Conditions turn bullish for UK Continental Shelf

Longer term, the OPEX/CAPEX outlook is for some £35billion to be spent over the period to 2010. A year ago, the forecast was for £29billion spread over six years.

With the Organisation of Petroleum Exporting Countries (Opec) resolved to keep a tight grip on global oil prices and to almost certainly shift its reference price band from the just suspended mid-$20 range to mid-30s, pending further market evaluation, the $35billion could turn out to be conservative.

Moreover, with signs that the long hidden potential of the UK Atlantic Frontier may finally be on the verge of realisation, the outlook for oil and liquids production is the best it has been since before the late-1997 through 1999 oil-price downturn. Further successes on the frontier, such as Rosebank/Lochnagar, could make a significant difference to the current 28billion barrels oil equivalent estimate of proven and technical reserves remaining in the ground.

But it appears no amount of money will reverse the decline in UK gas output that has set in. Britain is now a net importer after a brief period of self-sufficiency. Though UKOOA says the nation will still be 60% self-sufficient in gas by 2010, some 60-100 billion cum a year worth of import-focused projects are in hand and scheduled for completion around 2008.

They include the 23bcm a year Langeled pipeline that will transport Ormen Lange gas to Easington; Bacton Interconnector upgrade (two phases of 8bcm each bringing total capacity to 24.5bcm; BBL Netherlands-Bacton pipeline (10-15bcm); Isle of Grain LNG terminal (12bcm), and two LNG terminals at Milford Haven totalling 34bcm.

While there seems little that can be done to stem the gas slide, UKOOA says operators believe they can collectively halve the decline rate for oil from the current 14-15% to about 7%. This is seen as crucial to closing the gap that has emerged between the 2010 Pilot vision for UK production and reality.

“If we can sustain current investment levels, we feel we can get there, said UKOOA communications director Steve Harris, who expects the North Sea to still be in business come 2035.

That said, the bucket is considered more than half empty and he warned that operating costs climbed 12% last year.

Harris attributed this to a “significant increase” in the cost of maintaining the existing, and now ageing, infrastructure. But he insisted that such assets were worth maintaining.

He denied that rocketing costs had anything to do with alleged planned non-maintenance during the lean late-1990s when operators were struggling to keep the North Sea viable.

But Harris was vague when it came to the question of whether part of the jump could be attributed to the supply chain clawing back margins that had been all but eliminated six years ago.

“I don’t think there was planned non-maintenance,” he said.

“As to whether there is a margins issue … are contractors managing to raise margins? One would expect that they would be able to, but we don’t have any evidence.”

He was unable to tell Energy what the impact of oil-company hedging on the oil price had been on the North Sea; nor whether the negative impact of hedging, say at about $25 when global prices were far higher, was waning as such contracts gradually expired.

This was, said Harris, a confidential matter for the companies themselves.

When asked about the risk of fiscal shocks, notably the currently fashionable rumour centred around a windfall tax on gas-related earnings, he said this was a matter for Government and that it was a “downstream” issue.

“If Government wishes to come and talk with us, we’re more than happy to have conversations.”

He agreed that the current row over high gas prices was basically the doing of Government which, in the late-1990s, smashed long-term take-or-pay contracts in favour of short-term arrangements linked to a spot market for gas.

Harris said, too, that Government appeared to understand the North Sea “better than they ever have”.

“It’s vital we get no more surprises, he warned.

As for exploration and appraisal drilling and the absolute need to develop a systematic approach to hunting out the 5-9billion barrels of technical oil&gas, Harris said oil companies would be resistant to being dictated to on this issue.

“It will be very difficult for Government to get people to go and drill wildcat wells. They have to be confident enough to believe it’s worth doing.

That said, Harris said there was an initiative afoot to try to get companies to actively co-operate with regard to their exploration programmes — it was better, for example, to get one rig to drill 10 wells sequentially than have 10 rigs drilling single wells at the whim of an operator.

“What we’re doing within Pilot is putting together something called a wells club, which is about trying to get groups of operators to work together on a long-term contract for a single rig.

“It might mean that if you want your well drilled in June, you pay a premium. If you’re prepared to drill in January and take the associated risks then you pay a lot less.

“That way, the rig’s owner gets better, guaranteed utilisation and, hopefully, costs will come down. Contractors have put together their proposals, including Peak, which is taking about up to 22 wells. They’re doing incredibly well.

Meanwhile, as operators plan out their 2005 UK campaigns, they can be confident that Opec will ensure global oil prices favour the North Sea (by default, of course).

On January 30, the cartel’s members agreed to keep output limits on hold, convinced that oilprices near $50 a barrel are not stifling world growth.

Moreover, they took little time to settle on no change in supply quotas, despite worries among consumer nations about inflated fuel costs.

Gone are the concerns that dominated in Opec last year about the impact of rising crude prices on the economic growth that drives demand for its oil.

With inflation in the world’s big economic powers in check and low interest rates still generating above trend growth, cartel ministers see no reason for cheaper oil.

“$50 oil will not play a big role in slowing up growth of the economy. Some analysts say even $60 oil will play a small role in affecting growth, said Opec President Sheikh Ahmad al-Fahd al-Sabah.

“I am comfortable with the market between $45 and $55, said Edmund Daukoru, Nigeria’s presidential adviser on energy.

Opec now appears ready to defend oil prices at a floor of about $40 a barrel for US crude or $30-35 for a reference basket of cartel crudes.

Ministers agreed at their meeting to officially set aside their old $22-28 range for the basket, set in March, 2000, but are in no hurry to set a new target, saying prices are too volatile.

“We have to wait until the second quarter of this year to know exactly where the price indicator will head, said Sheikh Ahmad.

“But I believe that $35 is a suitable price as an average price for the Opec basket of crudes.

“Somewhere between $30 and $40, said Iranian Oil Minister Bijan Zanganeh.

Economists agree there is little sign yet of an energy price shock, partly because the US dollar’s decline on currency markets has protected non-dollar importers from the rise in dollar-denominated oil prices.

“Yes, oil prices are high, but the US economy hasn’t skipped a beat and the weaker dollar has insulated many growing economies from a shock, said Yasser Elguindi, analyst for Medley Global Advisers.

“High oil prices are not hurting demand because the value of the dollar allows emerging economies to afford higher prices.”

Several in the 11-member group point to forecasts that oil demand in energy-hungry China will rise strongly again this year — perhaps as much as 14-15% over the year. On top of this, fast-growing India is also “hoovering” up as much oil as it can secure.

“Between $45 and $55 (for US crude) has not affected global economic growth,” said Nigeria’s Daukoru.

Ministers next meet on March 16, but may yet decide to shave production to contain a seasonal quarter stockbuild. Meanwhile, crude prices are riding in the mid to high-$40s range.

“Now is not the time to cut,” said Zanganeh at the January 30 session.

Some in Opec worry that the mid-March meeting comes a little late for comfort to adjust supply. Middle East exports take six weeks to reach Western markets.

Should inventories build too quickly and prices fall, said group president Sheikh Ahmad, he would intervene and call a ministerial teleconference to take action.

All this augurs well for an excellent 2005 for the North Sea despite intense global competition for oil-company investment dollars.

Last word from Harris: “As long as we have an oil price over $30, the more confident we become.”