Drop in the ocean

In these tough times for oil producers, there are few more difficult environments than the deep waters off the coasts of Norway and the UK. Industry confidence there has hit rock bottom, as the price of oil falls perilously close to the costs of production and expenses are rising steadily.

In fact, the North Sea has become the world’s most expensive oil and gas region, according to trade association OGUK. This is not a boast. Not at a time when minds are being focused on containing costs all along the supply chain.

But despite this, there has been something of a revival in the North Sea. Output is at its highest in more than four years, and OGUK expects output at fields coming on line in 2015-16 to offset a 12pc decline in production at existing UK fields this year. Projects such as Clair Ridge, Schiehallion, Mariner, the Greater Catcher Area and Laggan-Tormore are expected to come on stream in the next few months and years.

Maintaining this momentum — a legacy of the $100/bl years — is crucial to a region that appeared not so long ago to be in terminal decline.

With that in mind, OGUK is attempting to foster an environment of collaboration across the North Sea. Its new initiative, the Efficiency Task Force, may have a name like something a failing government comes up with toward election time, but it could be a good fit for the changing face of the region.

Among other things, it proposes encouraging a pooling and sharing of resources – “high-value kit” in OGUK’s lingo – among operators. This would not have worked until recently, but the North Sea is increasingly becoming the domain of the independents — a far cry from the basin’s early days, when it was dominated by international oil companies. The newer producers — the likes of Enquest, Dana, Ithaca and Det Norske — are smaller and nimbler than their international peers, but with shallower pockets. This shift could make UKOG’s task simpler.

But pooling resources is about saving pennies, when the target should be saving pounds — lots and lots of pounds. And the vastly expensive elephants in the room take the form of old, obsolete or outdated infrastructure that needs removing. Decommissioning is becoming big business – there are 21 projects under way, including for the Brent field, the daddy of them all. The bill is estimated to run to tens of billions of pounds. There is even talk that when legacy operators come to divesting North Sea assets, they may have to retain some of the decommissioning costs.

It is not just this eye-watering bill that will hinder future output — small start-up projects become less economically viable, if there are no existing platforms and pipelines to use. The long years of wrangling over third-party access to North Sea pipelines was something less than a model of industry co-operation, requiring government intervention to arbitrate and monitor disputes. Exploration investment was already falling before the drop in global prices, and this decline has since accelerated.

In the meantime, the impact of lower prices on company spends is becoming manifest. Investments in the Norwegian sector will drop by 15pc this year and by another 8pc by 2017, the Norwegian Petroleum Directorate says. Similar declines are expected in the UK North Sea.

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