The North Sea was once a hotspot for oil drillers, but now the region is sinking slowly into the ground, with reserves likely to dry up within the next 25 years

“Our civilization is founded on coal, more completely than one realises”, wrote George Orwell in his 1937 article Down the Mine. “The machines that keep us alive, and the machines that make machines, are all directly or indirectly dependent upon coal.” Though struck by the conditions under which the resource was extracted – by the “heat, noise, confusion, darkness, foul air, and, above all, unbearably cramped space” – the old Etonian was under no illusions about the part it played in industrial Britain’s success story.

This was in the 1930s, however. When, in the dying weeks of 1952, fumes from over a million London chimneys were trapped beneath the cold wintertime air, it soon became clear that coal brought its fair share of dangers.

Dubbed the ‘Great Smog of London’, this thick fog of pollution brought everyday life in the capital to a complete standstill. Only after the smog cleared did it emerge that some 4,000 people had died, and that cattle at Smithfield Market had been asphyxiated. The resulting panic took weeks to subside, and the many horror stories told in the aftermath lived long in the public consciousness. The event was bitterly remembered for having shown the repercussions that coal could bring for a society hooked on the black stuff, and, what’s more, it proved that the country’s future would hinge not on coal, but on another resource entirely.

Not long after, the Clean Air Acts of 1956 and 1968, together with a series of production shortfalls – or ‘energy crises’ – around the midpoint of the century, rattled an industry that had thus far survived largely without challenge. Here, in the space of only 20 years, coal as a measure of consumption had fallen almost 50 percent, and a string of key oil findings called into question its status as the bedrock of the national energy mix.

Once-prosperous mining towns would fight and fail to regain their standing in industrial society, and much of Britain’s native energy business would abandon its roots to set up shop abroad. In the transport sector, the chemical industry, and even in domestic heating, coal was fast falling out of favour, and before long the great grinding wheel of the coal mine was replaced by the imposing and icily unfamiliar frame of the oil rig.

A crude lifeline
By the time the late 1960s had come around, the UK had fallen head-over-heels for oil. Enamoured by the promise of a cheap, reliable energy source, the industry’s brightest minds flocked to the oil-rich sands of the Middle East in search of a resource that, to their knowledge, existed only outside of UK borders. Oil was cheap and supply was plentiful, yet the key question was: what future could there be for a nation without any reserves to call its own?

The revelation that the North Sea was home to significant stores of oil and gas, therefore, was one of the most important discoveries of the 20th century, and the region soon set about building its reputation as the new oil capital of Europe. Beginning in 1964 with the Continental Shelf Act and the first few North Sea extraction licenses, a string of discoveries through the 1960s gave due cause for optimism, though it wasn’t until the early 1970s that key findings lifted the UK’s standing on the international stage. Cheaper, safer and more productive, oil has since risen to the fore, and brought the reign of coal to a swift end.

The BP Forties field and Shell Brent field, found in 1970 and 1971 respectively, set a bright and burning precedent for the future of the UK energy market. Neither understood nor even known of by much of the population, each new discovery made then and since has succeeded in handing the UK a greater degree of control over its energy consumption habits, bringing floods of investment from overseas.

Today, hundreds of oil and gas platforms are dotted along the coastline, while once-unspectacular cities like Aberdeen have become shining beacons of prosperity. However, the oil landscape is now on the wane to such an extent that the continental shelf is no longer the haven of old. Recent studies indicate that the North Sea oil sector is partway into a slump from which there is no reasonable chance of return.

Once lauded as a hot spring for aspiring oil firms, the viability of the region is sinking slowly into the ground. Barring a revolutionary new finding, major technological breakthrough or reverse price swing, reserves are likely to dry up within the next 25 years.

Continental shelf life
“It’s almost impossible to make money at these oil prices.” These were the words of Robin Allan, Chairman of Brindex, in an interview with the BBC. He went on to tell of cuts to people, projects and costs. His view of the situation: “It’s close to collapse.” Unfortunately, these statements mirror how many are beginning to see the North Sea oil crisis panning out. Without answers any hopes of survival will soon be lost.

Having witnessed a 60-percent price slump in the six-month period to February 2015, industry names like Allan are growing increasingly concerned that a number of North Sea oil fields could struggle to stay in the black. Output hasn’t gathered any meaningful momentum since the late 1990s, and is currently 70 percent shy of its all-time high in 1999. Even when, in 2013, North Sea firms ploughed record levels of investment into production, the funds failed to reverse the slide. And, despite parting ways with a mammoth £14bn to boost production, maintenance works and repairs required those in the region to offload another £9bn, just to slow the rot.

“Production from UK oil and natural gas fields peaked around the late 1990s and has declined steadily over the past several years, as the discovery of new reserves and new production has not kept pace with the maturation of existing fields”, notes the US Energy Information Administration (EIA). “The main reason for this decline is the overall maturity of the country’s oil fields and diminishing prospects for new substantial discoveries in the future.”

Oil companies are finding that in order to make good on what opportunities remain, they must drill deeper and further from the coastline, meaning that they must also make do with oil that is both more costly and more complex to extract. It’s a deadly concoction, and one that has made the North Sea the most expensive offshore basin in the world.

Cut and run
Crippled by a high cost structure and a new low-price oil environment, once-fruitful wells are struggling to even turn a profit.

