North Sea oil industry spend to fall by £10 billion a year

The report by specialists at Aberdeen university found more than a third of the oil and gas reserves in the North Sea may be left in the ground following the fall in prices.

The authors also predicted that the slump could result in a range of fields that are currently in production being decommissioned early or mothballed.

The findings of the study by Professor Alex Kemp and Linda Stephen underline how grim the outlook is for the North Sea supply chain as firms brace themselves for what may be a long period of low oil and gas prices.

Brent crude sold for around $35 per barrel yesterday compared with about $70/bbl in January.

The authors said the extremely low prices likely to be experienced in 2020 may be modified somewhat in 2021.

However, noting uncertainty about when demand may recover from the impact of the coronavirus they cautioned: “A range of still relatively low prices by the standards of the last 20 years could prevail for a long time ahead.”

The pressure on prices is likely to lead to massive cuts in spending in the North Sea.

Mr Kemp said: “Life will be very tough for the supply chain particularly for those dealing with exploration and those dealing with field development.”

The study found that if prices remain at around current rates in real terms annual investment in new developments is likely to fall dramatically from this year, to below £1 billion by 2040, compared with £5.5bn last year.

Spending on running costs is set to drop below £2bn annually by 2035. It totalled £7.3bn in 2019.

The forecasts are based on the assumption that oil and gas prices remain at around $35 per barrel of oil equivalent (BOE) in real terms.

The decline could be more rapid if prices are lower. Spending on new developments and operations could total around £135bn between 2019 and 2050 at $35/boe but fall to £115bn at $25.

The findings put the onus on the industry and the Government to come up with ways of slowing the decline.

“With decommissioning cost amounting to more than £37bn over the period and companies and government facing a cash shortfall it’s likely that the industry and government may prefer to delay decommissioning,” said the authors.

They added: “The future of the United Kingdom Continental Shelf at the oil and gas prices employed in this study depends critically on technological innovations which can significantly enhance productivity.”

Industry body Oil & Gas UK warned last month that up to 30,000 jobs could be lost in the North Sea amid the fallout from the coronavirus.

The industry body said yesterday: “Remaining as competitive as possible to attract investment, alongside innovative and flexible approaches and business models, will be required to ensure we can not only continue to meet as much of the UK’s energy needs from domestic oil and gas, but also prepare the UK to fully capitalise on net zero opportunities of the future.”

Firms that operate oil and gas fields and services companies have announced plans for deep cuts in spending.

The fall in oil and gas prices has impacted on investor interest in the North Sea. On Tuesday Neptune Energy pulled out of a £235m deal to buy a portfolio of North Sea assets.

The Aberdeen university study found 36 per cent of the remaining oil and gas is held in finds that would be uneconomic at current prices.

These contain 4.6 billion barrels.

Of around 470 possible new field developments considered in the study only 38 would be likely to win approval. Only 43 of the 92 field extension type developments considered would make the grade.

The study underlined how sensitive North Sea activity levels will be to oil and gas price movements.

Around 7.2 billion further barrels will be recovered from the North Sea by 2050 if prices average $25/boe. The number will rise to 8.3bn barrels and 10.5bn barrels if prices average $35/boe and $45/boe respectively.