[A-List] UK oil industry: prospects

["Michael Keaney" <michael.keaney@xxxxxx>]

The big squeeze

After a year of mixed fortunes for the North Sea oil and gas sector, Mike
Woodcock asks where the industry goes from here
The Sunday Herald, 24 November 2002

Elphinstone Hall in Aberdeen with its ornate oak-beamed roof and pillared
exterior provided a sumptuous setting to celebrate the North Sea oil and gas
industry, far removed from the unforgiving and harsh environment where the
multi-billion pound industry ekes out its black gold.

As oil industry worthies tucked into dinner at the Scottish Offshore
Achievement Awards 2002, it was clear the monolithic structure of the North
Sea industry, dominated by a clutch of global oil giants, was now giving way
to a sleeker, more modern model.

While Steve Remp, executive chairman of Ramco Energy, doffed his cap to a
series of talismanic figures from the world of oil and gas development in
Aberdeen, his thoughts were clearly on the way ahead.

That focus became even sharper later in the week when BP announced that it
was cutting jobs at Sullom Voe in Shetland, once the pumping heart of the
UK's offshore industry.

Remp used the platform to confirm that Ramco and its partners had secured a
petroleum lease from the Ministry of Communications, Marine and Natural
Resources in Ireland as part of a £120 million project to bring the Seven
Heads field, south of Cork, into gas production, then set three crucial
challenges for the industry.

The first was directed at his own company and other independent com panies
in Aberdeen such as Dana Petroleum, Cairn Energy and Tuscan to become the
next leading British independent and step into the shoes of the likes of
Enterprise and Lasmo that have been gobbled up by the majors in recent
years.

His second was to smaller companies, particularly in the services field, to
adopt modern technology and develop innovative partnering agreements to
improve their offering to the majors.

Citing James Goldsmith's quip that by marrying your mistress you create a
vacancy, Remp said: 'I see a number of vacancies now. I hope that one of us
emerges as that leading new British independent to fill that void left by
these very fine companies.

'For Ramco, success can come from focusing on a small number of high impact
projects like Seven Heads. The process of consolidation among the big boys
means they progressively make bigger and bigger crosses to bear as the bar
goes higher in terms of what they need to find to keep going long term.

'These companies are leaving behind smaller fields which can have a material
impact on independents like us. I genuinely believe that the application of
good technology is the key to our success."

Remp's final challenge was to the government and the Chancellor Gordon
Brown, who makes his pre- Budget statement this week, to remove the shackles
from the North Sea oil and gas industry in the form of the corporation tax
increase which, he said, was undermining the Department of Trade and
Industry's (DTI's) work to foster a better environment for smaller, more
entrepreneurial companies to grow.

'It has been a deeply misguided strategy to pull the rug out from under this
process by producing a huge disincentive to North Sea development in the
form of the Chancellor's tax,' he said.

So with Remp's voice jarring against the convivial, backslapping atmosphere
of the awards ceremony it would seem that 2002 has brought the North Sea oil
and gas sector to a crossroads.

The UK Offshore Operators Association's (UKOOA) and the DTI's recent annual
survey highlighted the crucial juncture reached by the industry with
forecasts suggesting that it will have to spend more in the years ahead to
produce less oil and gas.

The survey of investment and development plans of 28 UK offshore oil and gas
producing companies suggested that with North Sea fields maturing and
reserves in existing fields shrinking, the costs of new developments
replacing these fields are rising. Indeed, in the years to 2010 £1 billion
more will be spent to recover 370 million less barrels of oil equivalent
(boe) than was forecast a year ago.

As the US continues to hover on the brink of war with Iraq and the wave of
warnings of imminent terrorist attacks show no sign of abating, oil prices
are hanging on a diet of news detailing the latest diplomatic moves in
Washington and Baghdad. Last Monday, US crude oil futures in New York soared
$1.20 a barrel to $26.71 and the Brent crude oil international benchmark
rose 56 cents to $23.76 a barrel in a single day.

Couple that with a shift in the global giants' gaze towards bigger, more
lucrative fields in the Caspian Sea, West Africa and the Gulf of Mexico and
it is clear why a cloud of apprehension has formed and thickened over the
North Sea this year.

While the survey showed that there are 260 oil and gas fields currently
being developed on the UK Continental Shelf (UKCS) compared to 248 in 2001
and remaining reserves have risen by 1bn boe to 11bn barrels, the number of
new fields planned has fallen significantly.

