North Sea oil and gas sector attracts billions in foreign investment

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By Bob Duncan

The consolidation of the North Sea oil industry took a significant turn yesterday as Chinese firms rushed to take a place among the sector’s largest producers.

The announcement this week that two Chinese companies are to invest over £11 billion in Scottish oilfields has cast doubt on recent claims by anti-independence commentators that the long term future of the sector is bleak.

By Bob Duncan

The consolidation of the North Sea oil industry took a significant turn yesterday as Chinese firms rushed to take a place among the sector’s largest producers.

The announcement this week that two Chinese companies are to invest over £11 billion in Scottish oilfields has cast doubt on recent claims by anti-independence commentators that the long term future of the sector is bleak.

Chinese state-controlled group CNOOC has agreed a $15.1bn (£9.7bn) offer to buy Canada’s Nexen, which is the second biggest oil producer in the North Sea.  Its net production of both oil and gas is 114,000 barrels of oil equivalent per day (boepd).

In another separate deal, China’s Sinopec splashed out $1.5bn on a 49pc stake in the UK unit of Canada’s Talisman Energy, which produced an average of 71,500 boepd last year.  Talisman said its joint venture with Sinopec would “invest more in the UK than Talisman would have on its own”.

For the North Sea, the deals represent the latest twist in an evolving consolidation story that has seen several North Sea projects and companies change hands.  And this reflects the ‘renewed attractiveness’ of the North Sea, according to British offshore oil industry association, Oil & Gas UK.
 
“The proposed acquisition by international investors of interests in the UK continental shelf reflects the renewed attractiveness of our province as a place to invest and affirms the significant remaining potential of the UK oil and gas industry and its world class supply chain,” said Malcolm Webb, chief executive of Oil & Gas UK.
 
“Given the new ownership, we would expect investment activity to remain high.”

Only last week it was revealed that the first oil field to come on stream in the Scottish sector of the North Sea, the Argyll field, is being given a new lease of life.  And there are many more old North Sea fields in line for the Argyll treatment – around 340 it is estimated if all the small ones are included.

In another announcement, oil and gas firm Dana Petroleum saw revenues soar last year, boosted by a big rise in production.  The Aberdeen-based company reported an 80% increase in revenues to $1.7bn (£1.08bn), while profits came in at $292.6m (£187m).

The company said it was on track to grow production to more than 100,000 barrels a day by 2016.  It plans to invest more than $5bn over the next five years to more than double the size of the company.

Dana Petroleum also expects to start drilling at two new oil fields off Shetland next year.  The company has entered the detailed engineering design phase of what it calls its Western Isles Project.  The first oil from the North Sea fields, named Harris and Barra, should be available in 2015. Once under way, the project could run for 15 years.

Despite all of this, BBC Scotland reported this weekend that an oil and gas industry consultant has warned of sharp falls in production over the next five years.

In a reprise of David Cameron’s “uncertainty” story, Tony Mackay said disputes over whether Edinburgh or Whitehall controls oil revenue was distracting attention from the challenge of slowing the decline.  He said a study he was preparing estimated the drop could run to 7% per year on average.

He went on: “Both the UK and Scottish governments should give serious consideration to the implications of the continuing decline in production. I believe that the arguments about the control of future oil revenues have become a distraction from sensible discussion about how to slow down that decline.”

Mr Mackay has been criticised in the past for pessimistic forecasts on oil and gas production.  In January 2011, just before the Scottish elections, Mr MacKay claimed that an independent Scotland would be billions of pounds in the red and said that oil production levels would fall at twice the level predicted.

The managing director of Mackay Consultants also poured scorn on SNP claims that 91% of oil fields were in Scottish waters, and instead insisted that an independent Scotland would receive only 84% of the North Sea sector.

Another to cast doubt on claims that an independent Scotland would benefit from the oil and gas sector was BBC Scotland’s Business and Economy Edditor Douglas Fraser who claimed that the oil was wealth was not Scotland’s

“We’re told Scotland could be the sixth wealthiest country in the world, in terms of gross domestic product per head, and that there are 24 billion barrels of oil still to be pumped.  But that belongs to the energy industry: it’s not Scotland’s wealth.” he wrote on his BBC blog.

In another pessimistic forecast, the Office of Budget Responsibility issued a revised estimate of what government could expect to earn from UK oil and gas over the next 30 years, saying it would be about half of what the official advisers had projected last year.

According to the body, created by Tory Chancellor George Osborne in 2010, by 2040 – should Scotland still be part of the Union, the amount that the sector contributes to the UK GDP will drop to around 0.05%, around half the receipts it projected in last year’s report.

However the OBR predictions were put into perspective by Professor Alex Kemp, who writing in the Press and Journal last week, said: “Making projections of any economic activity over the next 30 years is an exercise fraught with risks: the range of plausible outcomes is high.

In the case of North Sea oil tax revenues the range is particularly wide. This is because the level of tax receipts depends on the interaction of production, oil and gas prices, investment, operating and decommissioning costs, and the tax system itself.

All of these determining factors are subject to substantial change over the medium and longer term, and thus tax revenues are particularly uncertain.”

He added: “There could be very worthwhile national returns from increased investment in asset integrity in mature installations including the infrastructure. Again, government incentives through the stewardship scheme could produce significant returns.”

A Scottish government spokeswoman said it had published an oil & gas industry strategy for Scotland in May, aimed at targeting higher long-term recovery rates, greater exports and £30bn annual sales by 2020.

She said: “Clearly the industry requires a stable taxation and regulatory regime to provide confidence and encourage long-term investments, something the Scottish government has consistently supported.”

Commenting in May, Alex Salmond said: “Oil and gas is one of Scotland’s greatest industrial success stories, having transformed the economic well-being of the UK over the last 40 years.

“With as much as £1.5 trillion of oil remaining to be extracted from reserves around these islands, an increasingly buoyant export sector now reaching 100 different countries, and emerging opportunities to deploy the sector’s vast expertise in other offshore projects, the industry has a bright future.”