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North Sea oil & gas outlook

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The North Sea oil and gas industry is facing job losses in the upstream side of operations, with Chevron and Shell having recently announced the cutting of 475 largely onshore jobs in Aberdeen, 250 from Shell and 225 from Chevron; and the selling off of assets. Drilling contractor, Odfjell, has also said it is cutting North Sea jobs. In the case of Chevron, the USA second largest oil company, this reduction amounts to one fifth of its Aberdeen operation.

The job losses – which include contractors, employees and expatriates – result from steamlining overheads costs on the one hand and reacting to disappointing earnings on the other – with high costs undermining some field developments.

These last issues relate to the asset sales, with Chevron having told its shareholders that it will sell £10 billion of North Sea assets in the next three years. It’s CEO, John Watson, said back in March this year [2014] that most of the sell off relates to uncompetitive assets; and that it will focus on its major North Sea projects, which include the Alder oil and fas field and the Enochdu and Rosebank oil fields. This last assertion seems less than certain though, with Chevron, in November 2013, describing the Rosebank project as not economically attractive. Rosebank is in the west of Shetland area where there are extensive reserves – but which are technologically and environmentally challenging to extract.

Back in February 2014, Shell informed its staff that it had started selling off its ageing Anasuria, Nelson and Sean assets.

Shell is currently investing about $2 billion a year in its UK assets, which fall into three main areas — described as ‘southern North Sea gas, non-operated stakes in big upcoming projects in the west of Shetland, such as the BP-operated Quad 204 and Clair Ridge schemes, and more mature fields in the central and northern North Sea, which include the Brent, Shearwater, Gannet and Curlew areas’.

Simon Henry, Shell’s Chief Financial Officer, has previously said that the mature assets have been absorbing $1 billion of the $2 billion spending for ‘very limited growth potential’.

Over the last four years, Shell’s total average production from the UK North Sea has been about 136,500 barrels of oil equivalent per day [boepd], though in 2013 that fell by 22% to 91,000 boepd.

Shell is also working with SSE and the UK Government to explore sending CO2 from SSE’s Peterhead Power Station for long term storage in the North Sea’s Goldeneye reservoir.

Chevron announces its second quarter [Q2] results for 2014 on 1st August – which were ‘solid’. It is worth noting that, in this report, the North Sea does not even figure. The action is elsewhere.

Shell produces around 12% of UK oil and gas and has interests in more than 50 North Sea fields, operating around 60 offshore and sub-sea installations and 3 onshore gas plants at St Fergus, Mossmorran and Bacton.

Fall in North Sea industry optimism

Industry body , Oil & Gas UK, reported days ago, on 6th August, that the confidence of the industry in the North Sea fell by 4 points from 6 to 2 above zero. On its scale of -50 to +50, this amounts to an 8% drop, not a matter to ignore.

Oil & Gas UK emphasises that while this registers a fall in optimism, at two points above zero it does remain on the positive side of the line.

It points out: ‘The index  captures a snapshot of the industry mood and gauges  a number of economic indicators, including business confidence, activity levels, business revenue, investment and employment with a higher rating [above zero] indicating a more positive outlook and a lower rating [below zero] expressing a more negative opinion.’

Ken Cruikshank, Oil & Gas UK’s Operations Manager, says: ‘ Unfortunately we have seen the index fall over the last five quarters and, while businesses remain in optimistic territory overall, this is not a trend our industry can afford to ignore.’

Cruikshank echoed a conclusion of Sir Ian Wood’s Review of the Industry, saying that: ‘Incentives are required to encourage further investment in the basin to turn around low levels of drilling as the reduction in activity levels is adversely affecting the outlook of contractor, service and companies in the wider supply chain.’

The issue of ‘incentives’ – aka a lighter tax regime with a consequent fall in annual state revenues – reflects a situation of current decline described thus by Cruikshank: ‘While capital expenditure last year was at all-time high, our costs continue to rise and production rates continue to fall, especially in some of the oldest fields which are taxed at rates of up to 81%, and exploration is at an all-time low.’

Relevant external developments in the market

The market for UK production is facing an additional threat for a covert agreement between the USA and the EU, revealed earlier when the website, The Huffington Post, got hold of and published a leaked secret trade agreement between the two.

This showed the Obama administration and the EU agreeing to ‘expand US fracking, offshore oil drilling and natural gas exploration’ – as well as exports to the EU [Ed: our emphasis], under the prospective Transatlantic Trade and Investment Partnership (TTIP) agreement.

This deal will be enabled by the USA removing the barriers it has placed on the export of fossil fuels. It can only depress the market for North Sea output, whose production costs are high – with even Scotland’s Grangemouth Refinery, with direct access to BPs Kinneil pipeline from the Forties Field, finding it cheaper to import cheap shale products form the USA.

Market demand satisfied more cheaply elsewhere will depress further the already low production and exploration rates in the North Sea – for the time being.

The ‘for the time being’ caveat is interesting.

The ‘official’ estimates the of recoverable shale oil reserves in the USA’s supposed star asset of California’s Monterey formation were heavily written down a few months ago by the Energy Information Administration – in a stupendous 96% drop from 15.4BN to 600M barrels.

The Monterey shale had been accepted – on what has turned out to be an EIA estimate based on little more than a back of an envelope calculation, to contain more than double the volume of North Dakota’s legendary Bakken shale and five times that of the major asset of South Texas’s Eagle Ford shale.

The EIA’s 2011 report estimated that Monterey had 64% of the USA’s recoverable shale oil reserves. It had been assumed that it would create up to 2.8 million jobs by 2020 and increase USA tax revenues by $24.6 billion per annum.

The extent to which plans were pinned on Monterey can be judged by a statement put out in 2013 by the industry funded analyst consultancy, No Hot Air [one of whose clients is the UK's upfront fracker, Cuadrilla]: ‘The star of the North American show is barely on most people’s radar screens. California shale will reinvigorate the Golden State’s economy over the next two to three years.’

Not at 600M barrels it won’t.

The EIA’s revised estimate of 600M barrels comes partly from analysis of actual output from wells where new fracking techniques have been applied, with some of the reasons for the initial overestimate coming from a lack of knowledge of the geological differences between the shale fields, with fracking techniques then less efficient and productive than had been assumed.

The result of this massive overestimate of the Monterey formation is that, according to the 2013 Hughes report: ‘light tight oil production in the USA will peak between 2015 and 2017, followed by a steep decline’, while shale gas production may peak this year, 2014.

This situation may well impact on the export deal made between the USA and the EU; but with the North Sea reserves mainly in the heavy crudes neither the UK nor the EU is adequately set up to refine, it is difficult to estimate whether there will be any immediate knock-on benefit in increased demand for North Sea output. The EU’s interest in the deal with the USA is because its needs, like the United Kingdom’s, centre on the sweet light crudes it can refine.

There is no current sign that the North Sea industry is gearing up for market development on the basis of the shorter than predicted life span of the American shales.


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