North Sea oil faces investment stalemate

There has been much debate over the future of the North Sea oil industry, with many predicting that new and exciting oil provinces will lure investors away with the promise of untapped resources.

Earlier this month, data revealed that UK production fell below one million barrels per day for only the second time in more than 30 years due to maintenance, which only served to heighten the decline in output from the North Sea oilfields.

The British sector pumped just 984,000 barrels of oil per day in June, significantly down on the 2.7 million bpd enjoyed in 1999.

But Alex Kemp, professor of Petroleum Economics at Aberdeen University, told investors it was little to do with a lack of reserves and much more to do with the uncertainty surrounding the investment case.

Speaking at the World & Junior Oil & Gas Congress in London on Monday, Kemp said: “Reserves have been depleting for some time but the remaining potential is still substantial. Activity levels are not particularly restrained by reserve levels, rather they are held back by other constraining factors.”

He cites the unfavourable tax system, which has seen the industry adversely affected three times over the past decade, and notes how the changes have led to increased uncertainty in the market.

“Since the Budget, assets have been put on the market but are failing to attract buyers. Naturally those companies which are selling assets are reducing their activity by doing so, which has a knock-on effect across the industry,” he continued.

Industry body Oil & Gas UK have warned that British oil and gas output could fall to around 500,000 barrels of oil equivalent per day by 2020, accounting for a measly 12% of the country’s projected demand.

However, were sufficient investment brought into the industry, output could rise as much as four times that level and meet around 40% of the country’s needs.

But Kemp argues that this investment is unlikely to increase due to escalating operating and decommissioning costs. The UK oil and gas industry is believed to be facing decommissioning costs of as much as $30 billion and it’s a clear bone of contention.

“The Budget earlier this year caused alarm,” Kemp said. “At the moment, the industry desperately needs some guarantee that they will receive decommissioning relief.”

Large oil companies have highlighted the difficulties in winding down old infrastructure and concerns have been raised that older fields are struggling to find new buyers because of the large sums of cash in security required to cover decommissioning liabilities.

The situation has prompted some operators to remove asset life extension plans and there could be more such decisions ahead.

Kemp’s answer to the problem is a decommissioning trust fund but says that the Treasury have not been prepared to accept this solution.

“Mother Nature has left a lot for investors but they can’t enjoy the maximum benefits because of these ongoing problems. We have a stalemate situation that is harming activity levels in the UK Continental Shelf,

“A solution must be found,” he warned.