With new fields being subject to the 10% increase in corporation tax to 40%
and to 100% first-year capital allowances, the number of fields planned has
fallen from 148 in 2001 to 84 this year. However, the number of projects
under consideration in mature fields has risen to 144 from 96.

Brian Nixon, director of energy at Scottish Enterprise, admits the sector is
changing fast but he suggests figures showing that 70% of production
worldwide is carried out in mature or maturing fields offers a great deal of
succour for the North Sea industry.

'The North Sea, being relatively mature, stands to benefit from that
experience,' he says. 'I think the challenge is to continue to develop new
technology and techniques but also to take even greater cost out of the
equation and maximise performance from the existing infrastructure.

'A lot of our service companies have got a strong, strong capability in
brownfield development as opposed to greenfield and are quite well placed to
support the North Sea but are also in a good position to take that expertise
to overseas markets.'

While the maturity of the North Sea sector has been much cogitated over,
there remain an estimated 29bn barrels of oil to play for. The wave of
mega-major mergers has left the field clear for smaller, more mobile
companies to nip in and scoop up some of the spoils but it has also paved
the way for some innovative new asset management deals.

Tadg Slattery, vice president of production services at Halliburton KBR, the
amalgamation of Kellogg and Brown & Root, suggests the majors have found
that platforms in more mature fields have become nuisances to them which
they would be happy to hand over to contractors to manage and bear the
responsibility for.

Halliburton KBR is running a field in Bangladesh for Shell without a Shell
presence and without it taking decisions relative to the field and has
similar arrangements with others in Russia and the US. He is convinced this
model can be adapted successfully to the North Sea and believes fields could
be handed over as early as the New Year.

'Aberdeen's importance in business in terms of turnover is reducing
considerably and it will continue to do so,' he says.

'We see a huge shift in what's happening in Aberdeen. We see that gathering
momentum with established operators handing over platforms to companies like
ourselves to contract operate.'

'From mature field owners the message we are getting is that they don't want
to set up infrastructure but are looking to contractors like ourselves to
demonstrate that we have the capability to run these fields. We are in
discussions with several operators about doing just that.'

So with investment, infrastructure and taxation thrust to the top of the
North Sea agenda where does that leave the prospects for continued
exploration? Professor Alex Kemp, petroleum economics expert at Aberdeen
University argues that exploration is tied up with these issues.

'2002 has been a year of mixed fortunes,' he says. 'The oil price has stayed
high so the cash flow is good but of course we have got a tax increase which
will increasingly bite into cash flow. We have also got a major decline in
exploration and we could end up with perhaps 12 exploration rigs for the
whole year which is very low. Last year wasn't very good and it was at least
24 rigs. That's a big worry.'

As much of the acreage in the North Sea is now deemed to be high risk he
believes much more needs to be done to encourage exploration and that
creating a more favourable tax regime for independents looking for
exploration opportunities could make a big difference.

Kemp also suggests the government should take more action to encourage
smaller companies into the 200 or so undeveloped North Sea fields which may
otherwise be written off as technical resources.

'Encouragement of new entrants is important. There are a number of smaller
companies who are doing things here but can do a lot more. They need access
to undeveloped fields. Fallow field initiatives need to be pursued to
encourage the development of of fields that would probably just be seen as
technical resources,' he added.

It is not all doom and gloom on the exploration front, however, with larger
size independents such as EnCana and Talisman making substantial investments
in North Sea fields and talking of aggressive exploration plans.

And, although the pendulum is swinging away from the majors in the North
Sea, Shell and BP still take up 80% of the market and both companies'
spending forecasts for next year are down but not by as much as many
analysts feared.

Pressure is increasing on BP and Shell to act as the DTI has made it clear
that if they don't use fallow fields they will lose them. Alec Carstairs,
head of corporate finance at Ernst & Young LLP in Scotland and Northern
Ireland who specialises in oil and gas, says this is opening up a raft of
opportunities.

'The balance of production is transferring from being absolutely, completely
dominated by BP and Shell to having a third tier of independents,' he says.
'That is where most of the opportunities are coming in and that is where the
good investment returns are going to come from.

'The implications for the service industry are that they are going to have
to be a little more dynamic and flexible to cope with the demands of the
independents who are saying we are going to survive by reducing costs and
saving resources.'

Without doubt the North Sea faces a series of short-term challenges which
will have long-term implications for the future of the industry. As the face
of the industry changes so its main players will have to adapt to survive
and succeed. The outcome of this transition in an industry that employs
around 300,000 people and attracts around £8bn of investment a year will
have a major impact on the UK economy for years to come.