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UK North Sea gas may buck decline trend

Record investment in UK North Sea gasfields could reverse a decade-long downward production trend, according to consultancy Wood Mackenzie

Gas production has been falling since the beginning of 2000, as fields mature, but large new developments mean the next few years could see output rise again.

“We forecast the decline in UK gas production to be arrested in the next three to four years, because of gasfield developments west of Shetland, before the declines continue again from 2015,” said Graham Freedman, senior gas and power analyst at Wood Mackenzie. The consultancy predicts UK North Sea gas production to climb this year and rise to 51.1 billion cubic metres a year (cm/y) in 2015, 10% above output last year.

“The main projects coming on stream in 2012 and 2013 are Devenick, Breagh and Jasmine, which should add around 5 billion cm/y of production during the period to 2015. There are also a number of other smaller projects planned for 2013-15 that should support overall production,” Freedman added.

Wood Mackenzie also expects record investments in the UK North Sea over the next few years, with this year’s spending set to exceed last year’s £7.5 billion ($11.9 billion) and the trend continuing until 2014. This year, £2 billion is expected in the west of Shetland area alone, it added.

“In transforming the licences offered to real exploration and production (E&P) activity for the economic and energy benefit of the UK, the engagement with the [UK finance ministry] to stimulate investment in marginal fields and achieve certainty on access to tax relief on decommissioning is crucial,” said Malcolm Webb, Oil & Gas UK’s chief executive.Despite UK oil and gas output falling over the past decade, with most of the easily exploited fields already tapped, there is still up to 24 billion barrels of oil and gas remaining in the North Sea, says trade association Oil and Gas UK. But, it adds, the UK must provide the right environment to invest.

The UK government opened the 27th licensing round on 1 February, offering 2,800 blocks, covering almost the entire unlicensed offshore. Blocks on offer include 79 holding undeveloped discoveries and 17 holding fields where production has ended.

The organisation said UK North Sea capital expenditure for 2011 fell short of a forecast of £8 billion after a new UK tax was introduced early last year. This increased the tax on oil and gas production to 32% from 20%, while the rate paid by E&P companies rose by between 62% and 81% depending on the age of the field, making it more expensive to invest.

Wood Mackenzie also forecast European gas demand to drop over the coming years, assuming average temperatures. Freedman estimated 2011 consumption to be around 520 billion cm, because of weaker fourth-quarter demand. “European gas demand is likely to show a small recovery of 2-3%, to up to 533 billion cm in 2012,” Freedman said. He added that unseasonably cold or hot weather could drastically change consumption, with regard to heating demand or high electricity usage from air conditioning.

“As a rule of thumb, cold weather could increase demand by about 10 billion cm and warm weather decrease demand by about 10 billion cm, so temperature can have a 20 billion to 25 billion cm swing effect,” Freedman said.

European gas demand is expected to fall in the next few years, because of lower industrial activity resulting from the recession and the persistent debt crisis in the eurozone.  But demand rose this week, with temperatures across Europe falling well below seasonal norms since the beginning of February, causing a spike in UK and European gas prices

Europe’s main gas supplier, Russian export monopoly Gazprom, was also unable to meet additional demand from European customers as it pumped more gas to meet surging domestic demand.

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