On 18th September 2014, Scotland will vote on the following question:
Should Scotland be an independent country?
Answer YES and the vote is for independence, answer NO and the vote is to stay with The United Kingdom. Energy has not figured at the top of the debating issues that have been dominated by currency union, the economy and disaffection with Westminster. The future of North Sea oil has been on the second tier but periodically gets thrust into the limelight, normally on the back of sensational headlines about the future. Part of the current reality is that Aberdeen is in the early stage of cyclical recession, brought about by declining production and soaring costs now exacerbated by Brent sliding below $100/ barrel. Redundancies have already begun. In this post I want to examine three issues that have been in the news 1) future exploration potential 2) offshore fracking and 3) remaining reserves.
Figure 1 The history of UK Offshore Field discoveries according to this UK government source. Three main discovery cycles are evident, the third centred on 2007 riding on the back of rising oil prices. The UK is now at a discovery rate cycle low not witnessed since 1968. In recent commentary the highly respected Professor Alex Kemp of the University of Aberdeen saw on average 3 discoveries per year over the next 30 years which is a rather cautious but credible estimate.
The local Press and Journal (P&J) carried a story on September 10th with the headline:
Economist predicts oil bonanza
Professor Alex Kemp amongst other things forecast that there may be 99 new fields discovered in the next 30 years. So let’s place this bonanza in context. Figure 1 shows the history of UK offshore field discovery. Since 1965, on average 12 fields have been discovered per year. The best year was 1989 with 29 discoveries. That was a bonanza! Professor Kemp’s forecast for the future is for 3 discoveries per year, one quarter of the historic average.
Another important consideration is the size of discoveries. I have not had time to collate this, but rest assured that the average size has declined dramatically with time. On average, future discoveries will be much smaller than those made in the past.
Figure 1 shows three clear discovery cycles and we are now at the cyclical low. Companies have for the time being run out of ideas and money. But that will change and the industry will pick up again in the years ahead, as new exploration plays are developed and new technology is brought to bear.
Professor Kemp had a letter in the P&J on 12 th September complaining that the paper had misrepresented his views saying amongst other things:
In Wednesday’s P&J, there was a headline attributed to myself predicting an “oil bonanza” from the North Sea. Nowhere did I say this. In our research, our economic model predicts that investment will fall off in the near future, while oil/gas production could increase for a few years, but then enter long-term decline. The total recovery we predict to 2050 is in the 15 to 16.5 billion barrels equivalent range.
By 2050, production is in the 200,000 to 250,000 barrels oil equivalent range.
I have had my disagreements with Prof. Kemp over the years but I do agree with the gist of this statement. Oil and gas production will rise a little in the years ahead with major projects like Clair phase II and Laggan fields coming on line. But then underlying decline of the whole basin will take production down. The North Sea will still be producing in 2050 but at much reduced levels that are very difficult to predict today.
Hopefully Figure 1 provides some context. Yes the North Sea has a future but that future is quite dim compared to the past. Aberdeen will continue to prosper for decades providing services to the oil industry in Africa and Asia.
Before the UK has even successfully drilled, fracked and tested an onshore well in “shale gas” or “shale oil” there is talk of an offshore fracking bonanza. The target is the Kimmeridge Clay Formation that is the organic and clay rich source rock for most of the oil and gas found in the Central and Northern North Sea. This is one of the richest source rocks in the world and it is certainly true that where it is buried to depths of 10,000 feet or more that it will contain abundant oil and gas. The problem is how to get the stuff out since the Kimmeridge Clay is a mud rock (true shale) where the permeability is so low that oil and gas will not flow. Fracking is designed to fracture the rock so that a portion of the oil and gas may be exploited. Let me provide some context.
In the olden days of giant conventional oil fields, initial flow rates from wells in excess of 20,000 barrels per day was the prize exploration companies were looking for. Forties Field had peak production rates in excess of 600,000 bpd back in the late 70s.
So now let’s consider shale. I sent an email to one of my groups with a question on flow rates. Shale expert Arthur Berman replied:
Peak rates are about 500-600 bopd per well in the best fields.
