Don’t look now, but there’s actually some good news coming out of the North Sea. The region helped make the UK a net oil exporter in the 1980s, but in the intervening years its offshore fields have matured and production has declined dramatically. To make matters worse, companies operating in the decreasingly profitable region are facing decommissioning costs that one industry group predicts will add up to £17 billion over the next decade. When you factor in the bearish turn oil markets have taken in recent years, you get a perfect storm for one of the UK’s most important energy resources.
But London will be heartened by what it’s seen in the North Sea in 2017. Operating costs have fallen nearly 50 percent, an industry reaction to today’s low-price environment, and that’s allowing firms to keep more existing projects in operation. In March, a new field was discovered off the coast of the Shetland Islands that has been hailed as “the biggest new oil discovery beneath UK waters this century.” Then, this summer, the British oil company Enquest started production in its ominously named “Kraken” oil field—a project that could save the firm from insolvency.
The WSJ reports that investors are piling on to this party in the North Sea:
Investors have sunk more than $16 billion so far this year into European deals for assets mostly located in the North Sea, a flurry that far outstrips energy deal activity in all but American shale country and Canada’s oil sands.
This is a major change from the outlook the industry faced even just last year, when it seemed that the North Sea was locked into an inexorable slide into irrelevance. BP’s CEO now says he sees the North Sea “turning things around,” and that sentiment is shared by the numerous other oil majors that are now looking to the region not only as a source of legacy operations, but as a place of potential growth now.
This is the new oil reality in which we live. The North Sea’s second wind came about because producers drastically slashed costs in order to stay competitive with global oil prices, and as a result they’ll be able to increase their supplies. Any resultant rise in output will help keep the market (over)supplied, which will in turn keep prices relatively low. There’s hope again in the North Sea, and as encouraging as that is for the UK, it’s yet another blow to the world’s beleaguered petrostates who are still desperately hoping for a return to $100+ crude.