tag:theconversation.com,2011:/uk/topics/uk-continental-shelf-11534/articlesUK continental shelf – The Conversation2021-12-07T14:37:16Ztag:theconversation.com,2011:article/1731832021-12-07T14:37:16Z2021-12-07T14:37:16ZWhy Shell pulled out of the Cambo oilfield<figure><img src="https://images.theconversation.com/files/435867/original/file-20211206-17-bjom9y.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C5991%2C3997&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/image-oil-platform-during-sunset-124714078">Dabarti CGI/Shutterstock</a></span></figcaption></figure><p>Shell has scrapped plans to invest in Cambo, a proposed oilfield off the Shetland Islands. The fossil fuel supermajor has been shedding UK assets for a while. It sold a large refinery complex in Cheshire <a href="https://www.shell.co.uk/media/2011-media-releases/stanlow-refinery-sale.html">in 2011</a> and US$3.8 billion (£2.64 billion) of North Sea assets <a href="https://www.shell.com/media/news-and-media-releases/2017/shell-completes-sale-of-uk-north-sea-asset-package-to-chrysaor.html">in 2017</a>. </p>
<p>But the decision to pull out of Cambo is different. Cambo is an undeveloped field rather than a mature legacy asset. Shell bought into it in May 2018 when it acquired a 30% non-operator stake. Climate protesters targeted the Cambo project in the run-up to COP26 – the UN climate conference hosted by the UK in Glasgow in November 2021 – <a href="https://smileymovement.org/news-list/Stop-Cambo-campaign">arguing</a> that new oil and gas developments are incompatible with reaching zero emissions.</p>
<p>Cambo may still go ahead. Shell’s partner in the project is exploring options to develop the field. But Shell’s decision to pull investment has left the government’s continued support for finding and producing new sources of oil and gas in the North Sea exposed.</p>
<h2>Undeveloped, for now</h2>
<p>Cambo is one of the UK’s largest undeveloped offshore oilfields. It was first discovered in 2002 by the US oil firm Hess, which drilled several appraisal wells before the licence passed to Siccar Point in January 2017.</p>
<p>One of several new oil and gas developers to invest in the North Sea <a href="https://blog.geographydirections.com/2020/10/12/north-sea-oil-new-owners-for-twilight-years-raise-questions-of-national-interest/">in recent years</a>, Siccar Point is a comparatively small company controlled by two private equity backers, Bluewater and Blackstone. Its <a href="https://www.siccarpointenergy.co.uk/about-us/our-strategy">strategy</a> is to accumulate stakes in <a href="https://www.siccarpointenergy.co.uk/about-us/our-strategy">low-cost, long-life</a> oil and gas fields in the UK with a view to <a href="https://www.reuters.com/article/siccar-point-ma-blue-water-blackstone-gr-idUSL8N27F785">bringing them into production this decade</a>.</p>
<p>Siccar Point retains its role as the operator of Cambo, with responsibility for managing development and production. The pandemic postponed Siccar Point and Shell’s joint final investment decision, which would commit capital to the project.</p>
<p><a href="https://www.reuters.com/business/energy/shell-partner-scrap-plans-develop-north-sea-oilfield-2021-12-02/">Shell’s announcement</a> that “after comprehensive screening … the economic case for investment in [Cambo] is not strong enough at this time,” came ahead of any formal decision from the UK Oil and Gas Authority, although it may have anticipated it. </p>
<p>The industry regulator supports the recovery of hydrocarbons from the UK’s continental shelf but may have been preparing additional environmental requirements, such as reduced emissions, for example, that would have raised costs.</p>
<p>More broadly, growing public concern about the climate crisis has heightened the reputational costs of pursuing new oil projects in the UK since Shell acquired its stake in 2018. <a href="https://www.bbc.co.uk/news/uk-scotland-scotland-politics-59312510">The Scottish first minister’s</a> alliance with the Green Party and <a href="https://www.standard.co.uk/news/uk/first-minister-nicola-sturgeon-sweden-wales-ireland-b965976.html">Scotland’s vague support</a> for <a href="https://beyondoilandgasalliance.com/">the Beyond Oil and Gas Alliance</a> – a coalition of countries supporting a moratorium on drilling for new fossil fuels – may have played a role, too. </p>
<p>Several of Shell’s plans for the UK have already been thwarted. The government regulator for offshore oil and gas rejected its proposals for developing the Jackdaw gasfield. The Acorn project, designed to capture and store carbon dioxide in underground rock formations, and in which Shell is a partner, was not selected for fast-track government funding either. </p>
<p>Earlier in 2021, a Dutch court ordered Shell to cut its worldwide <a href="https://theconversation.com/shell-ordered-to-cut-its-emissions-why-this-ruling-could-affect-almost-any-major-company-in-the-world-161754">CO₂ emissions by 45%</a> by 2030, and the company continues to struggle with its history in Nigeria. The UK Supreme Court ruled that Nigerian communities can <a href="https://www.business-humanrights.org/en/latest-news/uk-supreme-court-rules-that-polluted-nigerian-communities-can-sue-royal-dutch-shell-in-the-english-courts/">sue Shell directly</a> rather than its Nigerian subsidiary. A US activist hedge fund recently proposed splitting Shell’s legacy business from its newer investments in <a href="https://carbontracker.org/reports/shell-and-third-point-spinning-off-the-sector/">liquefied natural gas and renewables</a>. Shell will have been keen to reassure investors that its future is not at the whim of activists and regulators, but decided internally. </p>