And those rates will decline to half that in a year or two. So a new shale well may produce about one 40th of new conventional well. Drilling long horizontal wells and fracking offshore is VERY expensive. 500 bopd will produce a cash flow of $18 million in the first year, declining rapidly thereafter. According to Professor David Macdonald of the University of Aberdeen conventional North Sea wells today cost around $30 to $75 million each. Long reach horizontal and fracked wells will cost substantially more. It is therefore highly doubtful that unconventional oil offshore may come close to paying for the well let alone the platform and other operating costs at current oil prices.
Let’s try and frame this a different way. Sanish is one of the more prolific sweet spots in the Bakken shale oil play of N Dakota. Pre 2012 it had 273 operating wells. These wells are expected to eventually produce 167 million barrels of oil. That is really nice to have onshore and would indeed be nice to have in the North Sea. The catch is well productivity. A typical N Sea steel jacket platform may have 20 slots for wells (i.e. capability to produce from 20 wells at any one time). 13 or so offshore platforms would be required to support the relatively small production that Sanish provides. This may create a jobs bonanza, if only it could be achieved at a profit, which it can’t at current oil prices. 167 million barrels recovery may support paying for one platform but certainly not 13. OK, so the plan may be to use existing infrastructure, delay decommissioning and keep the N Sea going for a while longer. Great! If only the wells could produce more money than they cost to drill.
There seems little doubt that the Kimmeridge Clay will be drilled and fracked in the North Sea. Stock prices will rise on expectation and then fall again when the financial reality, that in the olden days was always worked out in advance, sinks in.
N56 is not a new hallucinogenic drug circulating around NE Scotland, it is an independent think tank with distinct YES leaning tendency much loved by the Scottish National Party leadership. N56 recently published Part 3 of their report into the future of the North Sea which reads like a report produced by industry experts.
Here’s an excerpt of the summary:
To date, 42 billion barrels of oil equivalent (bn boe) have been produced from UKCS using conventional production techniques and there is a consensus that there are remaining conventional reserves of around 24 billion boe (how much of this is produced will depend on oil prices and whether policy recommendations to encourage collaboration and maximise recovery are implemented).
Unconventional oil and gas production, or Upper Jurassic Oil, could add a further 21 billion boe – and perhaps even as much as 42 billion boe. This is based on recovery rates of between 5% and 10%, of the unconventional reserves in the UK sector of 420 billion boe (out of a total 1,000 billion in the Kimmeridge Clay as a whole). Most, if not all, of this would be within the Scottish continental shelf.
I should like to point out that there is absolutely no consensus on 24 billion barrels being the remaining conventional reserves, a point that Sir Ian Wood has been at pains to point out. Reiterated by Professor Kemp (see above). But to that N56 are now adding another 21 billion or even another 42 billion.
North Sea unconventional oil reserves are in fact zero and will remain zero until commercial viability is proven using the drill bit. Let’s take a look at what would be required to produce this resource. Average total recovery per well in the Bakken is 412,000 barrels (source Arthur Berman). That means 102,000 wells would have to be drilled off shore to recover 42 billion barrels.
42 billion barrels has a street value in Aberdeen of $4.2 trillion. The price tag for 102,000 wells at $50 million a pop is $5.1 trillion and that is likely a gross underestimate. Jobs galore, but money haemorrhaging from the economy.
As already pointed out, the N56 report looks professional and is superb propaganda. They even produce production numbers and costs that are not too far out of line with those I provide here. So where is the catch? N56 provide a typical oil value per well of $20 million and describe drilling costs as £10 to £30 million per well, i.e. $16 to $48 million in costs per well. So let’s take a deep breath, their median cost is $32 million and revenues $20 million. What are these guys smoking?
And it’s worse than that. All N56 costs are based on re-entering existing wells. The existing wells in the N Sea may only target a tiny fraction of the Kimmeridge resource. You quickly need to divide your 42 billion resource estimate by a 100 or even 1000. And even then you still need to work out how to earn more than you spend.
N56 conflates $ with £ and resources with reserves in an attempt to deceive. Is this what the future holds?
Prediction is very difficult, especially about the future.
Attributed to amongst others Niels Bohr and Yogi Berra. I will make a prediction for Friday 19th September and that is approximately 50% of the Scottish people will feel elated and the other 50% distraught. What has brought such division to our society?
by Euan Mearns
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