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North Sea rig closures may hit UK oil output

London, August 23, 2014

Britain's oil industry is facing the threat of a cascade of North Sea rig closures, unless ageing platforms can urgently source more gas to help squeeze out the remaining barrels, said experts.

The potential threat to oil revenues looms as Scotland prepares to vote in September's independence referendum, a debate in which oil production forecasts have become a political football.

The affected Northern North Sea (NNS) is a very mature part of the basin where producers are trapped in a vicious circle of falling output, rising costs to patch up ageing platforms, and dwindling power supplies.

To lift more oil from these depleted reservoirs, producers need to inject vast quantities of water, a power intensive process that requires a reliable source of energy, known as fuel gas.

Some platforms are not able to generate enough of their own fuel so have to try and import the shortfall from neighbours, but the overall net position in a key part of the NNS will go negative as early as 2016. This could force the early abandonment of rigs, with the loss of critical platform hubs sounding the death knell for dependent fields.

'We may be near a production efficiency precipice,' Taqa Bratani economics and joint venture manager Calum McGregor told Oil and Gas UK's Aberdeen conference earlier this summer. 'Because of the interconnected nature of this area, there is a domino effect that kicks in.'

McGregor presented findings from a cross-operator work group he co-chairs which seeks to improve co-operation amongst producers focused on the NNS 'Rejuvenation Area'. This includes Taqa's Cormorant and BP's Magnus hubs, which will leave the most stranded assets if they shut down early.

The fall in production efficiency means that time is running out. The NNS Rejuvenation Area is now producing at just seven per cent of its peak, compared with 29pc for the UK Continental Shelf as a whole.

To arrest this decline, producers need to lay their hands on fresh power supplies. Under government auspices, a Gas Work Group is looking at ways to source, transport and deliver reliable fuel gas. It is due to report back by the end of October.

Possible solutions include installing a power ring main, rationalising power generation equipment, bringing fuel gas in by tanker, sacrificial decommissioning and new pipelines.

'We've got to get this fixed, a very small amount of gas could make a lot of difference to this area,' McGregor said. 'If you can improve water injection then it delivers a significant incremental uptick in barrels.'

Currently, small producers trying to access gas find it difficult because there is not much upside for the seller.

'An individual platform doesn't need large volumes of gas for fuel, especially when you can couple it with your own production, so that means you are immaterial to the operator,' said Ian Sharp, chief operating officer at Fairfield Energy, also speaking at the Aberdeen conference.

Producers say the terms on which they are offered gas can be unhelpful. Sellers may offer to make 'reasonable endeavours' to supply another platform, but if they fail to deliver, there is no penalty to pay.

'You can't always rely on the gas and power supply, even if you persuade people to sell it to you,' one engineer said.

'Reasonable endeavours means it could be turned off when they like and even an hour's outage every three weeks can hinder your production.'

As output has declined in the NNS, platforms have become increasingly dependent on each other for fuel gas supplies and to spread fixed costs. The leveraging effect of any one party withdrawing is getting bigger as margins are squeezed.

Sharp described a downward 'death spiral' where less power leads to lower water injection, so production falls and there is less fuel gas for water injection. Eventually the platform becomes uneconomic and has to cease production.

He added that the Rejuve­nation group was now turning to the specifics of creating an effective fuel gas market. 'But there's not a lot of time to ensure we have safety in fuel gas supply before we see a downward spiral.'

Any solution will require producers and operators to work collaboratively rather than competitively '“ a sea change from the way the UK basin was developed, but something that is seen as vital to securing the future of the NNS.-Reuters




Tags: Oil | UK | North Sea | Rig |

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