<p>Walking away from <a href="https://www.siccarpointenergy.co.uk/our-portfolio/corona-ridge-area">170 million barrels of oil</a> may seem like a big deal, but it is unlikely to ruffle Shell’s investors. The company’s share of Cambo represents <a href="https://www.ft.com/content/c457f627-23b5-4409-b3a9-b42c00eaa275">a fortnight’s worth</a> of its total global production, but it would be spread over 25 years. Shell continues to explore for new fossil fuels <a href="https://investors.kosmosenergy.com/news-releases/news-release-details/kosmos-energy-announces-farm-down-portfolio-exploration-assets">elsewhere</a>. </p>
<p>Oil companies with multiple fields weigh up an investment case like Cambo against other possibilities for replacing reserves and reducing costs. One interpretation of Shell’s announcement is that it weighed Cambo’s potential returns against its reputational value, plus the cost of tying up capital in the long and contested process of developing a large oil project in the North Sea.</p>
<h2>Shell’s decision doesn’t close the door</h2>
<p>It is too soon to count Cambo out, although Shell’s decision has <a href="https://www.theguardian.com/business/2021/dec/03/shell-u-turn-cambo-could-mean-end-big-north-sea-oil-projects">knocked investor confidence</a> in North Sea oil and gas. The government’s recent North Sea transition deal views investment in the basin, including in so-called frontier areas with undeveloped reserves like west of Shetland, as critical to <a href="https://ukerc.ac.uk/news/offshore-oil-and-gas-continuity-or-transition/">a successful energy transition</a>.</p>
<p>Siccar Point is committed to <a href="https://www.siccarpointenergy.co.uk/uploads/20211202_Cambo_Shell.pdf">pursuing the project</a> but it will need new partners to match the technical and financial challenge Cambo presents. The spate of acquisitions on the UK continental shelf over the past few years suggests buyers for Shell’s share are out there. Shell’s “uneconomic” verdict on Cambo is significant, although not because it presages a wholesale retreat of investment from hydrocarbon production. Rather, it shows a growing differentiation among companies in the sector in how they evaluate wider business risks in responding to net zero obligations. </p>
<p>Long-standing, publicly listed firms are moving away from producing oil from the UK offshore, either divesting from the UK entirely or gradually shifting their UK portfolios towards gas and renewables. In turn, a diverse group of new firms are moving in, backed by private equity and overseas state investment funds and attracted to oil assets. The UK government’s goal of maintaining investment in oil while reducing emissions increasingly relies on firms whose connections to the UK are limited, and whose willingness to respond to net zero obligations remains to be seen.</p>
<hr>
<figure class="align-right ">
<img alt="Imagine weekly climate newsletter" src="https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p><strong><em>Don’t have time to read about climate change as much as you’d like?</em></strong>
<br><em><a href="https://theconversation.com/uk/newsletters/imagine-57?utm_source=TCUK&utm_medium=linkback&utm_campaign=Imagine&utm_content=DontHaveTimeTop">Get a weekly roundup in your inbox instead.</a> Every Wednesday, The Conversation’s environment editor writes Imagine, a short email that goes a little deeper into just one climate issue. <a href="https://theconversation.com/uk/newsletters/imagine-57?utm_source=TCUK&utm_medium=linkback&utm_campaign=Imagine&utm_content=DontHaveTimeBottom">Join the 10,000+ readers who’ve subscribed so far.</a></em></p>
<hr><img src="https://counter.theconversation.com/content/173183/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gavin Bridge receives funding from UKRI, Economic and Social Research Council. </span></em></p><p class="fine-print"><em><span>Gisa Weszkalnys receives funding from UKRI, Economic and Social Research Council. </span></em></p><p class="fine-print"><em><span>Tiago Teixeira receives funding from UKRI, Economic and Social Research Council.</span></em></p>Shell’s withdrawal highlights unresolved tensions on the road to net zero.Gavin Bridge, Professor of Geography and Fellow of the Durham Energy Institute, Durham UniversityGisa Weszkalnys, Associate Professor of Anthropology, London School of Economics and Political ScienceTiago Teixeira, Postdoctoral Research Associate in Geography, Durham UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/708632017-01-04T17:00:20Z2017-01-04T17:00:20ZHow to burn more oil and gas but slash emissions? Offshore power stations<figure><img src="https://images.theconversation.com/files/151722/original/image-20170104-18653-1vnt59r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/pic-267980426/stock-photo-oil-rig-platform.html?src=0DfMjpPU86EkftFTMCB5Bg-1-73">Lucasz Z</a></span></figcaption></figure><p>While the energy in fossil fuels is valuable for society, burning them has well documented environmental consequences – global warming, smog and the <a href="http://www.bbc.co.uk/schools/gcsebitesize/science/ocr_gateway_pre_2011/rocks_metals/6_clean_air3.shtml">effects</a> of nitrous and sulphur oxides. Many think the time has come to stop burning them almost entirely. This led to the Guardian launching a <a href="https://www.theguardian.com/environment/ng-interactive/2015/mar/16/keep-it-in-the-ground-guardian-climate-change-campaign">campaign</a> a couple of years ago to “keep it in the ground”, which attracted much support. </p>
