Choppy waters ahead: the decline of North Sea oil

With North Sea oil drying up, £17.6bn is up for grabs across the next decade. How do you get a share?

On 8 February 2017, Royal Dutch Shell unveiled its plans for decommissioning the Brent oilfield. Many other producers of North Sea oil are considering ceasing operation, or have already done so. However, the decline of this industry may herald the emergence of another: what opportunities does decommissioning present?

Background

The North Sea is estimated to have originally contained about 63bn barrels of recoverable oil. Two thirds of this has been extracted since the first major wells were sunk in the 1960s.

The four rigs (Alpha, Bravo, Charlie and Delta) located in the Brent field have produced around 2bn barrels of oil and 5.7tn cubic feet of gas since coming onstream in the mid-1970s. At its peak output in 1982 the field was producing half a million barrels of oil each day.

Now though, a combination of factors is pushing producers out of the North Sea. Delta ceased production in 2011, and the installation is due to be removed and scrapped later this year.

Why is the North Sea struggling to remain a competitive source of oil?

One obvious answer is a lack of supply; the majority of the accessible oil has already been recovered. It is estimated that roughly 20bn barrels of oil are still contained in the region, but drilling for the remainder is likely to be disproportionately difficult and costly (though there may be some reason for optimism). This dilemma echoes a worldwide trend in declining oilfield exploration. Companies can diversify and extend the life of their current operations – Shell, for instance, switched Brent from oil to a predominantly gas field in the 1990s – but these kinds of solution are expensive and no longer sustainable due to insufficient oil.

Another problem for North Sea producers is the slowing of demand. Consumers and businesses are becoming more environmentally conscious, increasingly demanding energy from renewable resources. The UK government is looking to greener technology in order to meet its commitments under international treaties, such as the Paris Agreement. Nuclear power is also on the increase – Hinkley Point C for example, though controversially backed by foreign governments, is due to come online in the mid-2020s.

All this is compounded by volatile oil prices. In mid-2014, oil sold for $115 per barrel. It is now trading at less than half that. There are many intersecting causes, but in part this has been due to OPEC. The cartel has intentionally been oversupplying oil to push prices down, in order to force out higher-cost competitors, in particular the resurgent US shale producers. Prices have dropped to such an extent that OPEC agreed to cut output at the end of 2016 with the aim of driving up prices once more.

These market forces are enough to squeeze anyone's profit margin, but for North Sea producers the impact is maximised. They already grapple with stringent safety rules, sky-high workforce bills and brutal geographic conditions, all of which give rise to the most expensive operating costs in the world. In the UK it costs $30 to $40 to recover a barrel of oil. In Saudi Arabia, recovering the same quantity sets you back a mere $5.

The North Sea is therefore an increasingly impractical and unprofitable source of oil. This pushes producers to withdraw from the region – but they must properly decommission their installations first.

The future of North Sea oil and gas – the decommissioning boom

Rigs have already been decommissioned in the North Sea, but this trend is set to accelerate rapidly. Oil and Gas UK, the industry body, estimates that across the next 10 years 100 platforms will be removed at a cost of some £17.6bn.

This figure encompasses the costs of not only removing topsides (the above-water structures), but of plugging 1,800 wells and extracting 7,500 km of pipeline. The fates of the supporting substructures are not known, but if oil companies are forced to remove these too the £17.6bn figure will quickly be forgotten due to the difficulty of the task. The concrete substructure of Brent Delta, for example, weighs about 350,000 tonnes - approximately the weight of the Empire State Building. Unsurprisingly, Shell wants to leave it on the seabed.

The profit opportunities for Able UK (the company awarded the decommissioning contract for the Brent platforms), and other decommissioning bodies are obvious. Due to the anti-pollution OSPAR obligations, oil companies have no choice but to utilise decommissioning services. Looking long-term, all 330 North Sea oilfields, consisting of 475 platforms and 5,000 wells, will ultimately be decommissioned. The costs, and potential profits, are going to be colossal over the coming decades.

Areas of Scotland and the North-East of England are heavily reliant on the oil exploration industry. A lack of evolution may result in financial decline. Now is the time for the UK to invest in technology and skills in order to diversify into the decommissioning sector, and in so doing become a global centre for highly lucrative decommissioning work.