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Oiling the economic wheels

Douglas Fraser | 09:24 UK time, Wednesday, 23 February 2011

The motor which drives Aberdeen's economy has had a bit of a rough time through recession.

So it's had a service, oil filter change, and it's now as good as, well, not quite new.

It's becoming more of a vintage classic. And it's one that's still able to turn heads.

Economic leaders in Scotland's north-east are battling the impression that the North Sea is past-it and in decline.

That's not always easy when the North Sea is, indisputably, in decline.

The question is how fast reserves are emptying and how technology can extract more, what a rising oil price will mean, and where the activity will go next.

North Sea bonanza

On all fronts, according to today's review of activities by industry body Oil and Gas UK, it's not looking so bad at all.

If current plans for the next five years are worked through, the rate of decline could half to around 3% per year.

Barring a miracle of geology, 40 years after the North Sea bonanza began, that continuing decline is inevitable.

Yet by slowing it down, the industry's confidently looking to continue production for at least another 30 years.

How many other industries can look, with some confidence, to that time horizon?

Sluggish Arab economies

Twin factors are working in favour of the North Sea.

It's relatively expensive to extract, so it's helped by the rising oil price.

When oil is cheap, it makes most sense to pump it - cheaply - out the Arabian and Texas desert.

So obviously, when it's more expensive, there's an incentive to look at more expensive basins for exploration.

With Asian economies rebounding strongly from global downturn, demand for oil is back in fashion.

Political uncertainty in North Africa and the Middle East is giving the price an upward push. That may turn out to be temporary.

Whoever takes power in Libya and wherever comes next, they will probably want to satisfy the protesters' demands on jobs, prices and prosperity - unshackling their sluggish economies and sharing the fruits of growth being enjoyed in other parts of the world.

So while there may be uncertainty and volatility, this doesn't look like the kind of Arab revolutionary movement that will turn the oil exporting taps off in the long term.

For that reason, it seems the more significant trend worth watching on oil is in demand from Asia.

In deep water

Coming back to the so-called UK Continental Shelf (that seabed convention beloved of the Treasury, ensuring the hydrocarbons aren't associated with any one part of the country), technology keeps moving the industry goalposts, and invariably to the upside.

Using an inventiveness which is often led by the Scottish offshore industry and its university friends, old and emptying oil wells can be coaxed into giving up ever more of their riches.

Smaller fields can be found and exploited in new and more efficient ways, often by new pipeline links to existing platforms, and improved methods of pumping.

In a market of majors, with big ambitions for big new projects, and smaller niche players expert in tackling older fields, BP has signalled it wants to sell such North Sea assets during this year, including some it's had from the start.

It's looking west of Shetland, to the Russian Arctic, to a new alliance with Reliance in India and to cleaning up the financial mess deposited in the Gulf of Mexico, and that new orientation means selling new opportunities to the North Sea independents.

Heavy oil is becoming a more prominent feature, justified by the price hike. It's harder to extract and to pump, and it can be more expensive to refine, but if the price justifies it, there are reservoirs under the northern North Sea that the UK and Norway can develop.

And - very controversially (the industry and its financiers are under growing pressure from the green lobby) - the new frontier is in deeper water, west of Shetland.

It's reckoned that quarter of all UK output will be from that area by 2020.

Scrapyard boom

So not much to worry about then?

Well, the industry's always worried about the Treasury's intentions, as it has previous on plundering profits.

It's being emphasised that quarter of corporation tax already comes from the oil and gas sector - the take totalling more than £9bn last year.

And there's always a new tax break to be sought. This year, it wants more help with offsetting decommissioning costs.

That, of course, is the other new frontier. Oil and Gas UK has updated its assessment of the cost of scrapping all that offshore kit, and it looks like a £29bn bill over the next 30 years.

Bad news for the industry - good news if you're a scrappie, or hope to become one.

The other fear on the industry horizon is rising cost. Because the supply chain works globally, demand from big and rather more exciting prospects in Brazil and Africa mean UK operators were facing 5% inflation last year.

Renewable energy is also competing for engineering talent and in the steel fabrication market.

That contributes to the growing cost of extracting the average barrel of oil (or gas equivalent).

As they get harder to squeeze up out of the UK seabed, that unit cost is up 10%, according to the Oil and Gas UK survey.

Vintage classic

All this helps explain why the north-east Scottish economy is following its own cycle, with property prices at least holding up, and more evidence this week that its employment position is strengthening.

The increased level of investment identified in the industry survey is being translated into 10,000 to 15,000 new jobs, some of these workers already being trained up after redundancy in recession-hit sectors.


  • Comment number 1.

    There's life in the old girl yet, I can hear the sighs of a huge CONDEM westminster brow being wiped! Just remember who really calls the shot and have done for decades in this sector, good ole' US, yes indeed there are still crumbs to be had at this particular table! Dinnae worry about decommisioning the industry will find another way? If it does not sink it will be left to rust in some isolated part of the world, either that or the contaminated pieces will be taken apart in some other exploited part of the world!

  • Comment number 2.

    This blog would be a stronger analysis of the outlook for the industry and NE Scotland if it also had something to say about the implications of what we now know about climate change and the constraints this imposes on the future role of oil. In particular, for example, how will legislative change like the UK Climate Change Bill play in to the variety of other trends identified in the blog? While things may play out exactly as predicted in this article, it seems naive not to reference that society is tentatively coming to agreement that we need to be finding ways of getting our energy without oil.


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