<p>The <a href="http://unfccc.int/paris_agreement/items/9485.php">Paris Agreement</a> is a shift in this direction with its commitment to keep the global temperature rise this century to 2°C. But within days of it coming into force last November, Donald Trump was elected American president. He <a href="https://www.theguardian.com/environment/2016/nov/11/keep-it-in-the-ground-what-president-trump-means-for-climate-change">wants</a> the US to withdraw from the agreement and has <a href="http://www.telegraph.co.uk/news/2016/12/10/donald-trump-name-rex-tillerson-us-secretary-state-nbc-news/">appointed</a> a fossil fuels champion, Rex Tillerson, as secretary of state. </p>
<p>There may however be a way to reconcile these two sides that is not being discussed. Instead of burning gas and coal in power stations and burning petrol and diesel in cars, we could extract their energy by burning them at source – in offshore power stations.</p>
<h2>Mission: carbon capture</h2>
<p>In parallel with developing green energy technologies like wind and solar, much attention in recent years has been devoted to cleaning up traditional fossil-fuel power plants with carbon capture and storage (CCS). </p>
<p>Most of the emphasis has been on <a href="http://www.ccsassociation.org/what-is-ccs/capture/post-combustion-capture/">post-combustion capture</a>, which involves removing carbon dioxide from the power station flue gases then compressing it into a liquid. This is then pumped to a storage facility, commonly proposed in the UK to be depleted oil and gas fields offshore. </p>
<p>So far CCS in the UK <a href="http://www.bbc.co.uk/news/uk-scotland-34943034">is still</a> not much further forward after more than ten years of endeavour. It doesn’t help that the technology has several major difficulties. The process of removing, treating and pumping carbon dioxide is costly and energy intensive, which is somewhat self-defeating. And moving the hydrocarbons hundreds of kilometres from their source to treat and burn them only to pump the carbon dioxide all the way back again is very inefficient. </p>
<p>So why not move the power station to the oil and gas field instead? You would burn the hydrocarbons in their containing rock by feeding them oxygen or air, while pumping pressurised water from a surface facility – per the diagram below. The heat from burning the hydrocarbons would convert the water into steam, which would be piped up to the surface to power a turbine to produce electricity that could be transmitted to shore using power cables. </p>
<p><strong>In-situ combustion</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/151713/original/image-20170104-18647-get2iz.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/151713/original/image-20170104-18647-get2iz.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/151713/original/image-20170104-18647-get2iz.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=366&fit=crop&dpr=1 600w, https://images.theconversation.com/files/151713/original/image-20170104-18647-get2iz.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=366&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/151713/original/image-20170104-18647-get2iz.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=366&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/151713/original/image-20170104-18647-get2iz.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=460&fit=crop&dpr=1 754w, https://images.theconversation.com/files/151713/original/image-20170104-18647-get2iz.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=460&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/151713/original/image-20170104-18647-get2iz.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=460&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>No hydrocarbons would be taken to the surface in this process, and the carbon dioxide and other environmentally unfriendly combustion products would remain locked within the subsurface reservoir. And in case you are wondering if the process is unsafe, it isn’t. Isolate the oxygen supply and you can quickly stop combustion. There’s also no question of explosions because these need a free path. Hydrocarbons are stored in a rock matrix, so no such paths are available. </p>
<p>Not only would this be a new form of green power for homes and businesses, with a concerted shift to electric cars it could displace petrol and diesel. It could also potentially be applied to onshore shale oil and gas reserves. In short, this is about having our cake and eating it. </p>
