Despite the UK's ambitious plans for a sustainable low-carbon economy, with significant reductions in greenhouse gas emissions to be achieved by 2050, oil and gas are set to remain a crucial medium-term component of the energy mix.
Although the UK currently relies on the North Sea for more than half its total oil and gas, production has been declining since 1999. Maximising domestic oil and gas production would increase Britain's energy security and reduce the its reliance on expensive imports. What are the prospects for the industry?
The search for oil and gas in the North Sea started in the 1960s. Exploration had been held back by the lack of international agreement covering ownership of mineral rights outside the three-mile limit, and because technology for offshore development was in its infancy. The Continental Shelf Act 1964 addressed the first of these issues by expanding the UK government licensing powers for mineral exploration and development from within three miles to 200 miles (320km) of its shores. The dynamism and innovation of a fast growing offshore sector brought about rapid progress in the second.
The first exploration licences were issued in 1964. BP, which had a reputation for taking on risky ventures, started its UK operations offshore by exploring an area east of the Humber in the Southern North Sea. Its jack-up drilling vessel Sea Gem found gas 8,500ft (2,600m) below the seabed. Drilling continued to a depth of 10,000ft and by the end of 1965 a 12-metre flare was burning at the top of the rig. Newspaper headlines billed it the arrival of North Sea Klondike.
Other discoveries followed and the Southern North Sea gas industry boomed, hastening the demise of town gas made by burning coal.
Between 1967 and 1977 nearly 5,000km of new gas transmission infrastructure was built in Britain, while millions of domestic, commercial and industrial customers had their premises and equipment converted to burn natural gas.
Increased exploration and investment followed as the pioneering oil companies headed north in search of oil. In 1970 BP struck oil in 100m of water 175km from Aberdeen. The company's share price soared amid hopes that the North Sea could become a major source of crude oil. For a nation that imported almost all its oil, this was a dizzying prospect with the potential to transform the economy and the balance of payments.
In 1975 the first oil was pumped to the mainland. Discoveries and development continued apace. By the mid-1980s there were over 100 installations. International oil companies and oilmen flocked to Aberdeen, which thrived on the investment, becoming known as the Oil Capital of Europe.
Extracting oil from beneath the seabed in the harsh North Sea environment was hard. Working conditions were tough and the necessary skills were often acquired on the job. North Sea pioneers describe the situation as akin to the Wild West. Safety came second to production. But the Piper Alpha catastrophe of 1988, the worst disaster in the North Sea, changed all that. The death of 167 men and the conflagration on the most prolific platform in the North Sea led to the Lord Cullen report and to a major review of safety procedures and standards. The UKCS (UK Continental Shelf) is now considered to set the highest safety standards in the industry.
Decline in production
UK oil production peaked in 1999 and has been declining since by 5-10 per cent a year. Industry body Oil and Gas UK calculates that some 42 billion barrels of oil have been extracted with another 24 billion still potentially left under the UKCS. Exploration and appraisal drilling has more than halved in the last five years, with 80mmboe (million barrels of oil equivalent) discovered compared with 520mmboe produced. Production has fallen by 38 per cent in the last three years and production efficiency has declined from 80 per cent to 60 per cent in the last 10 years. Currently the UKCS has the highest level of investments and operating costs ever, with operating expenditure and average unit operating costs up. Recovery rate is currently 46 per cent across UKCS oil fields.
Forty years ago the UKCS consisted of a small number of large fields operated by large oil and gas majors who built the infrastructure to extract oil and gas from large fields. Having produced the most accessible oil they move on and are replaced by small and medium independent operators who develop the smaller fields that remain.
The profile of North Sea oil and gas operations has changed since its heyday. In the last 20 years, the number of UKCS fields has increased from 90 to 300, with nine out of 10 current fields producing fewer than 15,000 barrels per day. The average discovery is now fewer than 25 million barrels. Many fields are marginal and very interdependent and there is strong competition for capacity in the infrastructure bringing the product ashore. Keeping these ageing assets in safe operational order is a perennial challenge.
Various geological, geographical or economic factors render fields marginal. These can include low recoverable reserves, distance from existing production facilities and technically challenging crude oil characteristics that need greater capital investment to develop, as well as fields where production income falls below operating expenditure.
While the North Sea contains mature fields which have been in production for decade, a fifth of the UK's remaining oil and gas reserves lie under the ocean between the Shetlands and the Faeroe Islands. This deepwater area, known as West of Shetland, the Atlantic Frontier or the Atlantic Margin, is on the edge of the UK continental shelf and exploration and production present substantial challenges.
