A “total reinvention is the level of change that is needed” for the North Sea to move forward and continue to be competitive, energy leaders heard in northeast England yesterday (11 March).
The North Sea’s mature status, high costs, low exploration rates and falling production were already cause for concern, even before the fall in oil prices from US$110/bbl to $50bbl.
But, speaking at NOF Energy’s annual conference, Energy; A Balanced Future, in Gateshead, BP Head of Energy Economics Paul Appleby said the North Sea had been here before and had recovered and that $50/bbl prices were unlikely to be the new norm.
Image: The Sage Gateshead, northeast England.
“$100/bbl oil was never going to be the norm. $50/bbl is not going to be the norm either,” he said. Volatility and change is the norm for the energy industry." Appleby said the North Sea was a mature province, with many challenges – even before the oil price fell. But, he said: “I remember the 1980s what the industry had to do then to be more competitive and it will do it again.”
However, Nigel Lees, Regional Director – Strategy & Growth, Wood Group PSN, pointed to the fact that the North Sea is a different basin to what it was in the 1980s. “This basin has never been as mature as it is today and that brings with it a different context,” he said.
Capital investment in the North Sea rose to £13 billion in 2013 and then a record £14.8 billion in 2014, said Lees. In 2014, further £9.6 billion was spend on operating costs – a 10% increase on 2013. On top of that, £1 billion was spent on decommissioning. Together, that amounts to more than £25 billion in spending – which is more than the £24.4 billion revenue generated in the basin, putting the UK North Sea in negative equity for the first time since the 1980s, said Lees.
“It is little surprise, in this environment, that projects have been out on hold - Chevron's Rosebank, Statoil's Bressay, and BG Group's Jackdaw,” Paul Charlton, chairman of NOF Energy, said. Together, those projects totaled some £10 billion investment which could have gone to the UK supply chain.
Three areas need change, said Charlton - regulation, costs and efficiency, and fiscal reform. In regulation, the new Oil and Gas Authority has been formed and in fiscal reform, the UK's Chancellor is due to announce measures following a fiscal review in the Budget next week.
To address cost and efficiency, a "step change in the way industry works," says Charlton. "It is going to require the operators to work together in a different way and to be open to new ideas. We need to break this ‘race to be second’ mind-set, which is still endemic in the industry. Total reinvention is the level of change that is needed."
Exploration efforts – the lifeblood of the basin – also need to be stepped up, said Lees. Just eight new fields were sanctioned last year and only 14 of 25 expected exploration wells were drilled. Just 8-13 wells are expected to be drilled this year.
Image: Nigel Lees speaking at the NOF Energy event.
But, Lees also said cost efficiency needed to be addressed and suggested four areas for focus: making sure the right people are in the right place at the right time; improving offshore efficiency by making sure the right resources were in place; better logistics collaboration, including rig sharing; and standardization and simplification. Every time we get involved in a project engineering is reinvented, he said, and everything has to be gold-plated.
Lees added: “Whatever tax changes come next week, it is only part of the story. We as an industry need to step-up.”
Speaking about the global energy landscape, Appleby said BP expected to see growth in gas, a decline in coal and increasing renewable energy supplies, leading to a balanced energy landscape by the 2030s. New resources, which were hardly visible in the global energy mix 10 years ago, would play a much larger role in this, including renewables, shale gas and tight oil, oil sands and biofuels.
LNG is destined also to play a larger role, he says, with supplies opening up from Australia, Africa and the US due to overtake Qatar's current dominant role. This change will likely impact global gas prices, due to more being shipped between different markets, where it is currently constrained by pipeline infrastructure, said Appleby.
This will also enable greater diversification of supply. Europe, for instance, will need to import 66% of its gas by 2035, but with LNG it will be able to import its gas from different sources. Currently, some 50% of its supply is by pipeline, and of this about 80% is from Russia, says Appleby. By 2035, Europe will import about 75% of its gas.
The article previously stated that Xcite Energy's Bentley field is on hold. "Bentley field is not on hold and is moving to the submission of the field development plan," according to Xcite.
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