<h2>Practicalities</h2>
<p>In-situ combustion has already been used for many years in <a href="http://www.terrapinn.com/2012/eor-and-heavy-oil-world-mena/Data/statusofiscprojects.pdf">places such as</a> the US and Romania to extract heavy oil. This involves injecting air or oxygen to burn the oil and gas within the reservoir, but instead of producing steam like in my proposal, the heat thins the heavy oil and turns lighter components to vapour, enhancing the flow to the surface. </p>
<p>That said, subsurface steam generation and surface power production present numerous uncertainties. We’d need significant research and development to prove the concept. Areas to be addressed include: </p>
<ol>
<li><p><strong>Modelling the combustion process</strong>: developing a model of the heat generation and the way the thermal front would move through different kinds of rock is likely to be extremely complex. </p></li>
<li><p><strong>Efficiency of heat transfer</strong>: how much of the heat could be captured to produce steam?</p></li>
<li><p><strong>Steam well design</strong>: this would require a new well completion arrangement with materials that could handle very high temperatures. </p></li>
<li><p><strong>Surface facility and transmission requirements</strong>: what does the surface facility look like – steam turbines, high-voltage DC generation? What other support systems are required? What are the requirements for moving the power onshore? </p></li>
<li><p><strong>Effect of combustion products over time</strong>: would the build-up of carbon dioxide and other gases undermine the process? Where would these products migrate to and what would happen to them? </p></li>
<li><p><strong>Reservoir seal integrity</strong>: would the seal that prevents hydrocarbons and combustion products escaping be maintained, or would the process compromise its integrity?</p></li>
<li><p><strong>Effect on hydrocarbon recovery</strong>: current techniques for extracting oil from the North Sea <a href="http://www.offshore-technology.com/features/featurethe-biggest-oil-fields-in-the-north-sea-4836046/">can remove</a> a maximum of about two thirds of what is in a reservoir. Would burning the materials in-situ enable you to access more of the energy over the conventional process? </p></li>
<li><p><strong>Integration with other infrastructure</strong>: what potential is there for linking this kind of facility with other oil and gas fields and also offshore wind farms?</p></li>
<li><p><strong>Commerciality</strong>: you would of course need to calculate full capital and operating costs for the process, together with the associated revenue streams. Conventional accounting might prejudice analysis of such a scheme, however, unless there is a value ascribed to the benefit of emissions reduction using <a href="http://study.com/academy/lesson/full-cost-accounting-definition-example.html">full-cost accounting</a> techniques, the overall benefits for society will be missed.</p></li>
</ol>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/151752/original/image-20170104-18653-k64byu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/151752/original/image-20170104-18653-k64byu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/151752/original/image-20170104-18653-k64byu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=698&fit=crop&dpr=1 600w, https://images.theconversation.com/files/151752/original/image-20170104-18653-k64byu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=698&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/151752/original/image-20170104-18653-k64byu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=698&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/151752/original/image-20170104-18653-k64byu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=877&fit=crop&dpr=1 754w, https://images.theconversation.com/files/151752/original/image-20170104-18653-k64byu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=877&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/151752/original/image-20170104-18653-k64byu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=877&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Barrier Britain.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/pic-345034715/stock-vector-illustration-of-a-vector-oil-drop-icon-with-a-map-of-the-uk.html?src=U0GDMIe3CVCpLNMvsyGgrw-1-58">blablo 101</a></span>
</figcaption>
</figure>
<p>Developing this kind of scheme would not come cheap. In the UK it would require such a level of investment, integration and commitment across the competing energy companies that the current fully private set-up would be a barrier. </p>
<p>The best route would be to set up a state energy company – accepting that nationalising the remaining resource in the UK continental shelf was necessary to maximise what was left. This sort of thinking is necessary if we are to achieve our climate change goals. Offshore power stations could be exactly what we are looking for.</p><img src="https://counter.theconversation.com/content/70863/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tom Baxter does occasional oil and gas consultancy work for Genesis Oil and Gas Consultants. It would not stand to benefit from developing the kind of project envisaged in this article.
