Smaller Oil Companies Fuel UK’s North Sea Revival

Tax changes and investment incentives are transforming the landscape of Britain’s North Sea — reinvigorating Europe’s second-largest oil basin after Norway and raising hopes that its long decline may slow.

The revival has taken many in the industry by surprise, because when the government in 2005 announced it would raise taxes on oil production, big international companies warned the move would discourage investments.
Two years later, the biggest oil companies are reducing their presence, but a clutch of smaller companies have moved in to fill the void. The shift in ownership suggests the government may be able to capture more revenue from high oil prices while limiting risks to its energy security needs.

This year, Royal Dutch Shell PLC, Chevron Corp. and Exxon Mobil Corp. started to offload a sizable number of their North Sea fields, much as BP PLC and ConocoPhillips did last year. As they reduced their exposure, small, independent companies such as Fairfield Energy Ltd., Oilexco Inc., Venture Production PLC and Perenco SA seized what they saw as a good opportunity. These smaller companies have leaner cost structures that make them better suited to the mature, high-tax basin, energy analysts say.

The North Sea is to the United Kingdom what the Gulf of Mexico is to the U.S. — a province that pipes oil and gas straight into one of the world’s largest economies, reducing its dependence on tight international energy markets.

The future of the basin, which in 2006 produced 2.9 million barrels of oil equivalent a day, is crucial to global energy supply. But ever since a peak in 1999, production has been in decline — falling 10% in 2006 — as fields slowly deplete.

The newcomers are now playing a big role in investment. According to Hannon Westwood, recent entrants, none of which are major producers, accounted for more than 50% of all drilling in search of oil or natural gas in 2006, a proportion it expects will rise this year. The consultancy said drilling in 2005 and 2006 reached its highest level since 1998, with 116 wells.

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