OPEC led production cuts have, at times, increased the appeal of North Sea grades to Asian consumers, Gibson Shipbrokers said. Simultaneously, signs are beginning to emerge that the sector has put the worst of 2014’s oil price crash behind it and is proving more resilient in a new lower price environment.
Due to the regions ageing infrastructure, high costs and declining production, some analysts have cast doubts over the long-term future of the North Sea. However, the embattled region has adapted to lower oil prices and over the next few years, looks set to post increasing production numbers.
New projects expected to come online within the next two years have the potential to add 1.2 mill barrels per day of production, helping to offset declining output throughout the region.
One of the largest projects undertaken, by Statoil, will begin producing 440,000 barrels per day in 2019 rising to 660,000 barrels per day by 2022. And in an example of re-invigorating older fields, BP has announced its Quad 204 project, which aims to add 130,000 barrels per day of production alongside an expansion to its Clair Ridge field.
These two projects are geared towards helping the company achieve its goal of doubling UK production to above 200,000 barrels per day by 2020.
Executives from both BP and Shell have recently expressed confidence in the future of the North Sea, as both companies have worked hard to reduce costs, and in some instances, sold off assets in the region.
For example, Shell has identified areas, such as the Penguin cluster located north of the Shetlands, which could be given the green light for expansion along with several other areas over the next 18 months.
One of the main reasons for a revitalisation in production has been the regions ability to cut costs in the face of declining oil prices. BP’s regional president for the North Sea recently said that the company’s cost of production had fallen to $16-$17 per barrel from $30 in 2014. This is in line with estimates provided by MOL Group, an integrated oil and gas company, who said that on average the region’s cost of production is $15 per barrel.
Mergers and acquisitions have been on the increase in the region. Wood Mackenzie has estimated that up to $15 bill has been invested by international equity funds. In the first half of 2017, $6 bill worth of deals were concluded, including Shell’s decision to sell around half of its UK production to a US based equity fund. And in a sign of further confidence in the region, Total’s recent deal to buy Maersk Oil, including North Sea assets, highlights that it is not only private equity funds with a taste for the North Sea, but also oil majors.
Despite oil majors and private equity funds showing commitment and investing heavily in the region, doubts still remain over the long-term sustainability of production in the region.
Research by Oil & Gas UK has highlighted that without sustained investment, as many as 80 fields could be shut by 2022. Thus far in 2017, only one new project has been sanctioned in addition to only one project in 2016.
However, enough investment seems to have been placed to sustain and increase output over the next few years, providing an important source of Aframax demand in the region and for long haul VLCC shipments to Asia, Gibson concluded.