</span></em></p>Carbon capture is fundamentally flawed. Here’s plan B.Tom Baxter, Senior Lecturer in Chemical Engineering, University of AberdeenLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/546862016-02-15T15:24:11Z2016-02-15T15:24:11ZDark predictions about North Sea oil look all too believable<figure><img src="https://images.theconversation.com/files/111370/original/image-20160212-32308-1h34vr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Sunset in Scotland?</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/cat.mhtml?lang=en&language=en&ref_site=photo&search_source=search_form&version=llv1&anyorall=all&safesearch=1&use_local_boost=1&autocomplete_id=&searchterm=north%20sea%20oil&show_color_wheel=1&orient=&commercial_ok=&media_type=images&search_cat=&searchtermx=&photographer_name=&people_gender=&people_age=&people_ethnicity=&people_number=&color=&page=1&inline=124714078">DabartiCGI</a></span></figcaption></figure><p>The oil price is <a href="http://www.macrotrends.net/1369/crude-oil-price-history-chart">struggling to</a> stay above US$30/barrel, little more than a quarter of the price 18 months ago. Recent forecasts for the UK industry have become much gloomier as a result. As recently as three months ago, industry association <a href="http://oilandgasuk.co.uk/product/op114/">Oil & Gas UK predicted</a> 79 platforms would close by 2024. Several major consultancies <a href="http://www.douglas-westwood.com/dw-monday-coming-decommissioning-boom-to-be-driven-by-uk/">have since</a> suggested <a href="http://www.ft.com/cms/s/0/37da458c-5b7f-11e5-a28b-50226830d644.html#axzz3zkwEHgAv">that it might be</a> more like twice that. So how pessimistic is it reasonable to be?</p>
<p>First the big picture. Since the first significant oil and gas production in the UK in the 1960s, 28 billion barrels of crude oil and more than 2.4 trillion cubic metres of gas <a href="http://www.ft.com/cms/s/0/ed241136-cab3-11e5-a8ef-ea66e967dd44.html#axzz3zkwEHgAv">have been</a> extracted, mostly from the North Sea. <a href="http://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html">According to</a> the latest estimates, a further 3 billion barrels of oil and 0.2 trillion cubic metres of natural gas are proven to be recoverable – <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/441082/UK_Oil_Reserves_and_EUR_2015.pdf">plus about</a> the same again in probable reserves. That may be a fraction of what has gone, but it still <a href="http://www.bbc.co.uk/news/business/market_data/commodities/143908/three_month.stm">amounts to</a> revenues of around £200 billion. </p>
<p>The viability of the sector fundamentally depends on the oil price. There are large discrepancies between what economists think will happen to the price next, but most agree it is unlikely to return to its <a href="http://www.macrotrends.net/1369/crude-oil-price-history-chart">pre-crisis level</a> of around US$110/barrel in the medium term. </p>
<h2>The UK reaction</h2>
<p>The immediate reaction of UK’s oil and gas producers <a href="https://www.gov.uk/government/statistics/oil-and-oil-products-section-3-energy-trends">has been</a> to continue production at the same pace. In the third quarter of 2015, total oil production increased by 7% year-on-year and drilling activity remained stable. That’s not to say there has been no reaction – 65,000 out of 440,000 jobs <a href="http://www.bbc.co.uk/news/uk-scotland-scotland-business-34193720">had gone</a> by last September and capital investment <a href="http://oilandgasuk.co.uk/wp-content/uploads/2015/09/Oil-Gas-UK-Economic-Report-2015-low-res.pdf">is thought to be</a> falling substantially. Without question, the business climate has fundamentally changed. </p>
<p>The high operating costs in the North Sea are a central concern. Even under more favourable prices, the industry would have a competitiveness problem relative to other regions. It <a href="http://oilandgasuk.co.uk/wp-content/uploads/2015/09/Oil-Gas-UK-Economic-Report-2015-low-res.pdf">costs around</a> £17 to extract a barrel of oil, among the highest in the world. </p>
<p>One telling statistic for the UK industry is that while its oil extraction cost was similar to that of Norway as recently as the mid-2000s, they have now sharply diverged (see chart below). One study has <a href="http://folk.uio.no/dilund/lessonsfromnorway_forthcoming.pdf">argued that</a> this is primarily because the Norwegian state bears a higher fraction of the exploration costs and thus takes some of the risks from producers. The UK industry is <a href="http://www.bbc.co.uk/news/uk-scotland-scotland-business-34193720">currently trying</a> to cut its unit cost to £15 by the end of this year, and has brought it down from a high of £20 in 2013, but even that may not be sufficient to sustain the industry in its current form.</p>
