North sea oil sector buoyant as firms invest in future

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  By Bob Duncan
 
Scottish oil exploration firm, Cairn Oil, has revealed plans to drill up to 15 new wells in the North Sea, following its recent acquisition of two oil businesses in deals worth hundreds of millions of pounds.
 
After acquiring Norwegian exploration firm Agora Oil and Gas for about £280 million in April and Nautical Petroleum for £414 million in June, Edinburgh-based Cairn now holds interests in 27 offshore licences in the North Sea; including stakes in the large Catcher, Kraken and Mariner fields.

  By Bob Duncan
 
Scottish oil exploration firm, Cairn Oil, has revealed plans to drill up to 15 new wells in the North Sea, following its recent acquisition of two oil businesses in deals worth hundreds of millions of pounds.
 
After acquiring Norwegian exploration firm Agora Oil and Gas for about £280 million in April and Nautical Petroleum for £414 million in June, Edinburgh-based Cairn now holds interests in 27 offshore licences in the North Sea; including stakes in the large Catcher, Kraken and Mariner fields.

The company said that it expected to be involved, over the next 16 months, in about seven firm and eight contingent North Sea exploration and appraisal wells, demonstrating its confidence in the future of oil production in the sector.  Cairn also claimed that advances in technology has turned previously uneconomic extraction profitable.

At the same time, oil giant BP is investing a further £100 million in the North Sea as it continues to increase its focus on large fields where it sees significant growth potential.  This follows last year’s announcement of a £3 billion redevelopment of its Schiehallion oil field in the Atlantic frontier, west of Shetland, in what was seen as a major boost for Scotland’s offshore industry.

BP continues to be a major investor in the North Sea, with current production of around 200,000 barrels per day.  It expects to invest around £6.7 billion over five years in the area, which will include major Scottish and Norwegian projects.

Oil & Gas UK forecasts that there are somewhere between 14 and 24 billion barrels still to be recovered from the Scottish sector of the North Sea. This range encompasses proven, probable and possible reserves plus a contribution from additional resources as a result of exploration activity.

The upper figure will require new techniques and technology, which are currently being developed, making previously uneconomic fields viable again.

In a speech delivered last month, Chancellor George Osborne said gas is crucial to meeting the UK’s electricity demand throughout the next decade and beyond.  He emphasised that Britain is committed to “making the most of our remaining oil and gas reserves”.

“This has long been one of our great industrial success stories, supporting a third of a million jobs, and extracting the equivalent of over 40 billion barrels of oil to date. We will provide more detail in the autumn on steps we will take to make the UK an even more attractive place for gas investors.”

UK energy ministers, however, have said they are planning to increase their reliance on shale gas, which is available onshore in England and Wales, as well as in English offshore waters.  These natural gas reserves are difficult to recover, and generally use the controversial technique of ‘hydraulic fracturing’ or ‘fracking’ which has been linked to the generation of earthquakes and the poisoning of drinking water.

Fracking involves drilling a hole deep into the dense shale rocks that contain natural gas, then pumping in at very high pressure vast quantities of water mixed with sand and chemicals.  This opens up tiny fissures in the rock, through which the trapped gas can then escape.  It bubbles out and is captured in wells that bring it to the surface where it can be piped off.

In the US, where fracking is common, the availability of cheap natural oil and gas has led to a reduction in oil prices, and there have been fears that a significant level of fracking in the UK could lower oil prices here, damaging future prospects for the North Sea oil industry. 

However industry experts have pointed to the relatively short life of the unconventional wells where the decline rate is described as “rapid”, and claim the boom will last for only a few years.

The epicentre of the American fracking boom is North Dakota where the rate of decline for wells after just twelve months is 70 per cent.

Oswald Clint, senior analyst at Bernstein Research said: “Twenty percent of it … is stripper wells.  These are little wells putting out just 10 barrels a day.  [In] North Dakota, those wells after five years become stripper wells doing less than 10 barrels a day such that when oil prices drop these are wells that the operating costs start to take over and people lose money.”

In other US states such as Alaska and the Gulf of Mexico, some of the larger fracking sites have not responded well recently and oil prices are expected to rise.

The total available shale gas reserves in England & Wales amount to less than 18 month’s of total UK gas usage, ensuring extraction would have a marginal effect on North Sea prices over a 30 year period, contributing just 5% of all gas used.

In addition, while world oil prices rose steadily from a low of $75 a barrel in October 2011 to $105 in May 2012, gas prices fell over the same period from $4 per MMBTU to just over $2.  Since then, oil has dropped to $95 and gas has risen to $2.7.  The disconnect between the two prices is clear.

Meanwhile, confidence in the North Sea energy sector was further demonstrated this week as Norway’s Offshore Northern Seas (ONS) conference attracted almost 60,000 delegates from over 100 countries to Stavanger, where they enjoyed 4 days of exhibitions and presentations.