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Lloyds List: British oil industry digs deep as 2007 promises to be a golden year

There remain plenty of opportunities in the UK North Sea and operators expect a lot more activity this year, along with several new challenges, writes Martyn Wingrove, Lloyds List
Published: Jan 04, 2007

THIS year is expected to be another positive one for offshore activity in the UK North Sea with new fields coming on stream, more exploration wells drilled and another group of developments being sanctioned.

Last year was a promising but challenging year for the British oil industry as operators have discovered more fields and approved new projects, but achievements were countered by rising oilfield costs and tougher weather conditions.

Production last year hit a new low in the UK sector, but industry experts anticipate a quick rebound in 2007 as a clutch of new fields come on line in the next six months.

There is every expectation that Britain will return to being a net exporter of hydrocarbon liquids, at least for another few years. based on the new platforms coming on line.

The UK North Sea was producing around 2.9m barrels of oil equivalent per day over the fourth quarter, of which half was actual oil and the rest a mixture of gas and condensates. New fields due to begin production in the next 200 days should add almost 400,000 boe per day of new capacity.

The largest of the new fields to come on line is Nexen’s Buzzard project, which will have the capacity to produce 200,000 barrels per day once at peak levels in the summer.

Three platforms have been installed over the field and a pipeline will link its crude to BP’s Forties export pipeline and the Cruden Bay terminal north of Aberdeen.

Another Canadian oil company, Talisman, expects the Tweedsmuir, Enoch and Blane fields to begin pumping oil by mid-2007 and Oilexco is just waiting on weather to get its Brenda field connected, now anticipated in early February.

Maersk Oil is working to get the Dumbarton field on line and US majors ConocoPhillips and Chevron are collaborating on the Brodgar-Callanish project, all of these in the central sector.

‘We are waiting for several new fields to start up and then this should make a lot of difference to UK production. The industry needs this to show the success of its efforts,’ says Mike Tholen, economics and commercial director with the UK Offshore Operators Association.

‘Production last year has been lower than people expected, so it will be interesting if the step up in production can be sustained. There are 50 plus projects in the pipeline.’

The British government will need these new fields to boost revenues and lower the balance of trade deficit. From the Chancellor Gordon Brown’s pre-budget report, the nation saw the Treasury overestimate what the North Sea would deliver in 2006 so the budget is down GBP3bn quite a hole in the coffers.

There are a few excuses for this, including higher than anticipated field shut downs due to unexpected maintenance work and faster decline rates on the UK’s mature production platforms. So the government has not collected as much tax as it hoped.

This year the chancellor could do a little better with the new fields coming onstream, as long as the ageing platforms keep on pumping, which the industry is finding a greater challenge every year.

Another challenge that will only get worse is the tight supply of oilfield equipment and engineers. Strong demand is also behind high rig and vessel rates that are forecast to be consistently high until 2009.

‘We expect the service sector to get tighter and could see slippage of drilling and exploration activity. Companies may struggle to find resources to work through their portfolios,’ says Mr Tholen.

High service costs have the greatest affects on southern North Sea operations, especially as British gas prices have fallen due to new pipelines commencing deliveries to the national grid.

‘In the southern sector, operators are feeling a little uncomfortable as the cost base is similar to the oil market, but with gas prices down this has an impact and could also impact on West of Shetland plans,’ says Mr Tholen.

In September 2006, the Norwegians started delivering gas through the southern phase of Langeled, the world’s largest offshore pipeline, and in December the Dutch began pumping gas through the Balgzand Bacton Line.

In 2007, there will be the linking up of the Ormen Lange field in the Norwegian Sea to the Langeled pipeline to increase supplies further, plus at least one liquefied natural gas terminal in southwest Wales is due to open for ship deliveries.

In order to get more domestic gas supplies to market, the government will finish its industry taskforce study into ways to develop the resources of West of Shetlands.

Work will start this month to look at commercial models based around building a gas hub in the region and a pipeline to mainland Scotland.

The government will continue examining other aspects of the energy industry, including how to change the tax system to encourage carbon capture and storage and how carbon dioxide can be used in enhanced oil recovery.

