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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Can North Sea Oil Stay Profitable?

The UK continental shelf in the North Sea has recently drawn attention with several significant asset sale deals that have seen Chevron reduce its exposure to the legacy production area and small independents gain more ground. Now an academic study has estimated there may be between 15 and 17 billion barrels of oil equivalent still to be pumped from the North Sea over the next three decades although overall production is set for a steady decline.

Professor and Alexander Kemp and Dr Linda Stephen from the University of Aberdeen, on request from the Oil and Gas Authority, recently completed a study involving economic modeling based on two scenarios featuring crude oil prices at US$50 and US$60 a barrel, respectively.

Nothing the favorable effect of lower production costs in the area, the authors of the study report the development of these resources would cost a few hundred billion dollars, assuming the current tax regime remains in place, incentivizing producers to drill for more oil and gas and also assuming platform decommissioning costs of over US$68 billion (53 billion pounds) in the period to 2030.

Remaining resources of 15-17 billion barrels of oil and gas sound like pretty good news—but let’s not forget the price and tax assumptions—yet the authors also report production will decline steadily. The number of new wells drilled annually in a “medium effort” scenario is set to fall from 15 in 2017 to 12 in 2030 and 10 in 2040. In a “low effort” scenario, the number of new wells drilled would decline from 12 in 2017 to 9 in 2030 and 7 in 2040.

It’s worth noting that this decline will occur despite improving technological capabilities that are boosting recovery rates while lowering costs further. There is hardly a chance for anyone exploring the North Sea to stumble upon an elephant now. Indeed, the authors of the study note the current exploration environment is dominated by small undeveloped discoveries that cannot generate substantial net present value whatever the investment made. Related: Why Big Oil Loves Artificial Intelligence

Even so, investment in the North Sea is rising: The Financial Times reported earlier this week investments in new oil and gas developments the area had reached US$3.87 billion (3 billion pounds) since the start of 2018, the highest since 2015. This compares with less than US$644 million (500 million pounds) invested in new North Sea oil and gas projects in both 2017 and 2016, the FT’s Myles McCormick reported.

Yet challenges remain. As Oilprice reported earlier this month, there has been something of an exodus of Japanese companies from the UK North Sea. While these companies have been replaced by small, private equity-backed independent energy firms, it remains unclear whether this replacement could ensure sustainable development of the area’s yet untapped resources over the long term.

The recent approval by the Oil and Gas Authority of a joint project of BP and Shell is certainly big news in this respect, after most supermajors, including these two, shrank their presence in the North Sea, but chances are such announcements would be few and far between in the long run. After all there is only so much lower than production costs could fall, and the future of prices is highly uncertain, discouraging risky undertakings.

By Irina Slav for Oilprice.com

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