The remaining lifespan of the UK’s North Sea oil and gas production risks being halved as the economic crisis has prompted a plunge in exploration in one of the western world’s most important deposits, the industry has warned.
The number of exploration wells being drilled in the North Sea has collapsed by 78 per cent in the first quarter of 2009 compared with the same period last year, according to the most recent industry data from Deloitte, the accounting and consulting firm.
In total, only 18 exploration and appraisal wells were drilled in the UK during the first quarter, marking a 41 per cent drop in total drilling activity compared with the same period last year. UK Oil and Gas, the industry group, is even more pessimistic, forecasting that total drilling could drop 66 per cent this year.
Derek Henderson, senior partner at Deloitte, said: “Unless exploration is at a healthy clip, it risks shortening the life of fields and the overall UK continental shelf, in this case.”
Exploration and appraisal wells are critical to any oil region’s long-term supply prospects. But they are particularly important for the North Sea, where ageing fields’ production is rapidly declining.
The UK and Europe will increasingly have to rely on Russia for natural gas and the Middle East for oil.
The worsening exploration climate could knock 10-15 years off the North Sea’s expected lifespan of 20-30 years, meaning almost half of all its infrastructure could be decommissioned within the next 11 years, UK Oil and Gas estimates.
Instead of satisfying 45 per cent of the UK’s oil and gas needs in 2020, at the current investment pace the North Sea would only be able to meet 12 per cent of its demand.
Oil prices have plummeted from $147 a barrel in July 2008 to about $50 today.
The North Sea’s situation is significantly worse than elsewhere because new discoveries tend to be smaller and rarer and old fields are becoming less productive but more expensive to maintain.
Analysts at Barclays Capital expect spending on global exploration and production to fall by only 12 per cent in 2009.
Companies – and the banks that fund them – are reluctant to explore the North Sea because oil prices at $40 to $50 a barrel make developing a new field, especially one that requires a lot of new infrastructure, a risky, if not foolhardy, venture. The industry forecasts further consolidation but fears it could lose as many as 50,000 of its 400,000 jobs in the next two years.
The fall in exploration activity is so bad that the Department of Energy has had to postpone its offshore licensing round and the Treasury has indicated that it will give companies some tax relief in the Budget later this month.
From 2010, the government is likely to suffer a significant drop in tax revenue because oil companies, together with banks, have in recent years been their most important sources of funding.