With declining oil production, rising costs and a crisis in exploration, the North Sea is at a crossroads. Press and Journal Business Editor Ryan Crighton investigates what has gone wrong – and what the industry needs to remedy its problems.
A crisis, by definition, is a time of intense difficulty or danger, typically accompanied by panic.
But there is little sign of either on the streets of Aberdeen. Pick a decent restaurant in the Granite City any lunchtime and it will be packed. The shops are busy, the bars are bustling, the roads are packed with Audis, Bentleys and BMWs. Houses and flats are flying off the estate agent shelves within days.
Recession? What recession? Thanks to its thriving oil and gas industry, Aberdeen is the city the economic downturn forgot.
However, in the waters around the UK a storm is brewing.
Over the past three years, production has declined by 38%. Even more alarmingly, there has been a huge slump in the number of exploration wells – the holes firms drill on the seabed in the hunt for oil and gas – being started.
In 2006 and 2007, the number of new wells opened up reached 48, and the total was still as high as 47 in 2008.
But since then, exploration has fallen back. In 2013, just 15 wells were drilled.
Malcolm Webb, who heads industry body Oil and Gas UK, fears a lack of new finds in the North Sea could lead to work drying up.
He admits it is a crisis – one which demands urgent concerted action by the DECC (Department of Energy and Climate Change), HMT (HM Treasury) and the industry itself.
“This clearly illustrates the parlous state of exploration on the UK Continental Shelf,” Mr Webb said.
“We are just not drilling enough wells in UK offshore waters and those that we are drilling are not finding enough oil and gas.
“This worrying trend has been growing for some time. It started in 2011 with a 50% drop in the number of exploration wells drilled, which has since failed to recover.”
Drilling rig availability and the ability of smaller companies to secure equity capital are major hurdles.
But so is a “lack of collaboration and overzealous legal and commercial behaviour” between firms, according to industry veteran Sir Ian Wood. He believes companies have increased costs, caused delays and led to poorer recovery from the UK Continental Shelf because of the way they have acted.
His recent industry review found more than 20 instances in the past three years where squabbling between operators caused delays and, in some cases, left assets stranded.
The tycoon said there has been an overall lack of focus on maximising recovery from the North Sea as operators “pursued individual commercial objectives in isolation”.
There is another factor threatening the basin: production costs. These are rising at an unsustainable rate, according to Oil and Gas UK.
Operating expenditure rose to £8.9billion in 2013, which was £500million higher than anticipated. This is the highest ever annual expenditure in the North Sea. Those operating costs are expected to rise further to around £9.6billion this year.
Average unit operating costs (UOCs) have now risen to £17 a barrel and the number of fields with a UOC greater than £30 a barrel has doubled over the last 12 months. The danger of rising operating and production costs is that an increasing number of assets will become “unviable” if there is a prolonged slump in the oil price.
Further compounding the problems with production costs is wage inflation. Record investment – £14.4billion last year alone – is fuelling record demand for people.
The industry is facing a chronic shortage of skills, which has pushed up wages for those with the skills companies need.
This has led to a culture of companies poaching each other’s staff. Writing for the Press and Journal today, the UK boss of Aker Solutions, David Currie, explains how the issue has affected the industry, and what companies are doing to address it.