<p><strong>Average lifting costs around the world</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/111368/original/image-20160212-29175-42vntn.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/111368/original/image-20160212-29175-42vntn.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/111368/original/image-20160212-29175-42vntn.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=353&fit=crop&dpr=1 600w, https://images.theconversation.com/files/111368/original/image-20160212-29175-42vntn.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=353&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/111368/original/image-20160212-29175-42vntn.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=353&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/111368/original/image-20160212-29175-42vntn.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=444&fit=crop&dpr=1 754w, https://images.theconversation.com/files/111368/original/image-20160212-29175-42vntn.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=444&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/111368/original/image-20160212-29175-42vntn.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=444&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Values in barrels of oil equivalent (£).</span>
<span class="attribution"><a class="source" href="http://oilandgasuk.co.uk/wp-content/uploads/2015/09/Oil-Gas-UK-Economic-Report-2015-low-res.pdf">Wood Mackenzie</a></span>
</figcaption>
</figure>
<p>Compared to Oil & Gas UK’s November forecast of 79 platforms closing by 2024, consultancy Douglas-Westwood <a href="http://www.douglas-westwood.com/dw-monday-coming-decommissioning-boom-to-be-driven-by-uk/">now predicts</a> 146 platforms will go between 2019 and 2026, accounting for more than half of the removals between 2016 and 2040 (the total number of platforms is currently around 300). It says that ageing UK platforms “are uneconomic at current commodity prices, as a result of high maintenance costs and the expensive production techniques required for mature fields”. </p>
<p>Meanwhile Wood Mackenzie, another consultancy, <a href="http://www.ft.com/cms/s/0/37da458c-5b7f-11e5-a28b-50226830d644.html#axzz3zkwEHgAv">believes that</a> 140 offshore UK fields will halt production in the next five years – even allowing for the oil price to rebound to US$85. One consolation, <a href="http://www.douglas-westwood.com/dw-monday-coming-decommissioning-boom-to-be-driven-by-uk/">according to</a> Douglas-Westwood, is that larger platforms are likely to keep pumping in spite of low oil prices until the 2030s. This is because they have an additional role as stations through which smaller, newer platforms route their petroleum back to shore. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/111372/original/image-20160212-29188-eoulmm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/111372/original/image-20160212-29188-eoulmm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/111372/original/image-20160212-29188-eoulmm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/111372/original/image-20160212-29188-eoulmm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/111372/original/image-20160212-29188-eoulmm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/111372/original/image-20160212-29188-eoulmm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/111372/original/image-20160212-29188-eoulmm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/111372/original/image-20160212-29188-eoulmm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Crisis situation?</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/cat.mhtml?lang=en&language=en&ref_site=photo&search_source=search_form&version=llv1&anyorall=all&safesearch=1&use_local_boost=1&autocomplete_id=&search_tracking_id=cd42WzGQlLKl26L-C-jWRA&searchterm=oil%20uk&show_color_wheel=1&orient=&commercial_ok=&media_type=images&search_cat=&searchtermx=&photographer_name=&people_gender=&people_age=&people_ethnicity=&people_number=&color=&page=1&inline=136078472">cyberdog</a></span>
</figcaption>
</figure>
<h2>Critical condition</h2>
<p>Either way, the situation is looking critical. It is not easy to say how negative it is right to be – the discrepancy in the different oil-price forecasts is a good indication of how hard it is to foresee the future of the industry. But with the consensus that prices are not going to rise much for some time, the fact that these forecasts for UK activity are getting worse is probably the correct direction of travel. </p>
<p><a href="http://oilandgasuk.co.uk/wp-content/uploads/2015/09/Oil-Gas-UK-Economic-Report-2015-low-res.pdf">With around</a> 375,000 jobs directly or indirectly affected by the North Sea oil and gas industry, the health of the UK continental shelf is of the utmost importance to the economy. This is putting increasing pressure on the Westminster government to reduce the tax burden and support investments to make the business proposition more attractive. It started to react last year <a href="http://www.bbc.co.uk/news/uk-scotland-scotland-business-31940616">by reducing</a> the supplementary charge levied on oil producers from 30% to 20% and cutting the petroleum revenue tax from 50% to 35%. Time will tell if the UK government will do more at next month’s Budget. We would only note that it hasn’t done as much as Norway to help shoulder the burden of production costs. </p>
