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Shell’s Draugen field at risk of being scrapped

Screen Shot 2015-01-12 at 08.45.23Bloomberg article by Dinesh Nair and Jillian Ward published 2 Feb 2015 under the headline:

“North Sea Oil Turns Buyer’s Market as Apache, BG Group Want Out”

(Bloomberg) — Want to buy an oil well in U.K.’s North Sea? There are plenty available as some of the industry’s largest names try to sell aging, costly wells that have become even less profitable with the plunge in crude prices.

BG Group Plc, Apache Corp. and Marathon Oil Corp. are among companies that have explored a sale of their North Sea assets, according to people familiar with the processes. In all, assets worth as much as 20 billion pounds ($30 billion) are currently for sale in the North Sea, said Dave Blackwood, senior adviser to investment bank Evercore Partners Inc.

Drillers have struggled in recent years to extract oil from the North Sea’s depleting fields, leading to reduced output and costs that jumped 26 percent last year. Oil has slumped about 36 percent since the Organization of Petroleum Exporting Countries’ Nov. 27 accord to maintain production at 30 million barrels a day, adding to the pressure for drillers to seek buyers.

The offshore fields, which first began to be exploited at large scale in the 1970s, helped cushion the blow from the collapse of U.K. mining and manufacturing in the 1980s. Now, their declining attractiveness poses a challenge to Prime Minister David Cameron, who faces re-election on May 7 and whose government is trying to encourage economic growth outside of London.

Government Measures

In December the government announced several measures to encourage North Sea investment, including reducing a tax on producers and adding incentives to carry out seismic surveys in under-explored areas. Further steps are likely to be announced in March, Chancellor of the Exchequer George Osborne has said. A new regulator, the Oil and Gas Authority, will be set up in April to aid production.

For many in the industry, the initiatives are too little, too late. Projects including Royal Dutch Shell Plc’s Draugen field are now at risk of being scrapped and companies such as Total SA may delay spending in the area until prices pick up.

BP Plc will cut about 300 jobs in the U.K.’s North Sea to cope with slumping oil prices and aging oilfields, it said on Jan. 15.

Decommissioning Costs

“The dramatic fall in the Brent crude oil price has serious implications for North Sea oil production and government revenues,” Anthony Lobo, U.K. head of oil and gas at accounting services and advisory firm KPMG said in an e-mail. “Many of the operators are struggling with containing their costs, and making any new finds worth developing under the current tax regime.”

Oil prices aren’t the only obstacle to potential buyers in the North Sea. The cost to shut down a well is more expensive in that area, especially for assets that may be decommissioned in just a few years.

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