OREANDA-NEWS. November 10, 2015. The North Sea oil industry, particularly the Shetland region at its core, is showing the strain of low oil prices, raising questions about its viability.

The demise of the four-decade old UK industry has been predicted many times, with recent concerns centered on taxation and possible independence for Scotland.

After oil prices collapsed last year, lobby group Oil and Gas UK predicted 20% of UK oil production could be shut down this year. Instead, only a few fields have been shut and oil production is booming, rising 14% year on year to a million barrels per day in the second quarter. Investment reached a record GBP14.8 billion (\\$23 billion) last year, Oil and Gas UK now says.

But the reality of oil prices halving, and staying that way, is hurting. That companies have hesitated to decommission aging facilities is perhaps unsurprising. Dismantling the offshore structures of a past era, when output reached three times today’s levels, is complex, costly work, as Shell is experiencing at the region’s best-known field, Brent.

But a decision by private equity-backed Fairfield Energy to decommission the Dunlin fields, northeast of the Shetland Islands, has sounded alarm bells, partly because the fields still hold significant reserves, but also because of the impact on the viability of the Brent pipeline system, which links fields east of the Shetlands and the islands’ Sullom Voe terminal. The pipeline carries about 10% of UK production.

Adding to concerns, BP said last month it and its partners no longer plan to use Sullom Voe for processing and loading oil from the giant Schiehallion field. Schiehallion lies in Atlantic waters west of the Shetlands and has been shut down since 2013 for refurbishment. When it starts up again next year the Shetlands will be bypassed in favor of Rotterdam.

Announcements increase pressure on one of the industry’s highest costing and most remote provinces. Industry chiefs have spoken of a ‘domino’ scenario in which the shutdown of one or two fields might render the Brent pipeline unviable for the remaining partners, leading to a wave of decommissioning.

The pipeline’s owners “are looking at the future of Sullom Voe and looking at the absolute operating costs and the cost allocation model, so that we can try and sustain the site and support the fields on all sides — east and west,” BP North Sea regional president Trevor Garlick said in September. “For the east in particular it is very critical that we maintain the reliability of that plant and the commercial offer.”

A BP spokesman said last week that bypassing Sullom Voe for Schiehallion crude would “lower production costs over the long term.” But that is not how everyone sees it; the Shetland Islands Council responded to the announcement by threatening to raise its harbor charges.

The challenges for the industry are different east and west of the Shetlands. To the east, operating costs are double those in some other parts of the North Sea due to “aging infrastructure, redundant facilities and a shortage of fuel gas” used to run facilities, Oil and Gas UK says. It has forecast east of Shetland operating costs to fall just 80 pence/b (\\$1.20/b) this year, to GBP17.00/b.

West of Shetland, companies have been beset by cost overruns and delays at projects such as Total’s multi-billion dollar Laggan-Tormore gas fields and Premier Oil’s Solan oil field. The latter, expected to start producing soon, has cost around \\$1.7 billion to develop, for a modest projected output of 20,000-25,000 b/d.

Extreme weather has caused both projects to grind to a halt at times.

“All operators have found that drilling [west of the Shetlands] is significantly more challenging than was forecast,” a senior industry executive said, going on to complain of difficulty attracting skilled labor, and accommodating workers when they do come to the Shetlands.

Shetland Islands consultant Andrew Blackadder, managing director of AB Associates, is confident the industry will continue to play a role in the region, but sees oil companies becoming a more transitory presence, symbolized in reduced numbers of resident workers and a growing tendency to fly staff in on a shift basis, as needed.

“What [companies] have been saying now is it is impossible for us to get the workers to come and live here. It is treating Shetland as an offshore installation,” he said.

Cost competitiveness

If the Shetlands are a particular challenge for the industry, not everyone makes much of a differentiation.

“I do not think the cost of [the UK] basin has reduced to the point where it is economically viable going forward. Our costs in Asia in our businesses there are incredibly much lower on every aspect,” Premier Oil’s North Sea and exploration director Robin Allan told the Offshore Europe conference in September. He highlighted red tape in the industry and attacked the majors’ “aggressive” treatment of struggling independents.

Efforts to galvanize the industry are gathering pace, not least as North Sea tax receipts have fallen close to zero in recent months, far off the nearly GBP11 billion (\\$17 billion) raised in 2011-12.

BP CEO Bob Dudley has pointed to major improvements in efficiency and costs in the company’s North Sea operations. Andy Samuel, chief executive of the Oil and Gas Authority, said in September the industry was starting to work more coherently and highlighted ongoing opportunities, such as 300 pools of hydrocarbons that have been discovered but lie undeveloped.

Some in the industry seem philosophical. The North Sea still attracts new investors, perhaps lured by the technical challenge and learning opportunities, by apparent political stability, or more nebulous criteria; Southeast Asian independents Ping Petroleum and Hibiscus Petroleum became the latest companies to buy up assets, from Shell and ExxonMobil, in August.

Stephen Kew, chief operating officer of Xcite Energy, is convinced a decision will eventually be made to develop his company’s Bentley field, which was discovered in 1977 and is thought to contain several hundred million barrels of heavy oil. The North Sea may be a far cry from the nimble, manufacturing approach of North America’s shale boom, but he says new methods and technology will make Bentley viable at oil prices as low as \\$35/b. Xcite even has a plan for Bentley’s eventual decommissioning, which should be far easier than anything now underway.

“Bentley and Xcite is a long game. There’s a 35-year field life at least, and it could be much more than that,” he said. “But there are issues out there. We can’t hide from the issues.”