<p>Last month the UK government <a href="http://www.theguardian.com/uk-news/2016/jan/28/aberdeen-500m-investment-north-sea-oil-price-slump">announced</a> a £250m investment into Aberdeen to secure oil and gas jobs and help the economy to diversify – doubled by a parallel infrastructure investment from the Scottish government. </p>
<p>The emphasis on diversification reflects the fact that the authorities are increasingly acknowledging that oil and gas will not be the same driver in future, irrespective of the governments’ efforts. All the same, there is still an opportunity to soften the blow if the governments and the industry do what they can. Together with technological advances that have gradually made it possible to extract more oil more efficiently, the UK North Sea may still have some life in it yet. </p>
<p><em>Erkal Ersoy, manager of the Centre for Energy Economics Research and Policy at Heriot-Watt, also advised on this piece.</em></p><img src="https://counter.theconversation.com/content/54686/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Achim Ahrens collaborates with BP for the Statistical Review of World Energy, but the views expressed here are his own.</span></em></p><p class="fine-print"><em><span>António Carvalho collaborates with BP for the Statistical Review of World Energy, but the views expressed here are his own.</span></em></p><p class="fine-print"><em><span>Marco Lorusso collaborates with BP for the Statistical Review of World Energy, but the views expressed here are his own.</span></em></p>But will the rigs stop pumping?Achim Ahrens, Research Associate, Heriot-Watt UniversityAntónio Carvalho, Research Associate, Heriot-Watt UniversityMarco Lorusso, Research Associate, Heriot-Watt UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/292952014-07-16T15:51:37Z2014-07-16T15:51:37ZAmerica is right, the UK’s North Sea tax regime needs reforming<figure><img src="https://images.theconversation.com/files/54014/original/vn9fh5dd-1405518626.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Americans claim that North Sea tax system is inhibiting investment</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/black_friction/2368687166/in/photolist-6Ez632-6Ez61B-4HGefe-cYjDub-5JYqRU-dfnVpp-4Bj9aU-9Y43Nn-avFYCS-dRuHpj-FpbRa-ekUMJV-5MQMHy-6bL1gX-6Jmzc-6njsi3-3XfY5E-9XVyze-9XVyzc-efMpis-6eD1aN-roBiy-63uNNZ-66pDhZ-649Ne5-8zcrNF-5HmT51-5o3i4i-5WzXN5-avFYCU-avFYCN-471EuR-3f6pRG-6Jmzu-5o3i9F-bGwnJx-bGwnUH-g4juHd-btBwXL-9Tbwyu-kYf7da-5zmEbT-6Jmyv-5kVyL8-9T8Hfa-kYgxnA-9TbwQj-9TbmT7-frfnFH-6tYDpr">Nick Bramhall</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>The UK North Sea is attracting attention once again after being overshadowed by the shale debate for quite some time. Most recently this has been thanks to the UK government’s <a href="http://www.proactiveinvestors.co.uk/companies/market_reports/70352/oil-column-uk-govt-launches-urgently-needed-north-sea-tax-consultation--0000.html">announcement this week</a> of a formal consultation to review the offshore petroleum tax regime. </p>
<p>This followed <a href="http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/10952376/Washington-blames-UK-tax-rises-for-collapsing-North-Sea-oil-hopes.html">comments last week</a> by the US Energy Information Administration (EIA) about the UK petroleum fiscal regime making the North Sea unattractive for exploration and production. The EIA said the current fiscal regime has contributed to a sharp decline in oil production and has made the country less competitive. This argument is echoed by the industry association for upstream companies, <a href="http://www.oilandgasuk.co.uk">Oil & Gas UK</a>, which states that investors are increasingly looking to invest elsewhere. </p>
<h2>What investors think…</h2>
<p>From an investment perspective, a combination of commercial and non-commercial factors come into play when assessing the competitiveness of an oil and gas province. This would include things like geology, the oil price and drilling costs, all of which are beyond the host government’s control, so it is hard to single out the tax regime and directly link it to investment figures. Nonetheless, no one could argue that the fiscal situation will play a big part in companies deciding where and how much to invest. </p>
<p>The oil and gas industry is the most highly taxed business in the UK. Fields developed since March 1993 are taxed at 62%, which comprises a corporation tax of 30% (compared to 21% for all other industries) and a supplementary charge of 32%. Fields developed before 1993 are also subject to a petroleum revenue tax (PRT) at 50%, which brings their overall marginal tax rate to 81%. The reason for rates that are much higher than other sectors is because of the special features of the industry, mainly the potential for extraordinary profits. </p>
