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"Drill, baby, drill"

Douglas Fraser | 07:45 UK time, Thursday, 8 July 2010

Sarah Palin's thoughtful advice to the US oil industry in those good ol' gung-ho days for offshore drilling may be better applied in British waters.

That's if the latest figures from Deloitte's is any guide. The consulting firm today reports sharp increases in drilling, particularly in the southern North Sea.

The second quarter of the year saw a 133% increase on the first quarter, and it's 86% up on the same period last year.

They're not huge numbers, and they're off the back of some very low figures when credit was tight and the oil price was more volatile.

The number of exploration and appraisal wells that were "spudded" - achieved a drillhead breakthrough - reached 28 in the second quarter, up from 12 in the first quarter.

Healthy middle age

It's been assumed much of this activity is for small fields, many of them reached from existing platforms. But the news of a big find off Aberdeen last week is a reminder that the North Sea may be mature, but it's middle age is proving quite healthy.

That's certainly the way Oil and Gas UK (OGUK), the industry body, was putting it on Tuesday when it issued its annual review of activity under UK waters.

Yes, mature fields and more subdued prices brought production down by 5% last year, on top of 10% the year before.

But its extensive update on the industry showed confidence coming back, with intention to invest more than £5bn for this year, rising a bit higher for next year.

The report also read like a manifesto directed at a new government with radical plans not only for cutting spending but also raising tax.

London's offshore jobs

OGUK stressed that, with the collapse or disappearance of bank profits in the past two years, the sector has now taken over as the biggest contributor of corporate tax to the Treasury.

It employs lots of people - more than 400,000 workers look offshore for their income source, and it would be wrong (of new ministers) to assume they're all in Scotland. Only 45% live north of the border. A lot of finance jobs in London depend on oil and gas.

Then there's the energy security argument. UK production can still meet much of the UK's energy needs ten years from now, at a time when security of supply looks like becoming a bigger issue.

So the message to ministers was clear: you can make a huge difference to the amount of oil and gas that gets extracted if you want to unlock the potential of offshore energy in Britain, but it depends on the right incentives.

That's not subsidy, but tax breaks, such as the one last year agreed specifically for two gas fields west of Shetland. Likewise, they want to retain the tax breaks on de-commissioning, which will become a bigger issue for the sector as platforms face the scrapyard.

Piper Alpha's lessons

And all this comes against the backdrop of offshore drilling becoming a globally hot issue. So far, the new British government's response to the Gulf of Mexico spill has been to increase inspection.

There's no talk of a moratorium in the deep water west of Shetland which presents the same kind of pressurised technical challenge that has caused such a nightmare for BP off the coast of Louisiana.

OGUK's chief executive Malcolm Webb is not being drawn on the implications. It's too early to say, is his line, except that he thinks it likely America's inspection regime will learn some lessons from the UK one. That, in turn, was built on the lessons from the Piper Alpha disaster, which took 167 lives twenty-two years ago on Tuesday.

The requirement for continued toughened inspection is surely going to be retained, post Deepwater Horizon.

The question is whether it will be accompanied in Britain, and elsewhere by increased costs of more blow-out and leak preventers, of relief wells being required, and of liability insurance (one of the issues being urgently reviewed by the industry).

Headquarter losses

It's feared by some that such elements could price the smaller operators out of the market for drilling, at a time when they have become vital to much of the UK's offshore industry.

Will the big companies be willing to replace them? Or will those smaller players be swallowed up. Is Dana Petroleum part of the answer, being stalked by a big investor - in this case, Korean.

That's another case of a significant Scottish headquarters looking vulnerable. And as with Venture Petroleum last year, it's another example when HQ power departs with little comment.

With sterling-denominated assets looking attractive in some parts of the world, it won't be the last Scottish company to attract such attention.


  • Comment number 1.

    A lot of finance jobs in London depend on oil and gas.

    Really? Yet the financial services sector invests very little in oil/gas technology companies. It's one of the main reasons that Scotland has so few major supply side companies.

    Perhaps it might be better if instead of being in London they should be in Aberdeen!

  • Comment number 2.

    I work in Oil and Gas.
    There's plenty of the black stuff left and plenty of it on UKCS. However, it's all about energy mix rather than just producing more. All the operators are re-branding themselves as energy companies. They should be encouraged to invest in the energy mix, rather than just O&G. Maybe these financial sector bods should be made to give something back by investing in this sort of thing. Everybody wins this way. They make profit. Energy gets the right mix. WE all have a more secure future through diversification.
    As for the yanks, well, we learned lessons from Piper Alpha to get to where we are today from a QHSE perspective. They have carried on doing the same thing the same way for as long as they could. I'm just surprised it's taken this long for a major incident to occur. However, it is through their own lax legislation that they are in this position. Yes, BP may be culpable however, the US legislator is to blame for allowing them to get into this position in the first place.

  • Comment number 3.

    What we really need to see is if we can follow America's example in using the new methods to extract gas from Shale from onshore locations. This has seen US going from major importer to being nearly self sufficient, whereas UK we are highly dependent on foreign gas imports particularly with low storage capacity to deal with any crisis. Hopefully this would help us bridge the gap until we can unlock renewable projects from our crazy slow planning system and opposition from NIMBYs

  • Comment number 4.


    Compared with the USA and places like Poland the shale gas potential in the UK is actually very small.


    Unlikely overseas owned O&G companies will invest here. But even BP invests more in US based R&D than it does here and that's because they consider the US market to be more important.

  • Comment number 5.

    What Scotland has secured from her oil assets is a national scandal and embarrassment that each and every Scot should be thoroughly ashamed. It is not just the current gerneration’s future and legacy they are squandering, it’s their children’s.

    Iraq, Afghanistan and Trident is Scotland’s oil legacy.

    We've given it away with a whimper and been lied to by unionist politicians and british oil companies as to the amount and the duration it will last.

    Time to take control over our own nation’s natural resources fro the benefit of Scotland, not give it away.

    C McK

  • Comment number 6.

    Dear Douglas,

    You are correct in noting that the Deloitte numbers are not huge numbers, and they're off the back of some very low figures when credit was tight and the oil price was more volatile. I think Deloitte themselves have been pragmatic enough to acknowledge this. There are a couple of points I’d like to make.

    First of all, the subject of tax breaks is mighty tricky. The latest round of licensing contains some tax breaks, but ones that are nowhere near levels the industry craves for. But then again tax breaks for "big oil" is a politically sensitive issue both in Westminster as well as Holyrood.

    The financial crisis and current state of the UK public finances makes allowance for such tax breaks for North Sea operators unthinkable. High oil price of US$147 a barrel masked under-investment and made tax breaks unpalatable for most of 2007-08. Subsequently, a lower oil price which fell to US$34 a barrel in December 2008 did not alter perceptions (much).

    Secondly, on a visit to Aberdeen in February, I found out that most new discoveries contain less than 50 million barrels; a minuscule amount by global standards. This may not entice major oil companies used to prospecting for "easy oil". However, this begs another question – is there any "easy oil" left?

    Guess we’ll have to wait and watch.

    Kind regards,
    Gaurav Sharma,
    The Oilholics Synonymous Report


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