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UKCS: still got it at 50

Despite low oil prices and extensive job losses, UK North Sea production isn't going into meltdown

Anyone hoping UK North Sea oil production would crumble in the face of low crude prices - and help rebalance the lopsided global oil market - is out of luck. Last year, despite painfully low oil prices, hydrocarbons output from the UK Continental Shelf (UKCS) managed its first increase in over 15 years. And growth could continue, as new fields enter production.

In the first 10 months of 2015, liquids output rose by nearly 11%, compared with the same period of 2014. Natural gas production was up by around 6% on the year. Overall, full-year production will be 7-8% higher than in 2014, says Oil & Gas UK, a trade association of upstream operators.

The North Sea is a high-cost basin, largely made of small, mature assets with high depletion rates. Production declines are an accepted part of life; since 1999, UKCS oil production has fallen from 2.6m barrels a day (b/d) to about 0.9m b/d. Reserves are dwindling too; only the West of Shetland area remains relatively under-explored and prospects for big finds are limited. Reflecting the fading appeal of a basin first drilled in 1967, the biggest companies have continued to divest assets and reallocate funds.

At first glance 2015's production numbers look impressively resilient. But there are routine explanations for the increase. One-off events had an effect; for instance, maintenance in 2014 at Buzzard, comfortably the UKCS's largest producing field, wasn't repeated in 2015 - skewing the year-on-year comparison.

The main reason, though, was robust investment in field development, stimulated by high oil prices before mid-2014, which encouraged operators to extend field life and defer decommissioning. That cycle of upstream investment - amounting to over £50bn ($73bn) in the past four years, according to Oil & Gas UK - is now showing up in production figures.

Much of the spending has involved new-field development: Golden Eagle, the UKCS's second-largest producing field, with initial plateau production estimated at 70,000 barrels of oil equivalent a day (boe/d), started up in late 2014, making a relatively hefty contribution to 2015 production. Kinnoull, the fourth-largest producer (Forties is still clinging to third place), with a 50,000 boe/d production target, came on stream in the last few days of 2014. Other recent start-ups or ramp-ups included Gannets F and A, and Peregrine - smaller fields, but still among the UKCS's 20 largest in terms of output.

Another important chunk of the £50bn, meanwhile, has been directed at improving production efficiency, with operators retooling ageing offshore production systems for the realities of 2016 - rather than requirements specified in decades-old designs. These two factors - new capacity and a better return from existing assets - should stave off any significant slide in oil and gas production over the next 12 months and may even boost output further. "I can't say production is going to soar," says Mike Tholen, economics director of Oil & Gas UK, "but the dynamic is not one where we're going to collapse and go away."

Even though official Department of Energy & Climate Change (Decc) figures suggest a gradual resumption of the decline in output as early as this year, the Oxford Institute for Energy Studies (OIES), a think-tank, expects "modest growth" in production in 2016, as new fields start up or existing ones are expanded. Wood Mackenzie, a consultancy, expects oil and gas production to hold steady in 2016, with an increase in gas output offsetting a fall in liquids production. But, over the next two to three years, liquids production will increase, says analyst Ian Thom. "There is more to come, as new projects ramp up and as production efficiency improvements continue."

Planning ahead

Although spending on decommissioning is gathering pace, field closures seem unlikely to make much of a dent in production - for a couple of years at least. Wood Mackenzie estimates there might be about 30 field cessations this year, but these will mostly involve mature fields with low production rates - below 1,000 b/d.

Further ahead, though, the outlook gets murkier. For one thing, most planned production capacity additions are scheduled to come on stream in the next two years. Production could, therefore, come under renewed pressure after 2017, says OIES. A slump in drilling activity in the past two years is further cause for pessimism. In 2015, exploration and appraisal drilling fell to an all-time low, with just 13 exploration and 13 appraisal wells drilled, according to the Oil and Gas Authority (OGA), the regulator. In 2008, there were more than four times as many.

Operators, of course, are acutely aware of this, and of how tough operating conditions have become more generally. Many assets are on a knife-edge between continued production and decommissioning; and the longer low prices persist or the further they fall, the likelier the latter choice becomes. At the same time, the more jobs lost in the region, the tougher it will become to sustain operating capacity in the long term. "The environment feels tough - it really does," says Tholen.

Yet there are some grounds for optimism. With an estimated 20bn boe still to recover - a O&G UK figure - potential remains. Reasonably large fields are still being developed too, including BP's Claire Ridge expansion and Maersk's Culzean gas field, the largest gas field sanctioned since East Brae in 1990.

Gas prices, meanwhile, have proved more resilient than oil prices. According to Decc, between the third quarter of 2014 and the same quarter of 2015, average industrial heavy fuel oil prices were down by 33%, while gas prices fell by less than 7%.

Then there are the qualities that keep investors coming back to the UKCS despite the heavily worked geology: political stability, competitive tax terms and an infrastructure network that can make developing even the smallest discoveries possible.

Perhaps most significantly, the government seems determined to continue to adapt to evolving market conditions. It has promised to implement the findings of the Wood review, an independent report it commissioned in 2013 to identify ways of maximising recovery. An important step was the creation of OGA, an independent regulator - one with a closer and more collaborative relationship with operators, and a pin-sharp focus on extracting oil and gas.

The 29th licensing round, later this year, could provide new insights into the industry's appetite for UK upstream investment. In the renewed spirit of support from Westminster, the government is throwing in £20m-worth of seismic data, in a round that targets under-explored areas of the North Sea. The real test, though, will be not acreage awarded, but the drilling activity that occurs on it later.

More North Sea jobs go as price slump continues

BP is to cut its North Sea workforce by 600 - or 20% - bringing total job losses among the region's oil and gas companies to around 5,500, says Oil & Gas UK (OGUK), an association of offshore operators.

Those 5,500 redundancies appear to have "overwhelmingly" affected onshore roles, leaving offshore staff relatively unscathed, says OGUK. Yet BP admits that its latest cuts will result in the loss of some offshore positions, as well as office-based staff - and a mixture of contractors and employees.

Continued job losses - especially in engineering and technical roles - threaten to erode the industry's long-term ability to operate, and might even affect safety. That, says OGUK, is "why the sector is focusing on becoming more efficient, as opposed to simply cost-cutting - to put itself into a fitter state for the future". A spokesperson for the Oil & Gas Authority says the regulator is "working very closely with government and industry to do all it can to support" the North Sea industry at one of the most uncomfortable points in its 50-year history.

Damage to support industries, meanwhile, is much greater. OGUK estimates that since the start of 2015, the total number of jobs supported by the North Sea oil and gas industry has fallen from about 440,000 to roughly 375,000. Most of those 65,000 jobs have been lost to sectors that support the oil industry, such as hotels, catering and transport.

The BP cutbacks, announced in January, are part of a package of redundancies that will reduce the firm's global headcount by 4,000 over the next two years. But the company, which laid off 300 North Sea workers a year ago, says it remains committed to the UK North Sea. BP is not the only North Sea operator to have made redundancies in an attempt to tackle the low crude-oil price. Other operators and services companies to have laid off workers in the region include Shell, Chevron, ConocoPhillips, Wood Group and Petrofac.

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