<p>This disparity between the taxes on petroleum and on other sectors is not unusual. <a href="http://www.kpmg.com/global/en/services/tax/tax-tools-and-resources/pages/corporate-tax-rates-table.aspx">Across the OECD</a>, all sectors in the economy with the exception of oil and gas are subject to an average income tax rate of 24%, down from 33% in 2000. In the oil and gas sector, the average government take –- meaning the share of revenues that accrues to the government over the life of a project – varies between 65% and 85%. In this regard, the UK is not much different. </p>
<p>And while the overall government take is important, the impact of tax instruments on cost recovery is also relevant. The UK petroleum fiscal regime has has the most generous depreciation system in the world, for example. Instead of <a href="http://www.investopedia.com/terms/d/depreciation.asp">depreciating</a> investment over a number of years in the usual accounting style, the UK permits a 100% write-off in the first year. This has major implications for the length of time it takes for companies to get their investments back, which boosts the attractiveness of the UK regime. Not surprisingly perhaps, other governments are not comfortable with the policy. </p>
<h2>Rather more Mexican than Angolan</h2>
<p>Having said that, the UK’s high rate of 81% is unsustainable. The condition of the UK continental shelf must be kept in perspective. Such a high level of government take is not justified in jurisdictions where development costs are high and the petroleum potential is only modest, which is the case in the UK North Sea. </p>
<p>While more fields have been discovered since the 1990s, they have been progressively smaller. Their average discovery size is 25-30m barrels of oil equivalent (mboe) compared to the giant Forties and Brent fields discovered in the 1970s, where the size of each originally exceeded 2400mboe. </p>
<p>The newer fields also have a shorter lifetime and tend to be technically more difficult to access. So the UK cannot put itself in the same league as countries like Angola, where the higher resource potential and lower cost of development can justify a government take that is above 80% in many cases. In contrast, in the US Gulf of Mexico, a mature but still active province, the government take can be below 50%. </p>
<h2>Other problems with the UK system</h2>
<p>A second issue for the UK petroleum tax regime is that since it was established in 1975, it has often been reviewed and amended. No other sector in the UK economy has been subject to such fiscal instability. Again and again, UK governments have succumbed to the temptation of changing tax rates and structures, mainly in response to oil price changes. Yet the oil price moves in unpredictable ways and so do costs, which are correlated with price movements. </p>
<p>The continuous increase in the headline tax rate since 2002 may have captured higher tax revenues in the short term, but it has almost certainly reduced the attractiveness of the province to investors as well. Norway is often cited as a contrasting example, where the government take of 78% is seen as acceptable in the context of a fiscal regime which has shown impressive resilience to changes in oil prices. Norway also still has many large fields producing or awaiting development. </p>
<p>The other problem with the UK fiscal regime is that it has become too complex, creating a higher administrative burden for the companies involved. In an attempt to achieve the difficult balance between preserving the high tax take on profitable fields and allowing a lower take on certain new and smaller fields, for example, the UK government has introduced targeted incentives to aid the development of marginal fields and encourage late-life field investment. The result is a wide spectrum of effective tax rates varying between 30% and 81%. An additional problem here is that targeting can never be perfect. Some investments will inevitably benefit from tax incentives even though they do not require them. </p>
<p>The perception of the North Sea is often one of declining production, fields having passed their prime, rising costs, and looming decommissioning. It does not have to be this way. The UK continental shelf has much remaining potential (11 and 21 billion boe), but this will only be realised if the UK continental shelf stays competitive as possible for as long as possible. Doing this means addressing the three problems above: high tax take, complexity and instability. Let’s hope the forthcoming UK consultation reaches the same conclusion. </p><img src="https://counter.theconversation.com/content/29295/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Carole is the director of a small consultancy firm - Crystol Energy Ltd. It hasn't done any commercial work in the UK North Sea. </span></em></p>The UK North Sea is attracting attention once again after being overshadowed by the shale debate for quite some time. Most recently this has been thanks to the UK government’s announcement this week of…Carole Nakhle, Associate Lecturer in Energy Economics, University of SurreyLicensed as Creative Commons – attribution, no derivatives.