We ended part three of our canter through the Offshore Europe with North Sea story with the news that, in 2003, the show had been sold to Reed Exhibitions just as offshore activity was picking up following the second global oil price crash.
Change was in the air, perhaps signalled in January that year by the news that the US independent Apache was buying BP’s 96.14% stake in the Forties field (but not pipeline system) for $630million.
Naturally, this fuelled speculation at the Raising the Game themed show about more large old fields changing hands.
Conference chair, Bruce Dingwall of UK junior Venture Production, warned in his opening speech of a lack of operator diversity.
“Today some eight companies produce about 80% of the total daily production volumes, with twenty odd companies sharing the rest,” he said.
“If you view the basin as an ecosystem, then clearly this is not an ecosystem in balance. This is a time of structural change in the basin and there are encouraging signs of new entrants both large and small, local and international entering the arena.
“This must be encouraged, their success must be cheered, and news of positive change in the basin propagated again and again on both a global and local basis to suppliers, to investors, to schools, to universities, the financial markets and to government as a good place to do business, as a good place to attract investment and as a good place grow people and companies.”
Dingwall warned too that a “top-down approach to change through strong leadership would be critical to getting the industry to move to a better place”. This message stemmed from the late 1980s through 1990s problems.
Indeed it was starting to dawn with its leadership that the UK Continental Shelf could actually last for another 40 or 50 years.
The UKCS was then just past half-time and there remained an estimated 28 billion barrels equivalent of oil and gas – producing, proven and yet to be discovered, with a lifespan out to 2050 at least.
Around the time of 2005’s Offshore Europe, the UK Offshore Operators Association, now today’ Offshore Energy UK (OEUK), estimated £35billion would be spent over the five years to 2010 … a lot more than the prior £29billion forecast of early 2004.
But this depended heavily upon the industry getting a lot smarter at doing its business, including halving the depletion rates of reservoirs already in production and being a lot more innovative when developing new resources.
Legendary energy investment banker Matt Simmons had warned that North Sea depletion was out of control – 14/15% when it really needed to half that and better.
But this would only be possible if government played a fair game.
Unless there was trust then it would not be possible for operators to slow the rate of production decline, let alone go out and hunt for new reserves. Nor would they brook being dictated to.
Analyst Tony Wood of the Royal Bank of Scotland summed up the mood of the time by saying: “The UKCS is currently experiencing a wave of optimism, on the basis of increasing activity and the sustained period of high oil prices ($30 and better).”
Graeme Sword, then head of oil, gas and power at investment house 3i disagreed and argued that, in just a few short months, the North Sea had become a much tougher place for new entrants to get a toe on the assets ownership ladder.
Not because of a greedy UK Treasury but oil price inflation.
Juniors could play at the table with oil around $35 but not once it reached $45/55.
Essentially, the only way forward for many new oilcos at that time was through securing so-called “promote” licences and fallow blocks from the DTI, despite this being a high-risk approach.
Though the UK North Sea was a busy place, with 400 named oil & gas fields producing oil or under active development, plus something like 250-300 undeveloped discoveries, the industry appeared to struggle to sustain output.
As for the supply chain, despite 40 years of North Sea activity to that point, the view in 2005, including at Offshore Europe, was no different to a decade earlier: it was not robust enough and mostly in foreign hands.
The situation then as now was that there were too few large/medium-sized UK firms with the clout necessary to succeed on global markets and too many small firms had neither the financial muscle nor nous to realise that their real futures lay overseas.
Jeff Corray, then with accountancy major KPMG, said that further consolidation within the UK (mostly Aberdeen-based) supply chain was important to success, even survival.
“We need more innovation, we need more creative thinking,” he said. ”Lots of people are good technically, but they need commercial skills too.”
On December 5, 2005, Labour government chancellor Brown caught the North Sea industry on the back foot by doubling the SCT surcharge on UK North Sea profits to 20%, despite falling, even plummeting domestic oil and gas output.
Moreover, Brown moved swiftly, implementing the surcharge in January 2006 with the expectation that it would rake an additional £2.3billion into Treasury coffers that year and possibly more if oil prices held above $60 per barrel, which they did.
Brent was to continue to drive upwards, reaching an all-time high of $147.50 in July 2008 as global production stagnated in the face of rising commodity demand.
Brent had averaged a little over $72 a barrel in 2007 and there was talk of 2008 coming in around $100.
No-one expected the massive late summer spike to near $150, followed by a dramatic cooling that saw the North Sea’s benchmark crude plunge briefly to sub $40 a barrel, but broadly languishing in the $40-50 bracket throughout winter 2008-09.
Quite how oil rocketed the way it did in 2008 in the face of the Global Financial Crisis precipitated in 2007 and which dragged through 2008, seems a contradiction in terms. Somehow Big Oil got away with it and its bull run quickly regained momentum unlike Big Money and a host of other industries hit by the financial debacle.
By March 2009 the picture was of an industry that seemed to be under control, without a hint of panic among North Sea producers. There were thousands of lay-offs, various new field developments were iced and maintenance programmes were slashed.
Unquestionably the headline grabber in Aberdeen at that time was BP, which took advantage of the banking crisis by demanding that its supply chain cut its North Sea rates back to 2004 levels. Other operators attempted the same trick, sparking anger and resentment among main contractors and the wider supply chain.
Meanwhile those self-same operators were mostly making money hand over fist and reluctant to share in their good fortune. Oil prices were quick to recover and Brent averaged $110 in 2011.
Renowned petroleum economist Professor Alex Kemp of Aberdeen University with colleague Linda Stephen certainly provided food for positive thought in early 2010 with the latest of their periodic North Sea papers.
Their basic premise was that, if oil prices were to stay above $90 per barrel and gas prices higher than 50p a therm, a sharp increase in UK North Sea new projects investment would be in prospect.
Their modelling suggested that capital spending could climb sharply from just over £5billion in 2009 to more than £9.5billion in 2013, while overall capital and operational expenditure might top £17billion in 2013 compared with around £13billion in 2010.
In their high-end case, Kemp/Stephen indicated that it was possible that overall expenditure (not including exploration and appraisal activities) could peak just below £18million in 2017, with a further peak of more than £18billion around 2025.
However, should both oil and gas prices collapse to around $50 per barrel and just 30p per therm, then the outlook would be gloomy, with rapid collapse predicted.
As things turned out, they came quite close with their predictions.
The boom kept on building and the theme chosen for the SPE Offshore Europe of 2013 was “The Next 50 Years”.
Brent was comfortably fetching more than $110 a barrel and, to the naïve, things would just keep on rolling along nicely for years to come.
But they were wrong!
And it starts with a report commissioned the Lib-Dem coalition in 2013 known as the Wood Review published early 2014, which was supposed to set out a long-term strategy for the UKCS and since seriously questioned.