BP and a power generation partner are waiting for guidance on fiscal measures to help build a hydrogen-based power plant north of Aberdeen and to pump CO 2 down an existing pipeline to the maturing Miller field.

‘Companies are looking at the long term in renewable energy. Talisman has its deepwater windfarm, BP its Miller project and Shell is installing small platforms with renewable power generators,’ says Mr Tholen.

‘The rules are being rewritten at the moment in people’s minds. They are trying to work out how to manage their businesses in a different price and cost world and how to think in different ways to involve these renewables.’

In 2007, Shell will be making more progress, installing two more small platforms with wind turbines and solar panels on the Shamrock and Caravel fields in the southern sector and Talisman will get its Moray Firth wind farm demonstration project on line, involving two huge turbines.

On the exploration front, new discoveries in 2006 and the abundance of opportunities will help hold up well numbers this year. Some operators need to appraise their latest discoveries or use the data to probe more prospects on their blocks.

The large independents, BG Group, Maersk Oil, Talisman, Nexen, and Oilexco, will continue to be key operators of exploration programmes, while oil majors such as ConocoPhillips will also be fairly active.

The favoured exploration plays are the central sector higher pressure zones and heavy oil fields West of Shetlands for oil and the Outer Moray Firth area for a variety of opportunities.

BG Group’s managing director of European operations, Mark Carne, believes the dynamics of the oil industry in the North Sea have changed and this is leading to new challenges while high oil prices are leading to renewed interest in exploration.

‘Developing fields is becoming more challenging as fields sizes are smaller, they are being discovered in deeper reservoirs with higher pressures,’ he says.

‘It is important to invest in exploration so the industry needs the right kind of tax environment to invest more. We have seen a significant increase in exploration over the last couple of years and a tightening of the rig market.’

Mr Carne, who will chair the largest exhibition outside the US this year at Offshore Europe 2007, wants to see exploration levels maintained but thinks oil companies will continue to find it hard to invest when there are better opportunities elsewhere.

The medium sized independents also hold some of the keys to exploration, but are finding it harder to get the funding required to continue exploring and trading so 2007 may be a year of consolidation.

For those that have portfolios and the funds then there could be new opportunities waiting in the wings despite the current shortage of available licences and delay to the 24th licensing round.

‘There have been plenty of deals and now there are a few available rig slots, but the surge in costs has been extraordinary,’ says Richard Wilson, head of the Oil and Gas Independents Association.

‘Exploration seems to be pushed back as the first choice for companies is an appraisal or infill development wells that can pay back quickly so there could be more appraisal than exploration drilling.’

Nigel Essex, a director with London-listed independent Wham Energy, thinks the chancellor’s recent tax increases have lowered the number of potential prospects for drilling.

‘The rise in taxes to 50% has reduced the materiality of prospects and affected the fundraising capability of independents. It is also harder to farm out promote blocks,’ says Mr Essex.

Many of the prospects on offer are in the 50m-100m barrel range, while those down to 20m barrels and very close to infrastructure could be considered.

‘Unsuccessful companies will find it harder to raise funds so there will be pressure to consolidate. To survive, a company needs to have a large portfolio and the cash to drill on the assets,’ says Mr Wilson.

The liquidity of the North Sea asset market is perhaps its greatest strength and allows new players to enter the region at very low cost levels.

Over the last few years, the licensing rounds have been another strength but in 2006 the 24th round was postponed so oil companies are eagerly waiting to get their hands on new areage early this year.

They are now waiting on the government’s department of trade and industry to get its act together and hand out the new blocks so the independents can continue to work up new drilling opportunities.

On the development front, the government sanctioned 28 offshore and eight onshore projects, including 12 new fields and 16 incremental projects last year.

More should be sanctioned in 2007, including Shell’s Shamrock and Caravel, ConocoPhillips’ Kelvin and Enochdhu and Chevron’s Alder projects, to name a few of those expected.

Overall, 2007 should be another strong year for the British oil industry as companies get to see their endeavours turned into achievements. This will include new oil fields coming on stream, more projects sanctioned and hopefully new discoveries drilled. and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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