There are growing concerns about the “sharp decline” in the production of North Sea oil and gas. The trade body, Oil and Gas UK, says in its annual report that, while there is record investment this year of £13.5bn, there has also been a sharp fall in output over the last two years. It warns that the industry’s latest estimates suggest that the decline will continue this year with no signs of recovery next year. The investment will only start to show a return from 2015.
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The cost of extracting oil and gas has increased
The report also raises worries about the rapidly rising cost of extracting an “average” barrel of oil. Extracting the oil has become more difficult because of the challenging geology; there have also been unplanned shutdowns on offshore platforms. The result is that the unit cost per barrel for extracting oil from the UK Continental Shelf has risen four-fold over the past decade. At the same time, the production efficiency rate has started to fall. This is the measure of how much oil or gas can be extracted from a given field. Today, it’s around 60% but just seven years ago, the rate was over 80%.
As the report points out in the restrained language of an official document, “Oil and Gas UK has found that much of the cost escalation is concentrated in a small number of fields, but the general trend for unit operating costs is rising markedly and this will not change unless the decline in production is reversed,” says the report. If there were to be a fall in commodity prices, the more expensive assets would have to be shut down and could face premature decommissioning.”
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John Swinney
Finance Secretary
Both the Scottish Finance Secretary, John Swinney, and the UK government’s Energy and Climate Change Minister, Greg Barker, welcomed the report. Mr Swinney pointed out that “the record levels of investment that we are currently seeing will raise production, which will see the sector continue to make a significant contribution to the public finances. With up to 24 billion recoverable barrels with a potential wholesale value of £1.5 trillion, more than half of the resources in the North Sea, by value, still to be extracted, it is clear that the industry will make an important contribution to the Scottish economy for decades to come. This latest report suggests that the industry will be active beyond 2050″.
Mr Barker described the industry as being in “excellent health”, adding that the report “…shows the positive impact the government’s fiscal policy has had on the UK Continental Shelf. The report makes it clear that the UK’s targeted tax regime will help ensure that we maximise the economic production of the country’s oil and gas reserves. The UK government can afford to provide this support, even at the expense of short-term revenues, because of the size and diversity of the UK economy.”
