UKCS oil & gas production has been falling dramatically; however, the impact of that has largely been hidden by the beneficial effects of healthy commodity prices – at least to the industry and Government, if not consumers.
North Sea/UK oil production peaked in 1999 at 137.4million tonnes, equivalent to 2.9million barrels per day. It has fallen in every year since then and the 2006 total of 76.6million tonnes (1.6mbpd) was just 56% of the peak. The annual declines in recent years have averaged about 10%. North Sea/UK gas production peaked in 2000 at 108.4billion cu m and has also fallen in every year since then. The 2006 total of 80.90bcm was 74% of the peak. The gas decline has been slower than oil, but the fall in 2006 was surprisingly large at 9.9%.
The official 2007 production statistics have yet to be published, but they may offer a temporary respite. The Department of Business, Enterprise and Regulatory Reform (DBERR, formerly DTI) publishes monthly figures, the latest of which are for October, 2007.
UK oil production was fairly stable during the first half of the year, fell in July and August but rose in September and October. It may therefore be that the 2007 total will be little different from the previous year, rather than a -10% decline, and there could possibly be a small increase. An Oil & Gas UK report in late-February suggested that oil production during 2007 was flat but gas production was down 12%. Combined output was -5% lower, it said.
The DBERR website gives monthly statistics for each field. I have not looked at them all, but it seems clear that the main reason for the improvement is the Buzzard field, operated by Nexen, which began production in January, 2007. In the 12 months to October, Buzzard accounted for 8.5% of total UK oil output and is currently producing at about 220,000 barrels per day. That is equivalent to virtually all the decline in the previous year.
In contrast, UK gas production has continued to fall during the year, although it can be misleading to compare the monthly statistics because they can be influenced by the weather and related changes in demand.
I am not optimistic about the future production trends, however, and fear that the 2007-08 improvement will be temporary. There are no other Buzzards in the pipeline, nor on the horizon.
There are rumours in the industry that the Lochnagar and Rosebank (Chevron) discoveries in the West of Shetland will soon receive development approval, but they, and other developments, can only slow down the rate of decline, not reverse it. Another discovery offering high hopes is Huntingdon (Oilexco), although little has been disclosed. These aside, I confess that I am surprised that the sustained level of high prices has not led to more new investment, because there is still a long list of undeveloped discoveries.
The DBERR website lists only nine new discoveries during 2007, only two of which have been given names – Victoria (operator Silverstone) in the Southern North Sea and Jacky (Ithaca) in the Moray Firth. These were not large finds and the recent exploration record on the UKCS has been very disappointing, in my opinion.
There can be little doubt that the UKCS is a declining market and will continue to shrink steadily over the next decade, albeit with year-to-year fluctuations. The official statistics show increases in both operating and capital expenditure during the first half of 2007, but I believe that about 40% of those increases are attributable to cost inflation rather than higher activity. In real terms, there has been a fall in expenditure, even if headline numbers set new records.
High oil&gas prices have boosted exploration and development in many other parts of the world.
Many companies in Scotland have taken advantage of that through greater export activity and there has not been the onshore decline in employment predicted, particularly in the north-east.
Thankfully, Scottish Enterprise and other bodies are actively encouraging international diversification. The scale of the industry and the number of oil-related jobs in 2020, say, will depend much more on those markets than the UKCS market.
Tony Mackay is MD of Mackay Consultants