Oil service companies, meanwhile, are rushing to conduct what’s known as ‘late life’ asset work. For bigger names, major refurbishments and fading efficiencies are forcing them to begin decommissioning early.

Shell, for example, is about to close the book on its Brent dealings. Earlier this year, the firm sought approval to decommission platforms in an area that, since 1976, has been responsible for 10 percent of the region’s oil and gas supply, not to mention £20bn in tax revenue. At 450 miles off the coastline, the removal of the facility is no easy task, yet the project could set a benchmark for those seeking safe and responsible methods of winding down platforms and pipelines.

Indeed, the region as a whole could conceivably make a name for itself as a new global frontier for the successful management and removal of ageing oil and gas facilities. However, very few – if any – in the oil business are eyeing this distinction with any great interest. It seems the focus has fallen not on dismantlement, but on trimming the fat from bloated operations.

In this sense the most significant case is, perhaps, BP. The company announced hundreds of job cuts at the beginning of the year, after an in-depth analysis of its North Sea operations showed that it would be wise to scale down. Chevron, Expro and TAQA UK, meanwhile, have also announced cutbacks of their own in a bid to break even. As the studies into the region’s fading fortunes pile up, so too do the losses.

According to a UK Oil and Gas (OGUK) report, the North Sea decline could mean that large swathes are “sterilised”, if only to stay in the black. Without cost and efficiency improvements, any firms left standing will have no choice but to make do with losses. Excepting the introduction of generous tax breaks and other such incentives, oil firms would be wise to wind up their North Sea business early, for fear of getting caught in the avalanche.

Price problems
According to figures cited by the EIA, UK production will continue to slip throughout 2016, driven by the overall maturity of the oil fields and diminishing prospects for new discoveries. Meanwhile, the UK Office for Budget Responsibility’s latest forecast shows revenues from UK oil and gas production falling from £4.7bn in the period 2013-14 to a measly £0.7bn in 2019-20, otherwise expressed as a slump beginning at 0.7 percent of total receipts and ending at 0.1 percent.

This sharp fall in production has come in spite of record levels of investment on the part of oil companies, whose patience is wearing thin as they scramble to tap what profitable pockets remain. OGUK figures likewise paint a frightening picture of where the industry could be headed. Assuming that price per barrel remains around the $50 mark, a third of North Sea oil fields will find themselves in loss-making territory. Add to that losses of £5.3bn for 2014, the worst annual loss since the 1970s, and the figures represent an industry in dire financial straits.

True, the North Sea oil industry has come up against the wrath of volatile prices on more than one occasion before, notably in 1986 when it was forced to contend with lows of $10 per barrel, but the situation this time around has been exacerbated by circumstances outside of price confines. Even prior to the months leading up to the collapse, major names such as BG Group, Statoil and Chevron were contemplating their future in the North Sea, reassessing whether the ends justified the means. Factor into the mix the small matter of climate change and fossil fuel divestment, and there is pressure both from internal and external sources to at least toy with the idea of a retreat from the region.

Please stay
Despite the mammoth task facing oil companies, salvation may yet come in the form of government intervention, given that the UK is at pains to protect the viability of its continental shelf. “Oil remains important to the UK energy balance, and contributed 37 percent of total energy consumption in 2013”, according to the EIA. However, “falling production has made the UK increasingly reliant on imports of both crude oil and petroleum products, and the UK became a net importer of petroleum products for the first time in 2013 since 1984”, the statement adds.

Fearing a return to the dark days of foreign dependence, the government has recently unveiled a list of reforms designed to dissuade firms from closing shop, in order to satisfy the country’s oil needs for at least the next decade. “The UK Government does not hold a direct interest in oil production, but this sector remains important to the government because corporation tax and supplementary tax income from the sector accounts for about 25 percent of UK corporate tax receipts”, the EIA notes.

As part of the recent call to action, the UK Oil and Gas Authority took to identifying two key risk factors that require attention and set out a list of policy recommendations, designed to mitigate the decline. The first risk is that profitability may not be enough to attract continued investment, while the second is that confidence in the future potential of the UK continental shelf is fading, which could again stifle investment in the long term.

Responding to calls from both government ministers and oil executives, Chancellor George Osborne announced a list of concessions to lighten the load for oil companies. In his 2015 Budget, Osborne slashed the supplementary rate – a percentage levied on oil firms on top of corporation tax – to 20 percent, down from 30 percent, and stated that petroleum revenue tax would come down to 35 percent, from 50 percent previously.

This decision effectively reverses changes made in 2011, and is expected to fetch £1.3bn while boosting North Sea oil production by 15 percent before 2020. “Today’s announcement lays the foundations for the regeneration of the UK North Sea”, said OGUK CEO Malcolm Webb at the time, though he hastened to add: “The industry itself must now build on this by delivering the cost and efficiency improvements required to secure its competitiveness.”

Changes to the tax regime have undoubtedly created a bit of breathing space for under-pressure oil firms, but the twin issues of dwindling profits and shrinking output remain. Accommodating policy is enough to hand oil companies an immediate pick-me-up, though tax breaks do little to alleviate the fact that production is well past its peak and once-regal rigs are struggling to survive the 12-hour working day.

Major improvements are desperately needed in terms of cost base and production efficiencies. Many are of the opinion that meeting these challenges is simply too much for the industry. The UK will continue working hard to keep its local supply going as long as possible, but oil companies are in the business of turning a healthy profit. The most expensive offshore basin in the world may no longer be the best place for it.