Oil production in the UK and Norway peaked a decade ago, but today there is a revival in activity. Key drivers are excellent exploration results in Norway, high field development activity coming up, and large programs for modifications of old platforms.

The number of players is higher than ever, with majors and large independents heavily involved in investing in new field developments and increased oil recovery (IOR). European energy companies are the strongest group of newcomers and have been active buying assets and companies. Players from Asia and the Middle East also have entered, and the number of junior E&P companies and startups has surged over the last decade.

Exploration drilling

In Norway, exploration activity reached a historic low in 2005 with only five wells. It has since exploded to 67 wells. The main drivers for this hike are:

  • More frequent exploration rounds with award of previously awarded acreage (APA rounds);
  • Cash back on exploration cost for companies outside tax position – 78% of exploration cost incurred is paid back the following year; and
  • High oil prices.

From Jan. 1, 2008, to Aug. 12, 2011, 3.4 Bbbl have been discovered in Norway, placing Norway as the number six exploration nation globally during this period. Norway has three province basins – the Barents Sea, the Norwegian Sea, and the North Sea. There has been breakthrough exploration in all of these provinces, but the North Sea, the most mature province, also has had the most exploration success – 1.6 Bboe has been discovered in the Norwegian sector of the North Sea since Jan. 1, 2008.

In the UK, exploration activity was hit by the financial crises and declined to one-third of the previous high level. About 1 Bboe has been discovered since 2008, placing the UK as the number 18 exploration nation globally – 75% of this has been discovered in the North Sea.

The 2010 estimate of yet-to-find resources in the Norwegian North Sea, according to the Norwegian Petroleum Directorate, is 5.3 Bboe. In the UK, licenses are awarded in regular licensing rounds expected to take place about every 1.5 years. The UK Department of Energy and Climate Change estimates yet-to-find resources in UK North Sea at 5.7 Bboe (estimate includes small volumes in the Irish Sea and Celtic basin).

Production

The North Sea province (excluding the Norwegian 5and Barents seas in Norway and West of UK) is characterized by mature giant oil fields developed in the 1970s that are currently experiencing a steep decline. New fields being developed and put into production are only a fraction in size of these elephants and are unable to offset the decline. The 2011 production is expected to be 4.5 MMboe/day, of which 58% will come from the Norwegian North Sea. This production level represents a decline of 42% since peak production in 1997. The good news, however, is that activity has increased, and numerous fields will be developed and put into production during the current decade, implying production will remain almost flat for the remainder of this decade. Estimated production for 2020 is only 10% lower than the current level.

Historically, more liquids production than gas has been produced in the North Sea. As the province matures, there is a shift toward more gas production due to gascap blowdowns, etc. As the gas price is lower than the oil price, these fields have become less economical and even more sensitive to fluctuations in the prices. Currently, the oil/gas ratio is 57% oil, and it will remain stable and above 50% for the current decade.

This representation of daily production from the North Sea based on current life cycle on the field in thousand boe/day shows that production will remain almost flat for the remainder of this decade. (Figures courtesy of Rystad)

New project development

Due to the stop in development decisions following the financial crises, few new fields will come onstream in 2011 and 2012.

In 2010, only two new projects were sanctioned in the Norwegian North Sea, whereas five new projects received governmental approval in the first half of 2011. On the UK side of the North Sea, 2010 was a good year in terms of the amount of resources being sanctioned with Jasmine (ConocoPhillips-operated) and Devenick (BP-operated) among the largest projects. This year has been good for plan for development and operation approvals in the UK as well. There is now more optimism in the market, and field development work is back on track, which will trigger considerable new investments.

With the trend shifting toward smaller fields and less economical developments, companies are forced to shift their focus from large standalone developments to a hub concept with possible tie-in candidates or subsea development solutions.

At the same time, several of the giant fields in the North Sea are in the late phase, where IOR decisions and large investments are necessary to extend field life. One such example is Ekofisk on the Norwegian Continental Shelf, where operator ConocoPhillips will invest 65 billion NOK (~ US $12 billion) to install two new platforms and drill 86 new wells to keep the field producing for another 40 years.

In the Norwegian sector of the North Sea, the greater Luno area is emerging as the new hot spot with several discoveries and operators. Most of the acreage in this area had already been awarded and explored previously; however, it was not until it was re-awarded that the discoveries were made. There have been four major discoveries in the area: Lundin Petroleum discovered Luno in 2007 and Avaldsnes in 2010, Det norske oljeselskap discovered Draupne in 2008, and Statoil discovered Aldous Major South in August 2011.

These four discoveries are expected to hold an estimated 1 Bboe of reserves, mainly oil. It remains to be seen whether some of these fields will be developed together or if they will all be standalone projects. Additional notable new projects are Suncor's Beta discovery and Wintershall's Grosbeak. Both fields have standalone development potential. There are at least 40 subsea tie-backs to be developed in the current decade as well.

In the UK North Sea, the largest fields in development are the Mariner and Bressay heavy oil fields. As UK authorities posted a new tax, operator Statoil withdrew its application. Negotiations are ongoing. Other interesting developments include GDF Suez's Cygnus, Nexen's Golden Eagle, and Nautical Petroleum's Kraken Heimdal Ull.

This chart, illustrating resources put in production per year in MMboe by current life cycle, shows a fair number of discoveries over the next decade.

Spending outlook

With more exploration wells being drilled, several projects being sanctioned, and IOR and redevelopment under way, the outlook for the oil service industry in the North Sea is also good. From a total offshore market in Norway of about NOK 185 billion (~ $34 billion) in 2010, the market is expected to increase by 50% in nominal terms to 2015. Subsea equipment and installation and the EPCI segments will experience the largest increase.

Looking at the North Sea only, there is a positive outlook for capital expenditure. An increase of 70% is expected from 2011 to 2014. The Norwegian sector will contribute 60% and the UK side 40% of total expenditures. The North Sea will be by far the largest market for offshore oil service globally over this period, ahead of Brazil, Australia, Africa, and the Gulf of Mexico.

Having weathered a couple of relatively difficult years after the financial crisis where particular UK-based companies experienced financing problems, the activity outlook for the North Sea is now very positive. Even though the province is maturing, almost all of the large majors and independent companies are present and investing heavily in new projects and producing fields, and business opportunities for the oil service industry are ample.

Annual capital expenditure in the North Sea in nominal million US dollars (expex not included) shows considerable investment in field development through 2016.