Threat to North Sea oil from low crude price and access to finance

Nov 06, 2008 01:00 AM

by Robin Pagnamenta

Billions of pounds of investment in the North Sea is under threat because of plunging crude prices, the impact of the credit crunch and soaring costs, oil industry chiefs said. Of the 170 new oil and gas exploration projects planned for the UK sector of the North Sea, up to 60 could be delayed indefinitely because they are no longer considered economic, Mike Tholen, economics and commercial director of Oil & Gas UK, said.
"Around a third of these E&P [Gas Exploration and Production] projects feel very uncomfortable at current oil prices," he said. "Where projects are marginal people will bide their time."

He predicted capital investment in the North Sea, including the development of new oil and gas fields and the drilling of appraisal wells, would plunge next year. Weaker crude prices, which have more than halved since July and were about $ 69 ( AW: $ 45 by now), are forcing companies to reassess important new projects while many have been left unable to access debt finance because of the credit squeeze. The problem has been amplified because oil industry costs remain high despite the economic downturn.
Mr Tholen said capital investment in the North Sea, where development costs are relatively high because of the hostile offshore environment, was already set to fall by 11 % this year to £ 4.7 bn (EUR 5.4 bn) from £ 5.3 bn (EUR 6.1 bn) in 2007. But he said the decline next year could be much steeper than that.

"I think people are going to need to be very careful about their decisions and their timing," said Frank Chapman, BG Group chief executive.
Oilexco, a mid-sized oil group with a dual listing in Toronto and London, said in October that it was struggling to raise finance because of the credit crunch. And it is the smaller, more marginal projects designed to access relatively small accumulations of oil and gas which face the biggest threat, said Mr Tholen.

The bigger developments are easier to justify economically if they can guarantee higher production levels for longer periods of time.
"I think there will be an abrupt cessation of activity in the North Sea," said David Thomas, chief executive of Melrose Resources, an Edinburgh oil group, said: "It's not just the oil price but the access to finance."

The situation echoes decisions by Shell and BG, to put the brakes on big projects such as expansions of the Canadian oil sands and the Karachaganak field in Kazakhstan.
Oil & Gas UK said the poor investment outlook was particularly worrying as existing infrastructure serving the North Sea, such as pipelines and platforms, has limited life before it is decommissioned.

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