Study predicts North Sea boom

10.01.2011  + + + The economy may still be in the doldrums but the North Sea could be in line for a new boom, research indicates.

Aberdeen University academics believe the future looks bright for the region, as long as oil & gas prices remain at currently robust levels, the fiscal environment is encouraging and UK industry continues its collective drive for greater efficiency.

Far from fading away, if oil prices were to stay above $90 per barrel and gas prices remain higher than 50p a therm, a sharp increase in investment in projects focusing on the UK Continental Shelf is possible.

That would deliver valuable tax reveuues to the UK Treasury, sustain jobs in the long-term, provide a strong domestic market for the oil & gas supply chain and offer a robust foundation for further internationalisation of the sector.

Indeed, it is possible that capital spending could climb sharply from just over £5billion in 2009 to more than £9.5billion in 2013, while overall capital and operational expenditure might top £17billion in 2013, compared with around £13billion last year.

Should the most optimistic scenario modelled by renowned petroleum economist Professor Alec Kemp and colleague Linda Stephen prove broadly correct, then it is possible that overall expenditure (not including exploration and appraisal activities) could peak just below £18billion in 2017, with a further peak of more than £18.5billion possible around 2025.

Even their mid-case scenario with oil priced at around $70 per barrel and gas at some 50p per therm offers good prospects for the UK Continental Shelf.

But should oil and gas prices collapse to around $50 per barrel and 30p per therm, the outlook would be gloomy, with a rapid decline predicted.

Kemp and Stephen said: "In the low price case ($50/30p in real terms) investment and production fall very sharply throughout the study period to 2041.

"Only 45 fields would remain in production in 2041, compared to nearly 300 in 2009.

"Production falls from 2.3million barrels of oil equivalent per day in 2010 to 530,000 in 2041. In the period 2010-2041 cumulative production is only 12.9billion barrels of oil equivalent per day. Most new fields and incremental projects are uneconomic.

"Under the $70/50p case, substantial numbers of new fields and incremental projects become viable. Investment holds up at current levels for a considerable number of years but still falls at a noticeable pace thereafter. There are still 115 producing fields in 2041. Production falls to below 1million barrels of oil equivalent per day in 2041.

"Over the period 2010-2041 cumulative production is 19.9billion barrels of oil equivalent per day.

"Under the $90/70p price case, field investment increases from present levels and remains buoyant for many years ahead. Very many new fields and projects become viable. There are nearly 170 producing fields in 2041. In 2040 production is 1.4million barrels of oil equivalent per day. Cumulative production over the period 2010-2041 inclusive is 25.5billion barrels of oil equivalent per day."

Kemp and Stephen added: "The results highlight the importance of small fields in total activity levels, and how the relative contribution of these increases with oil & gas prices because of the sensitivity of the economic viability of these fields to oil & gas prices."

Under the low price case over the period to 2041, the Aberdeen duo talk of 97 viable new fields (excluding incremental projects) with reserves less than 25million barrels of oil equivalent per field. They add that these would contribute 37% to aggregate output from all new fields (excluding incremental investments) over the period to 2041.

In the medium price case, there could be 258 viable new fields with reserves of less than 25million barrels of oil equivalent and they would contribute 33.3% to total output from all new fields over the period.

In the high price case, there would be "no less than 360" viable new mini-fields.

Kemp and Stephen point out that the high levels of activity made possible by buoyant prices hinge on the willingness of the industry to rise to the opportunity, and add that potential projects are tested at the $90/70p and $70/30p thresholds.

"It should be emphasised that prices of $90 and 70p (in real terms) are unlikely to be employed currently for investment screening purposes as cautious values have conventionally been employed. Thus the probability of the attainment of the high-case scenario is relatively low."

Under the high-price scenario the average annual number of new field developments in the period 2010-2035 would be 17.3 and in the period to 2041 it would be 14.9.

Kemp and Stephen said: "While this pace of development is consistent with historic experience at some periods of development of the UK Continental Shelf, the frequent attainment of annual developments in the range of 18-20 per year plus many incremental projects would be very challenging for the industry. Cost inflation would very likely be a common feature."

They added: "It should be stressed that the prospects indicated in the modelling depend on the various DECC and PILOT initiatives continuing to bear fruit over the period. Those initiatives refer to fallow field/blocks, stewardship of mature fields, infrastructure Code of Practice and the continued availability and integrity of that infrastructure. All this cannot be taken for granted.

"The need for tax incentives to stimulate investment in mature PRT-paying fields remains valid, and amendments to the field allowance for the Supplementary Charge could further enhance investment."

Jeremy Cresswell - © Aberdeen Press and Journal
Source: PennEnergy