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Lloyds List: Offshore, on stream and upbeat

British oil production is slowly rising again. After seven years of decline, fresh industry investment from a growing pool of large independent operators is pushing the industry forward again, but can this be sustained asks Martyn Wingrove, Lloyds List

Published: Jun 21, 2007

THE headline exodus of Shell, ExxonMobil and Chevron from the North Sea recently should not be seen as the death knell of North Sea production.

The oil majors may have put their larger assets on the market, preferring to focus on more profitable international projects, but UK oil production is going through something of a resurgence.

Production is climbing again from around 1.5m barrels per day at the start of this year, mostly because the large Buzzard field started pumping its crude through the Forties pipeline and tanker terminal, six years after its discovery.

High oil prices have given companies operating North Sea assets the financial backing to develop and appraise new fields and some that were previously unprofitable, but low UK gas prices mean some gas developments are facing the prospect of marginal economics in an industry where costs are rising.

The oil majors, those with upstream and refining operations, continue to pull out of the North Sea, leaving a void for the smaller, more nimble companies to come in and take over the maturing platforms, pipelines and production vessels.

A key example of this trend is this month’s announcement by Anglo-Dutch group Shell and US corporation ExxonMobil that they are putting their northern North Sea assets up for auction, with the exception of the landmark Brent field.

Some of the smaller players have the financial backing and are ploughing cash into new projects and existing fields, with 38% of this year’s capital investment coming from firms that entered the North Sea since 1999.

Many of these companies are listed on stock exchanges in London, New York, Toronto and Australia, while others have the backing of private equity and investment banks.

A vast amount of the region’s GBP10bn ($20bn) a year of investment goes on offshore vessels, drilling rigs, logistics, service contractors and ship operations. Strong demand for support vessels, subsea construction ships, drilling rigs and seismic survey boats results in high charter rates all around the sector.

So it is important to all parties, including oil companies, contractors, ship and rig owners and government that North Sea activity continues at a strong pace. In this light, the exit of the oil majors is not always seen as a negative as it provides fresh opportunities for the smaller companies, who are willing to invest.

These independent companies are in the forefront of starting new projects in the North Sea. The first of the UK projects to commence production this year was the highly-anticipated Buzzard oil field, operated by Canadian oil firm Nexen a relatively new entrant to the UK.

The Calgary-based company anticipates that daily peak production of 200,000 barrels will come in the third quarter of this year, but it is already pumping out more than three quarters of this so the UK is seeing the benefits now.

Buzzard alone means the UK will be producing higher levels this year than in 2006, although the country is still battling to be a net exporter of crude as demand for hydrocarbon liquids remains strong despite moves to improve efficiency.

Crude from Buzzard is fed into the Forties pipeline so it arrives in Scotland at Cruden Bay, north of Aberdeen and is pumped to the processing centres and export terminal near Edinburgh.

Another oil project already on line is Maersk Oil’s Dumbarton development in the central North Sea. Wells on this field are pumping oil to a Maersk-owned floating production storage and offloading ship.

This $400m project started up in January after a major refit to the Global Producer III FPSO in Tyneside. The field is set to be producing up to 50,000 barrels per day at peak levels so it is helping to ramp up British North Sea daily output to around 1.65m barrels in June.

The next highly-anticipated oil project to start was Talisman Energy’s Tweedsmuir developmentt, which involves subsea wells tied back to the Piper production platform in the Outer Moray Firth.

Coming on line in May, the Tweedsmuir and Tweedsmuir South fields should produce up to 50,000 barrels per day by September once modifications to Piper Bravo are completed. This crude is piped to the Flotta terminal in Orkney for tanker export.

The latest project just brought on stream by Canadian independent Oilexco is Brenda-Nicol. These two oil fields are producing through four wells, tied back with subsea facilities to the Balmoral production semi-submersible with a capacity of 30,000 bpd.

This project was delayed first by a divers’ strike last year, then by poor North Sea weather through the winter, then lack of available ship capacity for the flowline tie-ins and issues with platform modifications.

These four projects mean online capacity so far this year is around 330,000 bpd, plus there are other smaller projects to come on stream over the next seven months.

The new oil from all these projects more than offsets declines from other fields and helps increase British production and tanker exports, providing new supplies to Europe, North America and Asia.

On the outside it all looks fairly rosy for the British oil industry, but North Sea operators are worried about the tax burden, which they claim is holding back investment levels.

This might not be true for large light oil projects, but does affect the small field developments, heavy oil and gas projects and may be partially to blame for the oil majors steadily pulling out of the sector.

‘North Sea costs are escalating in what was already an expensive oil and gas province and investors have less expensive options in the global marketplace,’ says Mike Tholen, economics and commercial director of industry organisation Oil & Gas UK.

‘Also the current tax regime, raised by the government 18 months ago, is really starting to bite. Oil prices have softened and gas prices have plummeted. Companies are now really starting to feel the full weight of the tax burden.’

One of Britain’s largest gas producers, BG Group, is calling on the government to reduce the taxes on new gas production to restimulate this part of the sector.

‘Oil and gas projects face the same tax rate but gas prices are barely half the level of oil prices so we ask, does the exploration and production industry need differential tax rates?’ says Chris Cox, BG’s vice-president for UK upstream operations.

‘The two major increases in corporation tax in two years are having a material influence on the industry in the UK, impacting investment decisions so that many gas discoveries will remain undeveloped.

‘Our one plea is that the government sees there’s something to be done about low gas profitability. At least we are in dialogue with the DTI and Treasury over the fiscal regime,’ Mr Cox adds.

So 2007 is proving to be a busy year for North Sea investment, but so far there has been a lull in oil companies seeking government approval for new projects.

There have been a couple of oil discoveries, notably Nexen’s Golden Eagle and Oilexco’s Huntington and some successful field appraisal wells, so the forward project list still looks healthy, but there are concerns that production levels will start to decline again in 2009 if developments are not implemented rapidly.

Oil production has climbed this year and should rise again by the December, but the long-term forecast is continuing to decline as Britain becomes more dependent on imports.

According to Oil & Gas UK, production in 2006 (including gas) was around 2.9m barrels of oil equivalent per day, of which 1.6m bpd was oil. This year it predicts output will average 3.1m boe per day, with oil accounting for 1.7m bpd.

By 2010 British hydrocarbons output could be down to 2.6m boe per day and the basin’s daily throughput is due to decline at rates of a quarter of a million barrels of oil equivalent every year. So it will be a challenge to prevent decline rates accelerating and cost inflation escalating.

ON the gas side, UK production has fallen sharply as fields mostly in the southern sector have declined, but there have been some successful new start-ups and new projects are waiting in the wings.

Most of the southern sector fields are produced through fixed steel platforms, which are cheap to manufacture and install when compared with the central and northern North Sea facilities.

So far the Tors, Tethys, Mimas and Rhea gas fields have come on line in the southern sector and Merganser has started up for Shell in the central area. New projects this year include ConocoPhillips’ Kelvin platforms, ATP’s Wenlock field and Newfield’s Grove project.

German firm RWE Dea is hoping to begin the Cavendish platform in the next month or so, but start-up of Venture’s Cheswick field has been delayed until September.

Shell has two southern gas basin platforms to bring on stream this year on the Caravel and Shamrock fields, plus it expects to begin the Starling field as a satellite to its Shearwater platform soon. and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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