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Financial Times: Smaller oil companies step in to grab slice of North Sea’s declining energy resources

By Ed Crooks
Published: October 24 2006 03:00 | Last updated: October 24 2006 03:00

Next month a new oilfield will come on stream in the North Sea to boost the region’s output. Buzzard, operated by Nexen, a Canadian company, is expected to produce 210,000 barrels of oil a day, helping to make next year the first year of rising UK oil and gas output since 1999.

There is no denying that the best days of the North Sea are behind it. In June the UK’s output was at its lowest since 1978.

However, that does not imply a dearth of oil and gas to be extracted.

The UK Offshore Operators Association estimates that the North Sea has so far produced 35bn barrels of oil equivalent, and there are between 16bn and 27bn still to be recovered.

With the price of oil hitting a record high over the summer, and gas prices soaring last winter because of concerns over supply shortages, there are powerful reasons to make sure that the best possible use is made of those reserves.

As the productive lives of North Sea fields have been extended again and again, the date when the infrastructure will have to be decommissioned has been pushed back.

The current, very tentative, estimate is about2010-12. But the industry is concerned that the looming prospect of a bill of up to £20bn is casting a pall over what could still be a very significant contributor to employment, tax revenues and Britain’s energy needs.

The industry and the government are facing a classic problem: how to manage an industry facing long-term decline while preparing for its eventual demise.

The giant international oil companies have responded by gradually pulling out of the North Sea, making way for smaller and nimbler competitors to take their place.

For the majors, squeezing the last few drops out of an oilfield is often not worth the effort.

Management time, technological effort and capital are best devoted to the really big discoveries, the ones that will make a real difference to a company’s prospects.

That means, for example, the oil sands of Canada, in which Royal Dutch Shell yesterday said it planned to invest another £3.6bn by buying out the minority shareholders of its Shell Canada subsidiary.

For a smaller company, on the other hand, eking a relatively small amount out of a field can be very lucrative. So companies such as BP and Exxon have been selling assets in the North Sea to smaller companies such as Dana and Tullow, and others from the US and Canada.

Some of the majors are still investing. Royal Dutch Shell has recently been running adverts proclaiming its success in raising North Sea gas production.

But it is the smaller companies that have the stronger incentive to invest and develop fields, and make them operate more efficiently.

The results of these transfers of assets can be spectacular. For example, Apache, a US company, bought the Forties field in the North Sea in 2003. It invested $489m, and by 2005 had raised production by50 per cent from the level when it bought the field.

The problem, the industry says, is that the tax and regulatory system does nothing to encourage transfers of assets that benefit both the seller and the buyer, and the country as a whole, through higher oil production and tax revenues.

UK Offshore Operators Association’s preferred solution would be to allowoil companies to sell fields to make a clean break from the responsibility for decommissioning, and limiting the guarantees given by the buyers.

In some cases, when the buyer went bust, for example, that would mean the ultimate risk being borne by the taxpayer.

That thought appears to make the government uneasy: it is aware of the industry’s position, itsays, and is considering its views.

For Paul Dymond of the UK Offshore Operators Association, the government needs to decide how serious it is about attracting international investment into the North Sea.

“What we have here is two policies that conflict: attracting new investment into the North Sea, and trying to eliminate exposure to default,” he says.

“We should be looking to make the UK continental shelf the most attractive place in the world to bring investment dollars.”

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