The geology of the area is complex, the water is deep, there are strong currents and high winds and the area is a long way from existing infrastructure. Deepwater drilling is more demanding and hazardous than conventional offshore drilling, as operations take place at high pressures and extreme temperatures. Deepwater wells can take months to drill and operations are more expensive.
Investigation of the West of Shetland basins has lagged behind those in the shallower North Sea. However, in the last 10 years interest in the area has increased and more reserves have been identified. Advances in seismic techniques, deep-water drilling and subsea production technology have helped, while tax incentives for operators bringing forward undeveloped gas fields west of Shetland, announced in the 2012 Budget, have boosted activity and investment. If Scotland splits from the UK, it will retain around 90 per cent of the North Sea oil reserves and around half of the North Sea gas fields.
Squeezing the last drop
The oil and gas sector plays an important role in the UK economy, supplying nearly half of the nation's primary energy demand and paying billions in tax revenues. In June 2013 the government commissioned a review of UK offshore oil and gas prospects, led by Aberdeen oil tycoon Sir Ian Wood. His UKCS Maximising Recovery report was published in February 2014.
Wood wants "to ensure every last drop of oil is squeezed out" of the North Sea. His recommendations include developing a new shared strategy for maximising economic recovery of oil and gas for the UK, creating a new regulatory body to oversee it and getting greater collaboration within the industry.
"We need to maximise the recovery of our hydrocarbon reserves and attract investment," he said. "I see this as a watershed opportunity to ultimately reshape the regulatory environment, extend the life of the UKCS and bring at least £200bn additional value to the economy over the next 30 years."
Wood called for development of six key sector strategies: exploration, asset stewardship, regional development, infrastructure, technology and decommissioning.
One key area identified by the Wood Report is technology development and innovation. Commercial pressures dictate that industry wants quicker, smarter and sustainable methods of getting fuel safely out of the ground, but the oil and gas industry operates in a hazardous environment dealing with hazardous, combustible materials: it is risk-averse and looks for a high level of certainty. Operators are reluctant to be the first to try out a new idea.
An operator explains: "It takes quite a long time for something to break through into general use in our industry. If you get it wrong, the cost of mistakes is very, very high. There is an inbuilt conservatism in stepping out from the established norms. There is a race to be second."
The challenges of getting hydrocarbons from depleted reserves, from deeper fields and from more hostile regions bring a demand for new techniques and advanced technology.
The Industry Technology Facilitator was set up 15 years ago by 30 major operators in the sector to help introduce new technology. ITF chief executive Dr Patrick O'Brien explains the need: "Technology has always played and will continue to play a crucial role in our industry, and will no doubt significantly contribute to securing remaining North Sea reserves, [but] if we are to access close to the 24 billion barrels that are estimated to be viable, greater collaboration is needed to drive forward game-changing solutions."
Partnership plays an important role in innovation. The Oil and Gas Innovation Centre (OGIC) was set up earlier this year to create and fast-track technology solutions to help unlock new reserves and to extend the field life in the North Sea. OGIC links more than 2,300 oil and gas companies to the 12 UK universities with academic staff and researchers focused on oil and gas technologies. It will provide funding for over 100 projects in the next five years.
OGIC chair Paul de Leeuw explains: "We need to focus on getting innovation into the industry faster. It currently takes a very long time to get an idea from concept to application in the field. Other high-tech industries are much better and faster at introducing innovation. We need to learn from this."
In the past operators did much more in-house research, but as the structure of the industry changes, most of the new companies operating in the North Sea now rely more on the smaller players in the supply chain to deliver innovation.
Paul de Leeuw believes that is exactly where the opportunity lies for the OGIC and its industry partners, by leveraging "the great capability from our world class universities and other research institutes" to help innovative companies to get their technology to market faster.
ITF's O'Brien identifies some of the areas of interest. "A much bigger focus is needed on enhanced oil recovery in mature basins," he says, "particularly as most decommissioned fields typically have recovery rates of less than 50 per cent. Furthermore, we need to improve our ability to image the subsurface to find potentially hidden pockets of hydrocarbons, and we need to reduce the cost of drilling marginal developments whilst doing it in a safe manner."
As developments in technology expand the boundaries of possibility, the mature basins of the North Sea are being persuaded to gradually yield up remaining reserves.