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Crude Economics
UK Fighting Tooth and Nail to Keep North Sea Oil Flowing

One of the UK’s biggest domestic reserves of energy is drying up, but a (relatively) new government authority is hoping to keep the oil flowing from offshore reserves in the North Sea, despite challenging market conditions and a natural decline in the resource. The FT reports:

Compared with 43bn barrels produced so far, there are still an estimated 10bn-20bn barrels to recover in the North Sea. Yet, the biggest remaining reserves are beneath wild and remote waters west of the Shetland Islands. There are also many “small pools” of oil and gas that often require access from neighbouring fields to make them economic. […]

[The UK Oil and Gas Authority (OGA)] can impose fines up to £1m for companies that break rules and strip licences from those deemed to be blocking investment…There are carrots as well as sticks. The OGA advises the Treasury on the North Sea fiscal framework, which has become more industry friendly in recent years, and provides seismic data to help companies assess exploration and production prospects. The aim is to keep up the flow of oil from the North Sea and cash to the Treasury coffers, even as old fields are decommissioned.

We’ve been following Britain’s North Sea struggles for some time, and watched with something of a “there-but-for-the-grace-of-God” attitude when producers struggled to profitably produce oil from these offshore reserves in the face of a bearish crude market these past two and a half years. The collapse in crude prices couldn’t have come at a worse time for Britain’s oil industry, which was already struggling to cope with the fact that output from its prodigious North Sea oil fields were already falling.

But all is not lost for the UK’s domestic hydrocarbon ambitions. Just as American shale producers have adapted to falling oil prices by cutting costs, so too have British companies plumbing the North Sea—averaging operating costs in those fields have fallen 45 percent in recent years.

With the creation of the OGA, Britain is also hoping to provide regulatory incentives—both positive and negative—to companies still fighting the good fight out there in those offshore fields, and with tens of billions of barrels of oil at stake, it’s not hard to see why.

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