The latest monthly statistics from the Department of Energy and Climate Change (DECC) show UK oil production down – 19% on an annual basis and gas production down 21%. Those are alarming rates of decline.
The monthly statistics can be misleading because of short-term factors such as maintenance work and cold-weather snaps, but the trend over the last few months has been clear.
The official projections from the DECC were for a 5% decline in production in 2010 and those from Oil & Gas UK (the industry’s representative body) were similar. The actual decline has been much greater, and that looks certain to continue.
The UK is now a net importer of both oil & gas. In 2009 we consumed 74.4million tonnes of oil and products but produced only 68.0million tonnes, equivalent to just under 1.5million barrels per day. The domestic oil production was 91% of consumption. The equivalent figure for the gas industry was 69%.
UK oil production peaked at 137.4million tonnes (2.9million barrels per day) in 1999, so the current output is about half that level. The trend since 1999 has been steadily downwards, although there was a small rise in 2007. Similarly, UK gas production peaked at 108.4billion cubic metres in 2000 and has fallen in every year since then.
The North Sea is a mature province and these declines were inevitable, but the recent trends have been much worse than the UK Government and the industry expected – or at least predicted publicly. There are significant economic implications, notably a rapidly rising import bill.
Recent DECC projections show the UK’s oil import dependency increasing from 9% in 2009 to 61% in 2025 and the gas import dependency from 33% to 67% over the same period. Oil prices have been relatively stable in the $75-$85 per barrel range recently. The UK’s oil and gas import bill in 2010 will therefore probably be more than £1billion and then increase at about 10% per year.
I do not need to explain in this column the dire state of the UK economy. Simply, the rising bill for imported oil and gas must make things worse.
Both the UK and Scottish governments have ambitious targets for renewable energy which might reduce that import bill, but the costs of the renewables are high, so the consumer – that is you and me – will have to pay more for electricity generated from wind than imported gas.
The net economic effect is difficult to estimate but at current prices and exchange rate we would definitely be better importing gas.
There are two main reasons for this latest 20% drop in UKCS oil and gas production: firstly, the greater than expected fall in production from existing fields and, secondly, the disappointing contribution from new fields.
As an economist, I probably cannot comment sensibly on why output from mature fields such as Brent, Forties and Ninian is falling so rapidly, but I am puzzled why the decline is so much greater than predicted by both DECC and Oil & Gas UK.
Many of these mature assets have been sold by the multinationals such as BP and Shell to smaller companies whom I was told would be able to reverse the declines with new technology and lower operating costs. That has not happened overall, although there have been a few notable exceptions.
The report on DECC’s latest projections states that “recent industry forecasts have tended to over-predict production significantly in the short and medium term, reflecting asymmetric upside and downside risks”.
Please don’t expect me to explain what the last few words mean, but the industry – through UK Oil & Gas – should be able to make much more realistic forecasts than they have done over the last few years.
Indeed this organisation should be embarrassed by the inaccuracy of its forecasts, even if they were politically motivated.
Oil prices have risen substantially in recent years from about $30 per barrel to $80. That suggests that many incremental projects to boost UKCS gas and oil production should be economically worthwhile, but there has been a disappointing level of such investment.
Secondly, there has been a disappointing contribution from new fields. A few years ago we were told that the discovery of Buzzard would reverse the decline in UKCS oil production for a time, but that has not happened. The latest possible saviour is claimed to be Catcher, even though it is early days in the appraisal of that multi-fields cluster (know as Greater Catcher).
Forgive me for being sceptical, but the actual production statistics give a very different picture. Again, that surprises me because at $80 per barrel, many of the recent discoveries look economically viable to me, including expensive ones west of Shetland. The industry seems very reluctant to invest in both existing fields and new discoveries on the UKCS.
Neither the British Government nor the UK industry seem willing to take serious action to slow down the 20% year decline in oil and gas production. Perhaps they are in league with the Scottish Football Association.
Tony Mackay is MD of economists Mackay Consultants