The North Sea is a terrible place to produce oil and gas. It is cold, it is swept by wave troughs that have been measured at over 90 feet in height - nearly 30 meters. Gusting winds can reach hurricane force. It is, all in all one of the world's most inhospitable - and expensive - places to drill a well. North Sea oil and gas production peaked in 1999, when it produced six million barrels, and has since declined to well under half that amount. Since most of the same costs are still present while yield has fallen, the outcome is that the North Sea is now the most expensive offshore basin in the world.
In 2013 about £14 billion ($21 billion) was invested there on new production. Maintenance and repairs cost a further £9 billion. Until recently, all that was still worth the trouble. The sweet low-sulphur benchmark "Brent" oil the North Sea fields produce is very suitable for the production of gasoline and middle distillates like kerosene and diesel. The fields are also close to their markets in Northwestern Europe where most of the production is refined.
Now though the North Sea oil industry is in serious trouble. Low oil prices have forced spending cuts and lowered production around the globe, but its offshore oil and gas fields are among the world’s costliest. Production has been in steady decline for years, and operators have to continue to invest capital just to keep the decline at a slow pace, rather than a rapid one. Some industry experts speak of a North Sea "death spiral" and the Financial Times has recently commented that the North Sea is at "serious risk" of shutting down. Somewhat paradoxically, the North Sea could see its highest level of oil production since 2012 as new projects that were planned years ago finally come online, according to reports from the Bloomberg agency.
Unfortunately, that may not be wonderful news for their owners since, as the International Energy Agency points out, the bump in production will come from projects that were sanctioned with oil prices above $100 a barrel. London Brent has fallen more than 50% in the past year amid a persistent global production surplus and has traded recently at less that $50 a barrel, so margins - if they exist at all - are razor thin. The need to service debts incurred will spur pumping even at barely economical prices, but will not generate the hoped-for profits. Further, with shipments of Brent, Forties, Oseberg and Ekofisk and other North Sea grades possibly reaching 2.1 million barrels per day, the new production may even worsen the global supply glut, with a negative effect on already low prices.
What is worse, the new output does not really alter the long-term picture of decline for the North Sea. Bloomberg describes the current increase in North Sea production as "temporary relief for an industry facing long-term decline in output from ageing fields and high production costs."
The reactions of the companies
The collapse in oil prices has forced companies in the region to cut around 5,500 jobs since late 2014 according to the UK Oil & Gas Authority, the industry regulator. Britain’s biggest oil company, British Petroleum, has sold off some of its smaller, more expensive fields. At the peak of operations in the whole of the North Sea it was producing about 900,000 barrels of oil a day. That figure had fallen to 160,000 barrels at the beginning of this year. The British government has been forced, not very willingly, to attempt to help the industry through lower taxes, but that effort may not be enough. Today, many operators are acting as if they are looking for the door. Royal Dutch Shell (NYSE: RDS.A) announced this summer that it would shrink its footprint in the North Sea. France’s Total (NYSE: TOT) said in August that it would sell $900 million worth of North Sea assets in order to raise cash. Though some are calling for greater cooperation among companies to slow the decline - by sharing data on dry wells, for instance - few producers appear willing to give up a competitive advantage out of simple public spirit. Indeed, excessive cooperation may actually be at the heart of one of the greatest dangers facing them.
Much of the fragility of the present situation arises from the way operators collaborate to overcome the problem of very high North Sea operating costs: that is, by agreeing to share certain infrastructure like pipelines and processing facilities. This means though that when one shuts down its operations and pulls out, the cost of maintaining collective infrastructure becomes an even greater burden for the companies that stay behind. There is concern that the outcome may be a kind of "domino effect" where a few departures may rapidly trigger others. As more fields are capped, costs automatically rise for the remaining operators and the pressure on them to abandon the region themselves increases sharply. At some point, the flight from the North Sea might undergo a rapid acceleration as producers suddenly discover they do not wish to be the one left behind to turn out the lights.