Another short delurk to quote an article from today's Financial Times.
OIL: Troubled waters for the industry
February 16 1999
OIL: Troubled waters for the industry
With crude languishing close to a 12-year low, the long-predicted decline in the sector may be about to begin. Robert Corzine reports
Anyone seeking signs of the oil price collapse in Aberdeen, Britain's oil capital in northeast Scotland, may find themselves frustrated. On the surface, it is business as usual: helicopters shuttle between North Sea platforms and Aberdeen airport, and house prices, rivalling London and the southeast, remain high.
But dig deeper and it is clear Britain's offshore oil industry, which until recently accounted for nearly a fifth of all industrial investment, and which supports more than 380,000 jobs across the country, is at a turning point. With crude prices testing 12-year lows, many wonder whether the long-predicted but much-postponed decline of the industry is about to begin.
The answer is not straightforward. Short term, there appears to be little danger of a collapse in output. Wood Mackenzie, the Edinburgh- based consultancy, believes about 93 per cent of output from the UK continental shelf would still be economic with an average oil price as low as $7 a barrel, well below the present range of $10-$12. It also predicts UK oil output this year will surge by 14 per cent to a record average of 2.99m barrels a day, as companies seek increased volumes to offset lower prices.
A steady reduction in offshore operating costs underpins the new resilience of the industry. Royal Dutch/ Shell, one of the biggest producers, says its operating costs of about £2.50 a barrel are three times lower than its 1990 projection for this period. Technological innovation, more focused management and new arrangements with contractors and suppliers account for much of the reduced costs.
But the price collapse is being felt at the exploration and appraisal level, where activity has plummeted. Given the cyclical nature of the oil business, a prolonged downturn in exploration would have a knock-on effect on future production levels.
Capital spending is also being slashed. This will hit UK platform fabricators, which face a dearth of big field developments in the pipeline. Malcolm Brinded, managing director of Shell UK, believes subsea developments will dominate in future. The aim will be to tap the many small fields that surround the larger, developed reservoirs. Wells will be placed directly on the seabed with pipelines taking the oil, gas and water mixture back to existing platforms for processing.
"There are plenty of small developments in the £80m range," says Mr Brinded. "But we need to repeat them quickly and simply." That may require fundamental reforms to the way the industry is organised.
A new government-industry taskforce has been charged with enhancing the sector's competitiveness. "The North Sea needs to be operated differently," says Pierre Jungels, chief executive of Enterprise Oil, the UK's biggest independent explorer. Enterprise and Amerada Hess, the US oil group, recently looked at combining offshore assets under a single operating unit. That idea did not pass the discussion stage, but other operators may find more compelling combinations.
Mr Brinded says tax changes could allow more consolidation in individual licenses allowing companies to build meaningful stakes. Other big producers, such as BP Amoco, want relief from royalties on older fields.
But much remains to be done by the industry. Crine, an industry body, believes offshore life-cycle costs - including finding, development and operating costs - can be cut from $12 a barrel to $8 by 2002. In the early 1980s they were $22.
Some savings are expected from changes to the way the industry organises its supply chain. "We often never know how equipment performs after it leaves the factory," says Syd Fudge, chairman of the Offshore Contractors Association, a trade group.
Improved technology also figures in Crine's thinking. Cutting the cost of wells is the biggest priority, given they are the most expensive element in most offshore developments. Although day rates for drilling rigs have fallen from $130,000-$150,000 last year to $50,000-$60,000, new technical approaches, such as slimmer wells, could cut drilling costs by up to a third within five years or so.
But a question mark remains over future investment levels unless crude prices improve. "Oil prices at $14-$15 a barrel will keep the North Sea a viable business," says Mr Brinded.
But if prices stay depressed for several years, the long-term outlook could be grim, with returns on investment in small fields struggling to meet corporate hurdle rates. "It will be hard to stop the rot once oil companies stop investing," says Mr Fudge. "And we don't have much time. Investment has already slowed down." |
