Will The Shale Revolution Kill North Sea Oil & Gas?

  • Date: 24/02/14
  • John Kemp, Reuters

The shale revolution has profoundly altered the North Sea’s place within the global oil and gas industry. In a world of $100 oil or below, the UK’s offshore oil fields are becoming less attractive.

Britain’s North Sea exploration and production business is set to be transformed, with cooperation replacing competition and proactive, intrusive regulation replacing a light touch.

On Monday, ministers promised to back fully the recommendations contained in Ian Wood’s review on maximising oil and gas recovery from the UK Continental Shelf (www.woodreview.co.uk).

A powerful new regulator will be spun out of Britain’s Department of Energy and Climate Change (DECC), staffed by industry experts with salaries to match, to end the squabbling among offshore operators and promote a strategy based on shared infrastructure and regional development plans.

Government, industry and the regulator will all be officially committed to the goal of maximising economic recovery (MER) of the oil and gas that remains in offshore fields.

And the regulator will be given strong new powers, including compulsory mediation among operators and the power to withdraw exploration and production licences, to ensure that all operators behave in line with this goal.

But the problem is that the Wood review treats symptoms rather than underlying causes.

The issues facing Britain’s North Sea oil and gas industry are structural rather than behavioural. Compelling more cooperation may not be enough to stem the region’s decline.

ANOTHER SHALE VICTIM

The shale revolution has profoundly altered the North Sea’s place within the global oil and gas industry.

As a result of fracking, the marginal barrel of oil in the world now comes from an onshore shale play in North America. For the UK North Sea to continue developing, it must be able to compete with oil costing just $80 per barrel.

Britain’s remaining North Sea oil and gas fields are mostly marginal, which is why the major oil and gas companies have mostly quit the region.

In a world of $150 oil, even the small UK fields would look like a vital resource. In a world of $100 oil, they start to look much less attractive.

Much of the infrastructure in the North Sea is ageing and will need expensive maintenance and upgrades to remain in a safe condition.

Small operators are already struggling to raise the funding to drill wells and develop fields and may not be able to pay for their share of common infrastructure upgrades.

There is little the new regulator can do about cost pressures, from high salaries to rig-hire rates, which the Wood review identifies as another problem hampering exploration and production.

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