any event, the increase will be short-lived. By 2020 and thereafter, absent a substantial increase in exploration and investment, the North Sea will reenter decline, a descent that will be hard to pull out of. The queue of new projects does not look promising – the FT, citing data from Oil & Gas UK, said only one new oil field was given the green light in the first six months of 2017, compared to 22 in 2012.
Moreover, despite the positive rhetoric from the bosses of BP and Shell, both companies have reduced their presence in the North Sea. BP sold off a key pipeline as part of the Forties system earlier this year and Shell sold roughly half of its producing assets in the North Sea to an American private equity group.
In fact, the work of decommissioning old platforms and pipelines will overtake oil production as the region’s main focus. According to Wood Mackenzie, the cost of decommissioning in the years ahead will make the North Sea oil industry a net drain on the UK treasury, as oil companies can recoup taxes paid to offset the cost of decommissioning. Beginning in 2017 and onward, the industry is expected to spend upwards of 53 billion pounds to close up old platforms and equipment, half of which will fall on the UK taxpayer.
So, far from a boon for the country, the North Sea is in danger of becoming “a significant annual expenditure for government, rather than a provider of income” in the decades to come, according to a Wood Mackenzie assessment from earlier this year.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.