North Sea production falls – and looks set to continue its decline

THE North Sea oil and gas industry was last year hit by its biggest ever fall in production with another slide in output forecast for 2012.

A further fall would be a blow to the UK government as lower oil and gas production took its toll on industrial output in the first three months of the year, and was one of the reasons why the economy entered “double-dip” territory.

Industry figures yesterday revealed that output plunged by 19 per cent in 2011 to 656 million barrels of oil equivalent (boe) – half the rate of production in 2005. It equates to some 1.8 million barrels per day, according to Oil & Gas UK’s latest economic report.

The fall in production has been primarily blamed on a combination of platform shutdowns to address safety and maintenance issues with ageing infrastructure, and a slowdown in bringing new fields on stream.

Industry leaders warned yesterday that production is again struggling this year and could fall further.

Mike Tholen, the economics director of Oil & Gas UK, admitted that 2011 had been an “exceptionally bad” year for production but he stressed that the industry body was already engaged closely with government officials to identify ways of increasing exploration activity and to ultimately bring new reserves on stream.

The trade body was more positive on the outlook for 2013, although it did not give a specific forecast, as its research showed healthy investment in the North Sea.

The impact of the recent declines has been felt by the UK economy as a whole and the government was forced to reduce its forecast of tax receipts from the UK continental shelf (UKCS) by £2.2 billion – despite prices peaking at $127 a barrel last May during the Arab Spring uprisings.

Tholen said: “There are a lot of new barrels coming on stream in due course. Last year, investment led to 1.7 billion barrels of new developments being initiated and these will come on over time.

“But the first quarter of 2012 still reflects a downward trend so there is a lot to do to shore up the production base.”

He added: “There is something like £1 trillion worth of opportunities in the North Sea still to be developed and brought into production. It’s a massive prize and it will decades to deliver.”

The report showed that, despite the fall, production from the UKCS still met 68 per cent of Britain’s oil demand and 58 per cent of its gas needs, boosting the balance of payments by some £40bn.

There was also a fall of 19 per cent last year in the number of wells drilled compared with 2010. A total of 122 development wells were drilled (down 6 per cent); 14 exploration wells (down 50 per cent); and 28 appraisal wells (down 18 per cent).

The report states: “Part of the fall in drilling activity can be attributed to the unexpected increase in the supplementary charge on corporation tax from 20 per cent to 32 per cent in 2011’s Budget. “Exploration drilling is expected to pick up in 2012 with 64 exploration and appraisal wells forecast, although only 40 of those are firmly committed.”

The findings also highlighted the oil and gas industry’s contribution to the UK economy, estimating that the North Sea supports about 440,000 jobs – the same figure cited the year before.