The oil industry is expected to increase spending in the North Sea and the number of projects that could receive a greenlight is set to rise this year for the first time in half a decade.
An estimated 12 to 16 green-and brown-field projects are expected to be sanctioned in 2018, according to a report from Oil & Gas UK. To put that in context, only 17 projects moved forward between 2014 and 2017, combined.
That would translate into additional spending of about 5 billion pounds and the production of 450 million barrels of oil equivalent over time. As a result, revenues for oilfield service and supply chain companies will rise for the first time in years, the report predicts.
More spending and drilling will ultimately mean more oil and gas production from the UK North Sea over the next two years, although the level of spending and drilling “still falls short of the level required to sustain long-term production at current levels,” Oil & Gas UK said.
“While the project landscape for 2018 is the healthiest the industry has seen since 2013,” the industry will still need “greater exploration success” and will also need to boost production in existing assets in order to avoid decline. For its part, Standard Chartered says that without more gains in spending and the sanctioning of new projects, output will once again head into decline after 2019. Related: American Investors Aren't Interested In Aramco
The lack of investment from the last few years will soon start to bite. “Between 2014 and 2017, 33 new fields came on stream. This year, just four to six new field start-ups are expected,” Standard Chartered wrote in a note. “Drilling remains an ongoing concern; exploration, appraisal and development continue to falter.”
The bank says that only 94 wells were drilled in 2017, the lowest figure since 1973.
The North Sea is a mature oil basin that has been suffering from declines for a long time. It is a high-cost area, with oil fields that have mostly been picked over. Still, oil companies are greenlighting some new projects, and are also returning to older fields with new technology.
The International Energy Agency singled out the North Sea as one area that has seen a dramatic improvement in the decline rate at existing oil fields. In its Oil 2018 report, the IEA said that globally, the decline rate at mature oil fields dipped from an average of 7 percent per year between 2010 and 2014 to just 5.7 percent in 2017. The unexpected improvement came from a variety of places, but the IEA singled out the North Sea for exhibiting a “remarkable deceleration in decline rates.”
Slower decline rates ultimately help the region avoid a decline in absolute terms. “While in the North Sea the majority of output comes from fields that have already peaked, a number of redevelopment projects and efforts to reduce downtime and maximize output have paid off,” the IEA wrote. The agency said that in the Norwegian part of the North Sea, the weighted average decline rate dipped to 9.3 percent in 2017, compared to 18 percent in the early 2000s. “Decline trends in the United Kingdom are similar despite a marked slowdown in drilling rates,” the IEA said. Related: Oil Prices Up As EIA Confirms Crude Draw
An improvement in the decline rate along with higher levels of drilling and spending could lead to a slight uptick in overall production in the short run. The long-term is another matter. Because so many of the fields have been in production for decades and are past their peak, output gains are difficult to achieve. Higher oil prices would likely be needed if the North Sea is to boost production for a longer period of time.
Still, the report from Oil & Gas UK that points to the first increase in FIDs in several years will be met with relief from the industry. Last year, Royal Dutch Shell’s CEO Ben van Beurden told the FT that the North Sea had escaped the “death spiral,” which had seemed likely just a few years earlier. The decommissioning of older infrastructure would have raised the cost of existing assets, ultimately pushing more fields to shut down. “That big risk . . . looks to have been averted,” van Beurden told the FT in 2017.
By Nick Cunningham of Oilprice.com
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