north sea 2013 review

December 31^th, 2013

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The North Sea's oil and gas sector underwent another eventful year in 2013 for both good and bad reasons.

This year saw more tax relief measures aimed at projects in the UK zone of the North Sea, further investment in the region by international oil and gas companies and the go-ahead given for a major heavy oil field development project east of the Shetland Islands. But 2013 also saw the tragic deaths of four oil and gas workers in a helicopter crash offshore Scotland.

Field development news during 2013 was mixed.

Statoil ASA announced in late November that the development of its Bressay oilfield, estimated by the firm to contain between 200 million and 300 million recoverable barrels of oil, would be delayed because the firm has decided that the development concept can be simplified. Statoil had previously said that first oil from Bressay would arrive during the first quarter of 2018, with the field expected to operate for 30 years.

But a positive North Sea news story in the shape of the Kraken heavy oil field development arrived earlier in November, when operator EnQuest plc said it would proceed with its development. A special government tax exemption for heavy oil developments means that EnQuest will pay no tax until 2018 on revenues from the Kraken development.

Kraken is expected to produce as much as 30,000 barrels of oil equivalent per day when it comes on stream in 2016/2017.                                                                                       

Tax relief has become very much a theme of the current UK government’s attitude to North Sea oil and gas development, and the industry welcomed news of further progress in this area in March when the UK Chancellor announced in his spring Budget guaranteed tax relief on the decommissioning of oilfields on the UK Continental Shelf.

Meanwhile, UK independent Ithaca Energy continued to make progress with its Greater Stella Area development. In October, the firm reported that the hull for its floating production facility for the development had been successfully refurbished in a Polish shipyard and that the main topsides processing plant construction and installation activities would begin.

Ithaca added that an approximately 40-mile gas export pipeline for the project has been fully installed and is ready to receive gas upon the start-up of production from the Greater Stella Area hub.

But 2013 was also a year in which investments in the Norwegian North Sea slowed down. The country’s offshore industry focused on maintaining output at currently producing North Sea fields rather than new exploration, preferring instead to concentrate exploration activity on the Barents Sea – Norway’s Arctic zone.

One area of the North Sea where Norway’s oil and gas industry was busy, however, was in Norwegian production licenses 501 and 265, where Statoil and Swedish partner Lundin Petroleum completed several appraisal wells as they continued to delineate their giant Johan Sverdrup discovery. Statoil reported in early December that, as part of the Johan Sverdrup development plan, the partners decided to land oil from the field at the Mongstad terminal north of Bergen.

First oil is expected from Johan Sverdrup in 2018.

North Sea Helicopter Crash

Very bad news arrived in the form of August's crash into the North Sea of an AS332-L2 variant of Super Puma helicopter, which killed four oil workers and led to a temporary suspension of Super Puma flights. Coming just a month after the 25th anniversary of the Piper Alpha disaster (the UK oil and gas sector’s worst ever disaster), the crash was a stark reminder of the dangers faced by offshore workers.

That the incident occurred following the return to service of another variant of Super Puma, the EC225, after its involvement in two ditching incidents during 2012 was a significant blow against the industry. Amid high emotions, one online survey of oil sector workers found 89 percent of more than 1,000 respondents wanted Super Pumas taken out of service, while Total’s UK operation even chartered boats to get some of its staff out to platforms.

In the end, the UK’s Helicopter Safety Steering Group – which is comprised of oil and gas operators, helicopter firms, trade unions and regulators – recommended lifting the temporary suspension of Super Puma flights, including those involving the AS332-L2 variant.

Another helicopter crash in Scotland at the end of November – this time involving a police helicopter that crashed into a pub in Glasgow, killing nine people – was a further reminder of August’s tragedy.

One piece of health and safety-related good news in 2013 was the resumption of production at Total’s Elgin/Franklin fields in March – almost a year after they were shut down following a major gas leak. At their peak, the two fields can produce up to 280,000 barrels of oil equivalent per day, according to Total, and they accounted for around nine percent of UK gas production when the leak was detected.

However, the positive news that the Elgin/Franklin fields had resumed production was tempered later in the year by the revelation that the incident – the worst North Sea gas leak in 20 years – had been caused by corrosive drilling fluids that could threaten similar deep-sea wells around the world. The corrosive fluids implicated in the Elgin/Franklin leak, including calcium bromide, are commonly used in deep-sea wells and experts fear a reoccurrence of the leak as operators turn to deeper, hotter and higher-pressure fields.

The Scottish Independence Question

As far as the UK North Sea’s future is concerned, the debate continues to be heated. Scottish Energy Minister Fergus Ewing told Rigzone at Houston’s Offshore Technology Conference in May that he believes that oil and gas production from the UK North Sea could carry on until the end of the century. He cited the Clair Ridge project – BP’s extension of the Clair field that is designed to keep that field producing oil until 2055 – as evidence of the North Sea’s future longevity.

But by the end of the year there were arguments among politicians and the UK’s oil and gas industry itself concerning the North Sea’s production potential over the very near term. In early December the UK’s Office of Budget Responsibility (OBR) reduced its forecast for North Sea tax revenues in the 2013-2014 fiscal year by approximately $2.8 billion to $8.2 billion, stating that these revenues are set to fall further to $5.7 billion in 2016-2017.

Scottish Nationalists, as well as trade body Oil & Gas UK, disputed the OBR’s projections. Scottish Finance Secretary John Swinney said that the OBR oil forecasts “are simply not consistent with industry expectations for production or current price trends” while Oil & Gas UK Chief Executive Malcolm Webb said that his organization “takes a less pessimistic view”, foreseeing an upturn in production beginning in 2015.

However, UK Shadow Energy Minister Tom Greatrex said that the Scottish National Party “has characteristically and cynically inflated figures for future oil and gas revenues in pursuit of their objective of Scotland separating from the rest of the UK”.

The dispute suggests that any debate about the future of the North Sea during 2014 will be very much connected to the question of Scottish independence – a referendum vote on which will occur Sept. 18, 2014.

One company that showed its confidence in the North Sea’s continuing future as a hydrocarbon-producing region during 2013 was Austria’s OMV. In August, the firm paid $2.7 billion for a bundle of producing assets from Statoil as well as options over 11 exploration licenses. This was only weeks after OMV announced a major recruitment drive in which the firm plans to take on an additional 1,600 technical staff by 2016 as it boosts its activities in both the North Sea and Black Sea.