Storm Brewing in North Sea, as harbours onshore lie empty.

hurricaneThe 2016 version of the summer must-read for energy geeks, BP’s Statistical Review of World Energy was issued last week, and as usual it’s the best reading until the International Energy Agency World Energy Outlook is published in November for the geek Christmas gift market.

It contains much good, even great, world news, including the best of all: global energy intensity continues to fall, consigning the idea that energy use and GDP growth are inextricably linked to the dustbin of Peak Oil History. Even better news is how coal is also reaching a peak. Europe was one of the few areas that showed above average growth in energy use, admittedly from levels caused by economics and renewables.

Nonetheless, closer to home, there looks to be trouble ahead for both UK oil and gas production. There was a marginal recovery in North Sea gas production, but this chart shows the gap between consumption and production in the UK, as it developed in the 21st century:


UK gas production consumption

The UK North Sea collapse this century is fading faster still yet the key R/P metric of years of reserves to production showed something I haven’t seen addressed anywhere else.

The UK now has  an oil R/P of 8 years compared to the global average of 50 and 86.8 for OPEC. 8 years beats Brazil, Thailand and Turkmenistan but that’s it.  On gas it’s far worse with the UK having the lowest R/P in the world at only 5.2.  R/P is a key statistic and one should hope that it should set off a warning bell. The fact that it didn’t speaks more about the relative size of the UK 1.1% share of global production and the general wish/hope prevalent in much of the media that the UK should leave fossil fuels in the ground anyway. But this is a key point: The UK, at least measured by the North Sea, may not have the luxury of a choice over leaving energy in the ground for much longer: the North Sea is finally showing signs of advanced age and like death, a watery grave could beckon after the simplest sneeze.

The pneumonia moment for the North Sea is the drop in oil prices, a point made even more alarming recently:

..the list of complaints, warnings and proposals from the anonymously-interviewed 47 oil industry figures behind the new PwC report Sea Change is genuinely astonishing.

They warn there are only around two years to save the industry from a rapid decline, giving it a new lease of life for a decade or two.

To get there, they suggest that resources should be pooled in a gigantic joint venture between offshore operators.

By having one humongous offshore operator, they would effectively get rid of the competition which is their life blood.

They suggest the same for finance, saying the lack of lender confidence is the biggest blockage they face. Effectively, big firms would provide funding for small ones, to do what small ones do better, and maybe the banks would be attracted by de-risking.

To the PwC report itself:

The North Sea basin has a two year transformation window in which to ensure a strong, productive and profitable future for the sector according to senior oil and gas executives interviewed for PwC’s latest report, A Sea Change.

While much progress has been made to date in tackling issues such as cost efficiency and implementing recommendations from the 2014 Wood Review, the report believes that any inertia at this pivotal moment could lead to decline at an exponential rate.

The basin needs new ideas. It needs disruption and change at the same time as recognising the benefit of the existing wisdom and experience.

a key factor in that is addressing the issue of fragmentation (particularly in the UK sector) – there is a consensus view that there are too many players with differing viewpoints which can hinder progress. Furthermore,fragmentation can be a barrier to the efficient running of the basin

The industry is in need of disruption– new entrants with new ideas about how to work. There has previously been a “we’ve always done it this way approach – and the sector needs to embrace these disruptors rather than pushing back in order to innovate and re-invent itself for the future

The vision needs to be holistic taking into account offshore and onshore oil and gas in the UK and how this feeds into a low carbon future (such as perhaps emphasising the preferential fiscal treatment of gas production over oil)

In short, the North Sea is running out of options. We don’t have much time.  And while I’d like to believe, I’m not confident. The North Sea has been an incredibly profitable cash cow. Could this explain why it generally refuses to align itself with natural allies in UK onshore? The Scottish Parliament recently voted to ban fracking, although since the ruling SNP abstained, the vote carries no weight. Could the fact that the offshore industry didn’t say boo about the decision underline the short term narrow self interest overcoming their long term self interest?

Here’s some figures about one off shore project, the West of Shetland.  Firstly, this field would never be developed today. It made sense at $100 oil, but is marginal at $50 and far more a money pit than an oil field at $30. So some would say that the investors, and service companies and drillers and producers and owners of the asset have no vested interest, if not outright hostility, to cheaper oil and gas. Off shore supporting onshore, from the short term view, is turkeys voting for Christmas.

The project is part of a massive £3.5bn investment by French company Total. Challenging weather conditions delayed the project by more than a year and added millions to its cost.

And what does one get for this?

Total said the Laggan and Tormore fields will produce 90,000 barrels of oil equivalent per day.

This is, to be polite, underwhelming. The UK onshore industry could not spend £3.5 BN in their wildest fantasies. But even if they could, the 500 or so wells would produce, at an average of 5MMCF production per day the energy equivalent of 430,000 barrels a day.

The UK onshore could succeed in those levels of production (and government tax revenue) without a multi year project in dangerous and environmentally sensitive waters. UK onshore would not need to build any infrastructure of pipelines and platforms years before any production. Onshore may have slow local councils, but the pipeline and roads already exist. A well pad doesn’t need to be built in Korea, towed thousands of miles and be put into place sitting unproductive for years as the rest of the basic physical and organisational facilities add more layers of expense. There may be protestors at the gate, but no one will need to be flown in by helicopter – the pad will have a car park, train station or bus stop nearby. No equipment will come in by barge and tugboat and service ships. A few trucks will do the same job cheaply. No one needs to live (and be fed) on the well pad. Workers will go home every night either to their families or the nearest Holiday Inn Express.

But no one, except the UK Treasury which owns the resource,and the license holders would make any money. Service companies would do very nicely, but the barge builders and catering companies and helicopter operators would be out of luck along with thousands of off shore oil workers.  In short, the offshore wants, as the PwC report notes, to do things the way they always have and hope and pray that either $100 oil returns or they retire. Or the government effectively nationalises them and they simply spend their sunset years spending billions decommissioning the fields.

Offshore or on, we have a two year choice.  Either save the North Sea along with a thriving gas industry on shore, or we all sink together.

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