Commodities 2021: Confidence gradually lifts in battered North Sea oil and gas industry

London — The North Sea oil and gas industry enters 2021 picking up the pieces after a vertiginous price collapse, but with an optimism that it has more to give, as new companies, projects and exploration help navigate the energy transition.

Despite warnings in April from industry group Oil & Gas UK of a "body blow" to the sector as companies scaled back activity and spending, the industry emerges from 2020 having broadly maintained production, and encouraged by recent oil price rises, as well as government backing.

Asian appetite for North Sea crude has rebounded, with Norway's new flagship crude, Johan Sverdrup, now a mainstay for China's independent refiners.

UK oil output suffered somewhat in 2020, falling 6% over the first nine months to 1.05 million b/d, with some late-life fields consigned for decommissioning. Norwegian oil output was up 17% over the first 11 months at 2 million b/d on the back of Johan Sverdrup, which came on stream in November 2019.

Both countries' production could take a hit in the first half 2021 due to reduced drilling and reinstatement of postponed maintenance. The Forties pipeline, which carries a third of UK crude output, is set for a major overhaul in June; Chrysaor, one of the country's top producers and currently undergoing a merger with Premier Oil, expects full-year output from its assets to drop 15%.

But Norway's production remains buoyant, with Sverdrup output recently hitting 500,000 b/d, and production cuts in support of OPEC+ countries ending from January.

And between the two countries about a dozen developments, most of modest size, are due on stream in 2021, as are projects to boost production from stalwarts Buzzard and Troll, and a couple of projects to refurbish Norwegian fields that have had structural problems, Njord and Yme.

Even before recent oil price rises, Norway's industry was looking re-energized by tax breaks in June aimed at boosting spending; a number of smaller projects have already been approved as a result.

UK industry sentiment also appears improved; the merger of London-listed Premier with private equity-backed Chrysaor will mark the debut of a significant oil and gas player on the London stock exchange under the name Harbour Energy.

And a possible sale of ExxonMobil's UK upstream business is helping excite interest in potential M&A deals – the US major says it is providing information to third parties that may be interested in the assets.

Majors' future

The European majors stress their continued commitment to the region, and still play a big role at fields such as Total's Elgin-Franklin, and most oil and gas facilities in the challenging West of Shetland area.

Shell's revamped Shearwater gas hub is among UK projects due on stream in 2021. The Anglo-Dutch major's say-so will probably also be crucial to two West of Shetland projects on the table: Cambo, thought to hold 800 million barrels of oil, and the next stage of BP's Clair heavy oil development, Clair South.

Independent Siccar Point Energy hopes to approve Cambo in 2021, after it secured an extension of its reserves-based lending facility in December, but needs Shell's help as 30% stakeholder. As for Clair, in which Shell holds a 28% stake, BP has said it will "revisit" growth projects as conditions improve.

The European majors remain vital to capital-intensive energy transition projects seen as needed to ensure the "social license to operate" of the sector as a whole.

UK regulator the Oil & Gas Authority is expected to receive a new remit in 2021 requiring it both to ensure companies maximize economic recovery of oil and gas, and contribute to achieving the goal of "net zero" emissions by 2050.

BP, Equinor, Shell and Total have all made announcements on plans to capture CO2 emissions from industrial sites in Norway and the UK and store them under the North Sea. Clair South is seen as a test case for supplying renewable power to West of Shetland platforms, emulating Norway.

Net-zero challenge

Both countries' industries say they are ready for the "net zero" challenge – Equinor pledged in November to achieve net-zero carbon emissions both from its operations and consumption of its products by 2050.

Equally, the industry argues oil and gas will continue to be needed, and indigenous gas supplies come with a CO2 footprint less than half that of imported LNG.

The OGA echoes such arguments, estimating UK pipeline gas has a CO2 footprint of 22 kg/boe, compared with 18 kg/boe for imported Norwegian gas and 59 kg/boe for imported LNG.

"UK production until 2050 is consistent with the [UK] Committee on Climate Change scenarios," OGA head of exploration and new ventures Nick Richardson told the Prospex conference in December.

"Security of supply remains important, jobs remain important, and the economic value of the oil and gas sector to the UK economy remains significant."

That is welcomed by insiders such as Mike Lakin, managing director at London-based M&A specialist Envoi, who argues the majors "all going green... represents opportunities for the smaller companies."

"A lot of people are being let go from the majors, we're seeing a dramatic increase in the number of small companies starting up, people leaving big companies and doing deals... There's a great number of opportunities."

UK reserve sizes "are less, but if we see an increase in oil prices, modest-sized opportunities, managed by smaller companies, will work," he told the Prospex event.

Consultancy Westwood Global is more circumspect, forecasting that Norway's spending on field development, at $15 billion, will be more than three times the corresponding UK figure in 2021.

"2021 looks to be a year of modest recovery in upstream capital investment whilst investment in 'net zero' projects offshore continues to accelerate," Westwood Global Northwest Europe head Emma Cruickshank said in a research note.