North Sea industry faces new pressures over climate, resource shortfall

London — Rising oil and natural gas production and an easing of the UK's political crisis are giving rise to optimism in the North Sea. But concerns loom over an expected longer-term supply shortfall and the growing pressure to address climate change.

Europe's oil and gas industry has adapted well to the sharp downturn in prices in the middle of the last decade; costs have been reined in and production has recovered in both Norway and the UK. Asian refiners have proved keen on the larger crude production streams, such as Ekofisk, Forties and recently Johan Sverdrup.

London-listed oil and gas companies have enjoyed a share price bounce since the Conservative Party's December 12 election victory allayed fears of nationalization and windfall taxes, raising the possibility that the industry could become less reliant on the private equity backers that stepped in in recent years.

In production terms, the UK recovery has been a story of gradual improvement from a low base over the last half-decade.

UK oil production reached nearly 1.2 million b/d in the first nine months of 2019, lifted partly by new, heavier crude grades such as Kraken and Mariner.

For Norway the recovery has been mainly due to the giant Johan Sverdrup Field, which started up in October, causing national oil output to rise by about a quarter since mid-2019 to more than 2 million b/d.

The worry over future production is more acute for the UK, however, and industry group Oil & Gas UK foresees a "managed" decline from 2021.

The UK had just one discovery in 2019, Glengorm, which is estimated at 250 million barrels of oil equivalent, but is also subject to "very significant uncertainty," necessitating further appraisal, according to Bas Spaargaren, vice president for Europe & Africa exploration at the operator, CNOOC International.

Norway made a big push on exploration in 2019, with around 40 wells drilled and several discoveries. But the median size of Norwegian discoveries over the last five years was a modest 32 million barrels of oil equivalent, and the biggest find of 2019, Liatarnet, was a heavy oil discovery, bringing additional challenges. In terms of discoveries, nothing has come close to the 2010 Johan Sverdrup discovery in recent years.

NEW PROJECTS

In terms of new production in 2020, some relatively modest projects are expected to start up. In UK waters, BP's Alligin field will feed oil to the West of Shetland Schiehallion facility, and the UK major's Vorlich field will start feeding oil to Israeli-owned Ithaca Energy's Stella hub. In Norwegian waters, ConocoPhillips' Tor II is set to feed oil into the Ekofisk crude stream, while two other projects due on stream are refurbishments of legacy facilities shut down due to structural problems: Equinor's Njord and Spanish company Repsol's Yme.

As for projects earmarked for development approval, uncertainty surrounds the main UK ones. The biggest, Rosebank, in the West of Shetland area, may have to wait: operator Equinor is aiming for a Final Investment Decision by May 2022.

Cambo, another West of Shetland project with similarities to Rosebank, may get approval in 2020, but the operator, independent Siccar Point Energy, needs the backing of minority partner Shell; the project is complicated by igneous rock that 'intrudes' into the reservoir, as well as harsh sea conditions. Shell meanwhile seems hopeful of approving another, smaller project in the North Sea, Jackdaw.

Norway is in a stronger position, with a second development phase of the Johan Sverdrup field due on stream in 2022, lifting output from 440,000 b/d to 660,000 b/d. Another sizable project, Johan Castberg, comes on stream the same year.

LICENSE TO OPERATE

Oil and gas executives are used to challenges such as the shrinking average size of new discoveries, tough-to-develop reservoirs, and less-profitable heavy crudes. But a new element is the growing scrutiny of the industry's carbon footprint, and the challenge this poses to its reputation.

Norway appears ahead on practical steps. Johan Sverdup takes all its power from the domestic energy grid, with most generation derived from hydropower. Other fields are following suit. Joint venture Aker BP's latest Valhall facility boasts the world's first electrically powered lifeboat.

The UK is also ratcheting up pressure. Regulator the Oil & Gas Authority noted in December that power consumption by offshore oil and gas facilities amounted to 5% of UK power demand, with many facilities run on diesel.

It called for an "integrated vision" in which oil and gas facilities are linked to wind farms and sub-sea power interconnectors, and defunct platforms are repurposed for renewable technology.

It was a topic raised by Total CEO Patrick Pouyanne at the Offshore Europe conference in Aberdeen in September.

The industry, he said, is increasingly seen as "a dinosaur" and "the only way not to become a dinosaur is really today to act, invest and progress together."

-- Nick Coleman, nick.coleman@spglobal.com

-- Edited by Richard Rubin, richard.rubin@spglobal.com