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North Sea's golden years

The region may be past its prime but is still running with the best

The North Sea has been through a remarkable change since the oil price fall in 2014. Costs have dropped by as much as 40% and, against the odds, a new slate of projects awaits investment decisions in 2018. Despite its maturity, the region still sucks in investment and competes with upstart shale oil and low-cost Opec resources.

Two fundamental drivers are behind the North Sea's continued attractiveness: it's conventional oil, relatively easy to get to, and it's located in politically placid OECD waters. OECD conventional liquids production has declined from about 23m barrels a day in 1997 to about 17m b/d in 2017. For producers that don't have access to North American unconventional projects and want to avoid political risk outside OECD, it's Norway and the UK that often offer the best investment arena. In other words, the risk-adjusted cost of operating in Norway and the UK makes the resources highly competitive on top of the general cost reduction that has transpired since the start of the downturn.

Statoil's Johan Castberg project in the Barents Sea serves as a good example of how the region has transformed itself. The project, holding about 0.5bn barrels of oil, was originally envisaged as a semi-submersible platform with a pipeline to shore. Costs were estimated at around NOK100bn ($12.23bn) and the breakeven was around $80 a barrel. The price drop prompted a rethink on the plans, and the overhauled design is now a very competitive floating production storage and offloading (FPSO) development that will cost half what was previously thought and break even around $30/b. The project is expected to reach final investment decision by the end of 2017 and enter production late 2022.

The same story can be repeated for many other ventures, such as Statoil's Snorre Extension, Chevron's Rosebank and ConocoPhillips's projects in the Greater Ekofisk area. Overall, these projects are now poised to reach final investment decisions, and about 2.8bn barrels of oil equivalent are expected to be sanctioned in 2018 between Norway and the UK. That's up from 0.8bn boe in 2017 and just 200m boe in 2016.

The new wave of projects is expected to help maintain combined output from Norway and the UK at between 5.5m boe/d to 6m boe/d through 2025, assuming an oil price above $60/b.

Of this, two-thirds, around 4m boe/d, will come from Norway. Liquids production will jump from about 1.85m b/d in 2013 to more than 2.4m b/d in 2025, thanks to the start-ups of the Johan Sverdrup, Johan Castberg, Wisting and Alta fields.

The UK is seeing a similar renaissance thanks to major projects sanctioned before the downturn. Quad 204, Kraken and Catcher all started pumping in 2017. In 2018, BP's Clair Ridge field and Statoil's Mariner project will lift UK liquids production further to just over 1.2m b/d.

While the immediate future looks promising for the North Sea, poor exploration performance since 2014 means the project portfolio is running dry. The highly-anticipated Barents Sea drilling campaign in 2017, which included the high-impact Korpfjell prospect, failed to deliver. At least 10 more wells will be drilled in the Barents Sea in 2018, and explorers will be hoping for more success.

The UK saw more promising exploration results with finds in Hurricane Energy's Greater Lancaster Area located West of Shetland. Although substantial amounts of oil have been proven in the fractured basement reservoir, there's still uncertainty around the production capacity of this reservoir type. The recently sanctioned early-production system will be key to understanding the reservoir's full potential. Oil could start flowing from the project by the end of 2018.

The region will, nevertheless, need new big discoveries to keep production from falling off after 2025. It's worth noting that the same could have been said for the region around 2003, but policy changes, new discoveries and a rising oil price helped to reinvigorate optimism, production and activity. It remains to be seen if history will repeat itself yet again. But for 2018 at least, the arrows are pointing up.

Simon Sjøthun is Senior Project Manager at Rystad Energy

This article is part of Outlook 2018, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here

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