North Sea Oil's New Boom
I’ve been hearing dark mutterings about the imminent ‘end of North Sea oil’ all my life, with the dramatic impact that would have for the UK economy. North Sea oil was a diminishing resource that would be “gone by the end of the century” experts constantly assured back in the 1970s. But the rigs just kept right on drilling and producing into the new century – and the experts just kept right on being confounded. And it looks like they are to be confounded yet again as a new North Sea boom is set to boost oil reserves – and the UK’s economy.
“The North Sea remains an important hub for investment and will continue to be at the heart of the UK’s energy security for years to come,” Charles Hendry, the new coalition government’s energy minister, said at the end of June. For once, an energy minister wasn’t shooting the political breeze. Hendry was announcing the grant of 356 new North Sea exploration licences – a record number of licences since they were first issued in 1964.
Around 37 billion barrels has already been extracted from the UK Continental Shelf (UKCS), leaving around 25.5 billion barrels of recoverable oil – or so it was thought. That figure has just been upped by around a fifth to well over 30 billion barrels, the effect of new technology, higher oil prices, renewed interest in fields, as well as the discovery of new ones. A growing body of opinion believes that even upping the reserves by a fifth will prove a conservative estimate.
And the hits just keep on coming
Bizarrely, as the oil giant BP – and its share price – flounders, the British oil and gas sector is experiencing a new boom, in the North Sea and beyond (see Falkland Islands link below), the newfound confidence being best exemplified in a string of drilling successes for British independents like Dana Petroleum. Dana has recently announced discoveries in the North Sea, Egypt and Morocco, sending its share price on a steady upward tack.
In April, Dana announced a find of approximately 130 billion cubic feet of gas in its Platypus prospect in the southern North Sea. In May, the company’s skyrocketing confidence saw it enter into an agreement to buy out PetroCanada Netherlands, boosting its own North Sea holdings from 36 to 54 fields, including 15 new fields. In June Dana announced a new North Sea oilfield discovery at West Rinnes before announcing two more for its North Africa holdings, one in Egypt, one in Morocco.
Almost inevitably, Dana’s ‘string of hits’ has attracted attention from the bigger oil companies. In July, amidst interest from China’s large national oil companies, a takeover bid was formally issued by the Korea National Oil Corporation, sending Dana’s share price spiralling up another 17 percent.
Elsewhere in the North Sea, the large Catcher prospect, held between British independents Encore Oil, Premier Oil, Wintershall and Agora Oil and Gas, represents a section of rich formation. Catcher is estimated to hold 150-300 million barrels – worth around lb1 billion/$1.4 billion in terms of boosting UK Government coffers. Encore Oil’s further tests at Catcher suggest that figure too could be “very significantly” increased in the future. As the various prospects added up, Premier Oil’s share price jumped 7 percent, with the company currently recently touted as a hot investment prospect. The share price trend for many other leading British independents too is upwards, boosted by major new prospects around the Falkland Islands.
And it is not just British companies seeing recent investment in the “declining” North Sea paying off. In June the Texas-based Apache Corporation, which bought BP’s North Sea Forties Field in 2005, announced prospective capacity had jumped from 150 to 200 million barrels since the purchase. And Apache’s Maule field, discovered just last October, is already producing over 11,000 barrels day, with a further well about to be sunk. In addition, development of the Bacchus field – 70 percent held by Apache in partnership with Shell (20 percent) and Endeavour Energy (10 percent) – will shortly get underway.
Even BP has lately reiterated confidence in retaining its North Sea ‘Clair’ prospect with BP’s North Sea Manager, Bernard Looney, dismissing rumors of an imminent BP sell off in the North Sea to help pay the bill for its Gulf of Mexico spill. BP’s local energy representative Jake Molloy put it, “Clair is one of the biggest developments BP has. If you want a source of income you would be holding on to these assets, not selling them off”.
While the oil (and gas) is clearly there, the main threat to its extracting could come from a lack of investment. According to the UK Department of Energy and Climate, energy investment in the UK Continental Shelf dropped last year by lb1billion/$1.5billion to lb4.9 billion/$7.5billion. In recent years investment has declined significantly precipitating a fall in Britain’s North Sea energy output, from a high of over 4 million barrels per day (bpd) in 2001 to around 2.8 million bpd in 2009. A fall exacerbated by two New Labour tax hikes which took a direct toll on investment for the first half of the new decade.
So what changed – leading to the latest clutch of North Sea successes? According to Apache’s regional vice-president, James House, the North Sea investment ‘mood music’ began to change last year with new “government’s incentives aimed at encouraging development of smaller fields in the North Sea”. There are no signs that the new UK government is about to derail the investment incentive process.
Extrapolating the North Sea Experience
More significantly, there is no reason to doubt that the North Sea story of renewed viability and new, if more difficult to extract, prospects can be replicated in other parts of the world. And it makes a nonsense of peak oil theories that predict steep and imminent decline for global oil reserves.
Energy insiders are only too aware that it is in the long-term financial interest of the oil companies to understate energy reserves. Announcing less conservative figures would likely attract higher taxes from covetous politicians. So too, anti-carbon political zealots would be eager use higher energy tax cash to further subsidize highly expensive wind, solar and other alternative energies.
In 2008, British economist Peter Odell of Holland’s Erasmus University argued that every year more barrels of oil are added to the world’s reserves than are used up. Odell points out that when major oil companies cut production they do so to avoid would “undermining the market value of oil, and thus reduce their profits”. What was simple hard ‘above the ground’ political and economic factors, is too often misinterpreted or worse, misrepresented by peak oil theorists as ‘below the ground’ dwindling supply. Odell believes the indications suggest there is still much more to come from the North Sea’s still unexplored areas.
Dr Richard Pike, CEO of the Royal Society of Chemistry, has also consistently made out a case that there is at least twice as major oil producers would have us believe. Pike states that the industry practice of reporting “proven reserves” is an “historic convention” with little relevance to actual production.
In our forthcoming book Energy and Climate Wars Michael Economides and myself devote a chapter to debunking “oil is running out” that suggests even Dr Pike’s doubling of the current proven reserves may prove a conservative estimate.
A resurgent UK North Sea oil industry has real implications for panicky peak oil assessments. Not only does it offer a hard lesson in the impact of “above the ground” economic factors on extraction, it offers a major case study that could be extrapolated across the globe.