“More than 42.3 billion barrels oil equivalent (bboe) have been produced from the UKCS [United Kingdom Continental Shelf] and 10-20 bboe are estimated to remain. Despite the low levels of exploration activity in recent years, encouraging discoveries have recently been made in the West of Shetland and the Northern North Sea, Central North Sea and Southern North Sea.”
The North Sea is one of the most mature oil and gas provinces, and has been explored extensively since gas was first discovered in 1959. The North Sea oil and gas industry was strongly affected by a drop in crude oil prices in 2014. This Energy Insight will explore crude oil price drivers and effects of the 2014 price drop, as well as the outlook for the North Sea oil and gas industry.
Photograph of a semi-submersible oil drilling rig, Cromarty Firth, Invergordon, Scotland. © Terry Whittaker, reproduced under Creative Commons 2.0
History of the North Sea
“The North Sea is the shallow, north-eastern arm of the Atlantic Ocean, located between the British Isles and the mainland of north-western Europe and covering an area of 220,000 square miles (570,000 square km). Discoveries of petroleum and natural gas beneath the seafloor began in 1959, and the UK began recovering oil from the North Sea in 1975.
In the central portions of the North Sea, offshore oil wells now stretch from north of the Shetlands for more than 400 miles (640km) to the south.”
A short video
on the history of the North Sea Oil. BBC. 26th July 2016
An offshore interactive map from the Oil and Gas Authority.
Why do crude oil prices change?
Put simply, supply and demand drive crude oil prices. When oil supply increases but demand for oil doesn't at the same rate, oil prices drop, as seen in 2014-15 and late 2018. As mentioned in the 2016 Energy Barometer
, “the effect of the continued lower crude oil price, $35/barrel at the time of the survey, is being felt across the energy system. Impacts on the oil and gas supply industry include reduced investment, imbalanced markets and job losses.”
In the 2010s the US has seen a dramatic increase in production thanks to the shale oil boom
, which has greatly reduced oil imports. Countries that once sold to the US are forced to trade and compete in Asian and other markets. Other countries such as Canada and Iraq have also seen an increase in production and exports year on year. Demand growth for oil has lagged due to vehicles becoming more energy efficient, and economies in Europe and developing countries have weakened. OPEC
has made several production cuts in an effort to raise oil prices, for example in Autumn 2016.
In 2017, oil prices started to recover, in part thanks to a year of production cuts led by Russia and OPEC. Outages in Libya and the North Sea also reduced supply. However, the US continued to export huge amounts of oil and gas, approaching 10million barrels per day (mbpd) by the end of 2017
What drives crude oil prices?
An analysis of 7 factors that influence oil markets, with chart data updated monthly and quarterly. EIA. July 12 2016.
The effect of low crude oil price on the North Sea
Brent crude oil prices started falling in 2014 and in January 2016 the price of Brent crude oil fell to below $28 a barrel. This has had devastating effects on the North Sea including investment cut backs from top companies and thousands of job cuts. Oil and Gas UK (OGUK)
report that employment supported by the offshore oil and gas industry dropped from 463,900 in 2014 to an estimated 282,700 in 2018. 2018 also saw the lowest level
of new oil and gas wells being drilled since 1965. Additionally, OGUK have warned that a no-deal Brexit
may negatively impact the industry, adding £500million to sector costs.
Future of North Sea Oil and Gas
Over 42 billion barrels have been extracted from the North Sea and around 20 billion could remain meaning there is perhaps 30 to 40 years of production remaining. It has been reported
that the North Sea has two years to improve performance to avoid premature decline.
In September 2018, energy company Total announced the discovery of a new gas field at Glendronach
, west of the Shetland Islands. Initial estimates place the volume of gas at 176 million barrels oil equivalent (mboe), the largest conventional gas discovery in the North Sea since 2008. This was swiftly followed in January 2019 by the discovery of an even larger gas field at Glengorm in the central North Sea. The Glengorm site
could hold as much as 250 mboe, and is jointly owned by CNOOC
, Edison and Total. Meanwhile in November 2018, BP announced it had hit first oil
after £5 billion of investment in the Clair Ridge project (45 miles west of Shetland), safeguarding oil worker jobs
until 2050 and beyond.
In general, there has been a slight recovery in the North Sea oil and gas industry since 2014. Kevin Swann, senior analyst at consultancy firm Wood Mackenzie
, has suggested that “companies are focusing on better prospects, rather than drilling everything”. It seems likely that there is still significant value for investors in the UKCS, as long as exploration is more measured and selective.
Further to the declining output, and therefore income, from North Sea Fields, an additional cost to be added to operating budgets is that of decommissioning existing North Sea production structures. Some 470 installations, 7000 miles of pipeline and over 5000 wells are coming to the end of their useful lives. In 2010, the EI together with DeLoitte, produced a document outlining the thinking at the time on decommissioning:-
Decommissioning: the end is nigh Deloitte/ Energy Institute Energy Briefing Series 2010 Decommissioning
For a comprehensive guide to the decommissioning sector, see the Energy Insight: Decommissioning offshore oil and gas
Developments in the deepwater sector
As more accessible existing plays become worked out and production drops to uneconomic levels, the world’s almost infinite demand for oil and gas has led to the need to expand exploration and production into deeper water areas, leading to advances in technology. Deepwater North Sea is estimated to hold over 20% of the UK’s remaining reserves in an extremely hostile environment.
Off the coast of Aberdeen, Neptune Energy
are investing the high pressure, high temperature Seagull field, which is expected to produce a modest 50,000 barrels
of oil and gas per day over 10 years from 2021. Improvements in 3D seismic imaging may allow operators to discover new reserves in previously written-off areas, for example the Rattray volcanic province
. 140km north-west of the Shetland Islands, Siccar Point Energy
is exploring potential new gas plays between the Rosebank and Cambo Fields.
This energy briefing, produced by Deloitte and the EI in 2010 gives an insight into the problems encountered and overcome at the time when the prospect of millions of barrels of recoverable oil was exceptionally attractive to producers: Developments in deepwater oil exploration
Deloitte/ Energy Institute Energy Briefing Series 2010 Deepwater oil exploration
Opposition to new exploration
The North Sea remains a viable source of oil and gas, albeit on a more modest scale than seen in the late 20th Century. However, the industry faces a new challenge from environmental campaigners who seek to remove fossil fuels from the UK energy mix in a bid to tackle climate change, as well as growing consumer and political pressure to decarbonise the economy. Responding to the discovery of gas at Glengorm, CEO of Friends of the Earth
Craig Bennett stated that “if these companies were to exploit this new find… many more people will die because of the impacts of climate change”. With the UK committed to the 2015 Paris agreement
to reduce greenhouse gas emissions and the UK government’s Clean Growth strategy
prioritising nuclear and offshore wind, developing new fossil fuel infrastructure in the North Sea may no longer be a desirable option.
This Energy Insight was originally published on 4th November 2016. It was updated on 29th April 2019.