North Sea oil & gas: alive and kicking?

As the North Sea’s offshore oil & gas sector continues to see its revenues grow, a number of industry challenges could see it enter choppy waters. James Pozzi take a look.

The offshore oil & gas sector, an industry that accounted for 866,000 barrels of oil produced daily from the North Sea in 2013, is often cited for its wealth creation.

North Sea Oil and Gas - Hot TopicThe city of Aberdeen in Scotland, the oil & gas epicentre with its booming housing market and above national average salaries, is the UK’s most visible testament of such wealth.

Just two years ago, the University of Aberdeen estimated oil production in Scottish waters represented about 96% of total North Sea production, while accounting for 47% of Scottish gas production.

The industry was an essential tool in the political campaigning of both sides of the Scottish referendum, showing that black gold remains one of the world’s most valuable and powerful entities.

But the seabed in which the oil is extracted could find itself beneath choppy waters, with a series of forecasts predicting less prosperous times on the horizon. While revenues continue to rise, actual profits fall.

The Wood Review, published earlier this year and led by oil & gas business leader Sir Ian Wood, dissected the challenges and opportunities facing the UK’s energy industries. In the government commissioned review, Sir Ian warned the offshore oil & gas sector could have just 15 years left before depleting North Sea oil reserves began to hit jobs and the economy.

This was in contrast to the figures espoused by the Scottish National Party during the referendum, which predicted a further 24bn barrels were left in the North Sea, a figure Sir Ian put at 45% to 65% too high. These gloomy forecasts were accompanied by the Office for Budget Responsibility (OBR) stating in its July 2014 Fiscal Sustainability Report that North Sea oil and gas could produce £20bn less in revenue than originally forecast over the next three decades.

Inefficiencies and skills challenges

One of the key drivers of the decrease is the perceived inefficiencies in the supply chain. According to audit firm EY, which published its UK upstream oil & gas supply chain economic contribution report in April, the offshore supply chain is worth £35bn annually.

Vice-president at Hitachi Consulting David Delvin, whose firm advises on oil & gas supply chains, believes companies operating in the North Sea need to re-evaluate their ways of operating.

“The success of the UK oil and gas supply chain should not be undermined but, looking to the future, significant changes must be made to both process and behaviour for this industry to remain world-class in a competitive global economy,” he says.

He cites the fact that the UK supply chain, which accounted for 42% of turnover in 2012 from exporting services, needs to ensure sustainability by reducing costs in an increasingly global market awash with cheaper foreign options against a backdrop of increased competition and limited collaboration.

“Collaboration is certainly not uncommon in the oil and gas sector,” Delvin explains. “However, further collaborative opportunities such as sharing exploration rigs, field cluster developments, exploration and drilling projects, sharing of critical spares and technology innovations need to be considered as a way of reducing costs within the industry.”

Concern also lies in industry skills and oil & gas having the unflattering distinction of a workforce average age of 41 years old. While skill shortages are nothing new to any industry, the demand for talent has seen an almost unprecedented rise in average earnings.

In 2013, sector wages rose 15% to £73,600 per annum due to a lack of qualified staff, leaving large operators concerned that wages were rising too high. Tellingly, 35% of companies questioned in a 2013 Oilandgaspeople.com  survey believed the shortage had been caused by insufficient investment in apprenticeships because of an assumption that North Sea Oil was in decline.

But while the figures hint a sense of desperation, it could yet prove effective. Trade body Oil & Gas UK stated in its 2014 UK Offshore Workforce Demographics Report the total number of people travelling offshore has increased by 8.6% compared to 2012.

Additionally, offshore workers in the 24-29 age group recorded the highest percentage growth at 14.7%, bringing the industry average age down by a year.

Scotland’s world leading role

Concern over natural reserves has led to notions of supplies running out within the next 50 years. But if the unthinkable were to happen, Nick Shields, director of the Scottish Manufacturing Advisory Service (SMAS), believes Scotland’s expertise in extracting resources could be applied to other operations across the world.

“Certainly in having developed a leading capability in extracting resources from difficult environments such as the sub sea, Scotland can export that knowledge and be seen as a global centre for that capability,” he says.

“If resources start to deplete in the North Sea, then it’s still a centre of excellence for extraction; whether it’s off the coast of Brazil or Indonesia or wherever, people will know that the products, technology and skills to extract these resources come from Scotland.”

But as extraction becomes increasingly difficult, the calls for more investment and innovation has also shown signs of life. One of this year’s most notable breakthroughs was from Edinburgh’s Heriot-Watt University developing a new technique aimed at adding decades to the lifespan of oil reserves in the North Sea.

The technique, called a low-salinity water injection, would see a reduction in the salt levels in sea water that is already injected into reservoirs. Professor Mehran Sohrabi, the centre’s director, called for more investment in the industry to explore new innovations.

“At least half of the original oil still remains in the North Sea reservoirs but there are great challenges in extracting it using enhanced oil recovery techniques,” he said.

“These include limited platform space and large well spacing, making extraction too expensive to pursue. This is a massive leap forward, especially in an offshore setting. The process is relatively inexpensive, meaning the costs for EOR could fall dramatically while yields could rise.”