The North Sea oil and gas industry is entering a hangover period after years of booming business, a leading energy financier has warned.
The UK Continental Shelf (UKCS) system is in a fragile position as a result of rising production costs and a dip in exploration, according to Eddie Leigh from Simmons & Co.
He is worried about the soaring cost of producing oil from the region. He said: “Production of the 42billion barrels from the UKCS in the last 40 years was done at an average of $20 per barrel.
“But current production is going to come in at something like $40 per barrel.
“That’s an enormous cost escalation; after three or four years of boom there is a bit of a hangover to come.”
He said that global exploration and production (E&P) capex will hit a new record of around £435billion this year – up 7% on last year. “E&P spend has grown almost fivefold since 1999, and oil companies are having to work incredibly hard to maintain their existing production levels,” said Mr Leigh.
He said despite these challenges, there was still enormous opportunities for oilfield service companies in the North Sea.
However, he warned companies faced a challenge in attracting staff to Aberdeen due to high living costs and a “chronic shortage of housing and schooling”.
Industry bosses warned last month that North Sea oil and gas is at a crossroads and record investment levels will plummet by half if nothing is done to help new projects get started.
Nearly £26billion was spent offshore in 2013 but much of this was due to spiralling costs, trade body Oil and Gas UK (OGUK) said yesterday. Production and exploration trends are declining, meaning operators are facing the biggest challenge in the history of North Sea oil, it added.
Announcing the findings of its latest annual activity survey, OGUK said capital investment last year totalled £14.4billion – a new record – but it warned that this was likely to fall to £13billion this year and could slump to about £7billion by 2016-17.
OGUK chief executive Malcolm Webb said the “clock was ticking” and urged the UK Government to quickly implement the four recommendations and 29 action points in Sir Ian Wood’s review of the oil and gas industry.
The current “paradox” of high investment but a low rate of exploration success meant the industry faced two possible futures, Mr Webb said.
He added: “We desperately need to start drilling more wells but we also need to find those wells.
“We have to move fast – otherwise 2017 begins to look difficult.”