Crude Economics
Bear Market Puts British North Sea Oil Production in Peril

Britain’s North Sea oil holding has for years shored up its energy security; offshore production helped turn the UK into a net exporter of crude in the early 1980s and eventually a net exporter of natural gas. But over the last decade or so North Sea production has tapered off, and the UK has once again become a net importer of fossil fuels, on which it relies for the vast majority of its power production. Now, as Reuters reports, bargain crude prices are tightening the vice on an industry in an already precarious position:

For years North Sea producers have delayed expensive decommissioning projects, supported by high oil prices that have helped paper over soaring operating costs.

But with oil prices halving over the last 12 months, some companies are faced with the unenviable choice of operating at a loss during a field’s twilight years, or limiting losses by bringing decommissioning forwards. Unsurprisingly, the industry is looking at the second option very closely. […]

As more platforms and fields cease to operate, terminal and pipeline costs for neighbouring fields in the same chain are expected to rise. This is of particular concern in mature areas such as the Northern North Sea, where interdependence is high…”The domino effect is now a significant challenge. If some of these fields are shut in, it will affect the whole basin,” [said Gunnar Olsen, business development director at Total E&P UK].

This “domino effect”, wherein British offshore production sees costs rise as fields are abandoned, should be keeping London leadership awake at night. Britain’s only realistic domestic recourse—plumbing its sizable shale reserves—has hit the skids recently as staunch public opposition has put a halt to exploratory drilling.

David Cameron’s new government is arguably the most fracking-friendly administration Britain has yet seen. But if it can’t find a way to balance community concerns about the controversial drilling process with the strategic and economic benefits a shale windfall could bring to the increasingly energy-poor country, then Brits can expect their electricity bills to rise along with their country’s dependence on foreign suppliers.

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