UK: Back To The Future - Exploring The Options For The 21st Century North Sea

Last Updated: 2 May 2007
Article by Deloitte Energy & Resources Group

Most Read Contributor in UK, August 2017

"A new breed of low cost operators had begun to move in and take on this ageing asset base which was failing to attract the level of investment required to sustain production."

A few years ago, many thought the North Sea to be in terminal decline – at least from the point of view of the Supermajors as they looked to manage their exit from the North Sea. A new breed of low cost operators had begun to move in and take on this ageing asset base which was failing to attract the level of investment required to sustain production. Never was this more visible than when BP sold their iconic operating stake in the Forties field to Apache for $1.3b in early 2003.

Quite simply, BP would not, or could not, extract the value remaining in a field that was producing a fraction of its peak 20 years ago when the economics needed to be assessed against a global portfolio of opportunities, all vying for the same finite capex investment. BP’s sale of Forties to Apache in 2003 was seen as an important statement of intent, and the start of a Supermajors exodus from the North Sea. Apache successfully increased production to near 2000 levels, and a new era of low-cost North Sea operations seemed inevitable.

Forties production

But what a difference a few years makes. At $45-$70/bbl, not only do previously marginal fields become economic (take Clair, discovered in 1977, but first began production in 2005), but application of new technologies to enhance reserve recoveries also becomes an attractive proposition. Broadly speaking, only half of the North Sea’s oil has been recovered, and the Supermajors are re-engaged to extract as much of the remaining hydrocarbons as possible. Both BP and Shell are building new offices in Aberdeen, and the message is very much that they are here to stay.

On the face of it, the Supermajors have a huge advantage; they operate most of the North Sea, so are best placed to make the most of enhanced reserves recovery, and they also own and control most of the infrastructure required to tie-in new smaller discoveries.

Exploring the options in the 21st century North Sea However, on the flip side, they face a number of major operational challenges:

  • As the Forties experience shows, operating an end-of-life asset requires different skills and mindset;
  • The North Sea businesses still need to compete for capital against developing areas around the globe;
  • The Supermajors’ business processes are set up to identify, evaluate and execute a small number of large opportunities, rather than to do the same for a large number of small opportunities; and
  • Availability of appropriate specialised skills is limited, so accessing and managing talent has become increasingly critical.
Capabilities to exploit the 21st century North Sea

There’s no doubt that the mature North Sea environment demands safe and highly efficient operations. The Digital Oilfield is making it easier to optimise the whole process from reservoir evaluation through to drilling and production operations. But to make the most of this technology, data infrastructure must be in place, the organisation must be able to deal with remotely supported or even remotely controlled operations, and the capabilities and working styles of the workforce may need to be radically different. A strong and devolved decision-making structure is needed, with a renewed focus on collaborative rather than solo working. As well as up-skilling the workforce technologically, the ethos that the 21st century North Sea Supermajor will expect will be very different, and the transition to this working style may be difficult for some people.

Competing for capital

The rise in the oil price in recent years does mean that there is generally more capital available for field investment, but the mature North Sea must still compete with other potentially more attractive opportunities around the world. The Capex available is certainly not unconstrained, yet the return of capital to shareholders happening across the industry suggests that there are not enough projects to invest in with the required returns. This means that despite an oil price several times higher than the historical lows of recent times and the consequential high returns associated with the industry, the focus on keeping costs under control, and minimising development and lifting costs has never been higher. To succeed in the 21st century, the North Sea business of the typical Supermajor needs to be leaner and meaner than ever before.

Adapting business processes

Traditionally, the typical Supermajor has relied on a small number of large oil fields to provide the mainstay of its operations. However, it is likely that there are no more Brents, Forties or Ninians waiting to be discovered in the North Sea, and the Supermajors, like their smaller lower-cost competitors, will see their portfolio change to a larger number of smaller accumulations. Business process priorities will continue to change to respond to this new environment.

"workforce technologically, the ethos that the 21st century North Sea Supermajor will expect will be very different, and the transition to this working style may be difficult for some people."

Access to talent

During the nineties, recruitment into the industry fell away – largely due to the low oil price, and certainly not helped by a sharp drop in the perceived attractiveness of working in both the engineering sector and the oil industry specifically. While the large oil companies could historically have had the pick of the graduate population, the number of students studying relevant disciplines has dropped sharply, and the cream of the crop are now being tempted by competition from "sexier" industries, such as advertising and media. For the Supermajor of the 21st Century, recruiting to meet the demands of the business is not a sufficient option. The question is how to retain and make best use of the limited talent available.

In conclusion

In the simplest of terms, the higher price oil environment has given the North Sea a new lease of life, and the Supermajors are understandably keen to capitalise on their dominant position in terms of both licensed acreage and subsea infrastructure. However, given the global portfolio of development opportunities, and a limited (although nonetheless increased) Capex budget, in many ways it is more difficult for the Supermajors to survive in the North Sea than the small independents who don’t have the same portfolio of options. They will need to focus on becoming more efficient through leaner processes, better use of technology, and smarter deployment of people. The alternative may be a faster withdrawal from the North Sea sector than the price of oil might imply.

Why Deloitte?

Our oil and gas group, which includes experienced practitioners from around the world, provides comprehensive, integrated solutions to the sector. These solutions address the range of challenges facing energy companies as they adapt to a changing regulatory environment, to political, economic, and market pressure, and to technological development. Our indepth expertise in this dynamic sector serves as an indispensable resource for a significant proportion of the world’s energy companies. Our goal is to provide the energy industry with unparalleled service, innovation and critical thinking.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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