Friday 19 December 2014

Is the North Sea really a dead duck?

The papers are full of bandwagoning about the death of the North Sea. Do we think this is true though or just useful copy as the fall in oil price plays out.

Here are some thoughts on it:

1 - The oil price will bounce back, but in reality the days of $200 oil are a chimera. There is lots of shale oil, LNG is replacing oil demand rapidly across the world (rapid in terms of over this decade). Many countries full of oil have restricted access to market - Libya, Iran and Syria for example.

2 - So where will it hit, well the ceiling may well be governed by the Shale Oil sit around $69 in the US currently, maybe a tad more. So long-term this may well be the placeholder for oil to float around - touching a hundred in times of stress maybe, but no further. Certainly going lower at points such as we are now.

3 - Oil demand is rising more slowly than in the past as the world grows more slowly and Renewables and LNG take the strain- another long-term constraint is in play.

So, overall this is very bad news for the North Sea, where extraction costs are $60-70 per barrel - the same as Shale oil. So it won't die but it becomes a very marginal business with small fields at the end of their lives. Plus the increasing regulation around decommissioning is another negative factor.

I can't see a new North Sea rush without huge tax breaks (umm, by which I mean reduction of the huge taxes on production and distribution, not actual subsidies) which maybe what is needed. The greenies in the political parties may well put a stop to this.

Such a shame for the humour of the world that the Scots did not go independent though and then have to face this reality!


Steven_L said...

The 'morningcall' phone in on BBC Radio Scotland was about the oil price and the north sea this morning.

All the industry folk that called in seemed to think that the Saudi's are basically taking on US shale and Russia is just a side effect / complication.

There's starting to be talk of job losses around Aberdeen and contractors rates get cut very quickly.

If you ask me, the oil industry is a lot like the banks. In the good times they dish out all the money to their employees - who spend it on flashy German motors and inflating Aberdeen house prices - and then their shareholders / bondholders will take most of the hit in the bad times.

Since most oilies around here tear around Scotland in cars that do 15mpg they are probably hedged against their 10 - 20% pay cuts.

Nick Drew said...

Bad news? In the short-medium term, yes of course (although short-run marginal costs of production are often close to zero)

I well remember the slump of 1986, when Aberdeen suffered greatly

but then came the great technology break-throughs that slashed apparently insuperable offshore costs: (that's slashed, not just 'shaved off the odd 5%')

- massive new barge cranes
- single-lift topsides
- horizontal drilling
- unmanned platforms

low prices drive innovation to a degree which always amazes people

including the engineers themselves, who are much smarter than they realise, they just need a man with a lash standing behind them every decade or so

Nick Drew said...

PS: illustration - the firm I was working for in 1986 had a new gas field for sale (only buyer was BG in those bad old days): the chairman had heard someone sold a field to BG @ around 28 p/th for the gas, he noisily declared that nothing shy of 30 p/th would be acceptable for the new field, the project absolutely wouldn't fly at south of 30, oh no no no

then came the price crash

a year later he settled for 16 p/th

funny, that

CityUnslicker said...

ND - Yes, however, the interesting bit is that Shale techniques will likely be cheaper and quicker to develop being onshore?

It is not like they keep finding hug new fiels, although there is EOR and the like which supports your point.

Nick Drew said...

yes, there is EOR, + the sunk costs phenomenon discussed before, + already-existing infrastructure which can be blistered onto much more cheaply, than if totally new infrastructure is required

that said, the iron law of the Land of Offshore is:

"it's more expensive to do ... absolutely anything onshore than offshore"

if an onshore alternative can be found, it'll be preferred - as you say, shale, or indeed anything else (algeria looks good from that point of view, if not politically)

Steven_L said...

The other one the industry have been rolling out is about trainees.

The reckon that oil firms operating in north east Scotland spend a lot on training school and uni leavers. Then when these bad times come they will all up sticks to one of the other oil and gas producing countries and not come back. So when the price recovers they have to start again with training. There's probably some truth in this.

Does anyone have any figures or indication on whether and to what extent the tax losses from oil and gas payroll, oil taxes and forecourt duty will be offset by taxes on other parts of the economy as energy consumers get a windfall?

How will it affect the deficit on the run up to the election?

Nick Drew said...

Steven, that's what I mean abt whether Osborne knows how to parlay this genuine windfall into (inter alia) electoral benefit