2015 was a surprisingly good year for British oil production; it was up on the year for the first time in more than 15 years. Global production wasn’t too shabby either, growing some 2.5 percent on the backs of headstrong Russian, Saudi, and US producers. Of course, with building global inventories, this is all occurring amid precipitously and steadily falling prices. Sustainability – though impressive to date – remains a key question in 2016 for major and marginal producers alike. Among the latter group, Britain faces a variety of challenges in 2016.
Since the turn of the millennium, British crude production has only known one direction: down. More specifically, crude oil output has fallen some 25 percent since 2010 and more than 60 percent since 2000. Much of the decline can be found offshore in the North Sea, where production has plummeted nearly 70 percent in the last 15 years and 40 percent in the last five. Production on dry land, though minimal, has experienced a similar decline over the same period, though recent figures – since 2012 – show modest growth.
While early indications suggest production in 2015 significantly exceeded projections, onshore and offshore growth wasn’t entirely unexpected. Over the last four years more than $70 billion in investments has been poured in to the sector in an effort to bring new fields on stream. The UK portion of the North Sea is believed to hold untapped potential of between 12 billion and 24 billion barrels of oil equivalent. Looking ahead, the challenge – as it has been for some time – is how to effectively manage the aging assets, the smaller, more expensive new discoveries, and the diverse pool of increasingly interdependent operators.
Much of the recent development has targeted the relatively mature central and northern sections of the North Sea. Notable plays include the Bacchus, Balloch, Cladhan, and Ythan fields developed by Apache, Maersk, TAQA, and EnQuest respectively. The fields – all at different stages of development and operation – are fairly representative of the patchwork of smaller-scale production that currently defines, and will continue to define, the UK offshore sector.
With that said, the hefty Golden Eagle oilfield has changed the pace – if only briefly. Launched in late 2014, Golden Eagle is already the third most productive UK play, stemming the broader sectoral decline, and giving its operator, Chinese-owned Nexen, two of the top three producing fields. It fell short of its peak production goal in 2015, but showed average month-to-month growth of 7 percent. Further, Nexen has demonstrated an ability to keep operating costs low in what has progressively been the most expensive environment to operate. Across the North Sea, operating costs are expected to drop some 22 percent by the end of 2016.
The positive takes mostly end there. Production is set to drop again next year, and several hundred if not thousands of jobs will likely be cut – the workforce is already down more than 15 percent since 2014. Moving forward, capital investment in North Sea oil is projected to decline by up to 4 billion pounds annually through 2017. By 2019, spending on decommissioning old fields will overtake spending on the development of new fields.
The UK government has gone out of its way – and against the grain – to enable rapid and sustained growth. And, to be sure, things were heading in the right direction. Unfortunately, the timing couldn’t have been worse. There is a future for North Sea oil, but it’s not at today’s prices.
First published at Oilprice.com