North Sea gets huge boost with Culzean gas field

At it's peak, the Culzean field will generate 5 per cent of the total UK supply. Picture: PA

About quarter of a billion barrels of oil equivalent are believed to be located in the Culzean field east of Aberdeen. It is expected to create more than 400 jobs – and support a further 6,000 UK wide.

The announcement provides some welcome respite for Scotland’s flagship North Sea industry, which has been left reeling from thousands of lay-offs in recent months as global oil prices have nosedived.

But the SNP government in Scotland is warning the problems in the sector may not be over without action to help boost dwindling exploration levels.

At peak production in 2020-21, the Culzean field is expected to produce enough gas to meet half of Scotland’s gas needs.

Chancellor George Osborne welcomed the news on a visit to Scotland yesterday, insisting the decision by the UK Oil & Gas Authority to approve exploitation of Culzean is a “clear signal that the North Sea is open for business”.

“Already the UK’s oil and gas industry supports hundreds of thousands of jobs across the country and this £3 billion investment comes on the back of massive government support for the sector,” the Chancellor added.

“Despite challenging times, this government has backed the oil and gas industry at every turn, introducing a vital package of support to help it to protect and create jobs.”

The field was discovered in 2008 and, with an estimated reserve of 250-300 million barrels of oil equivalent, it is described by Danish operator Maersk as the largest gas field sanctioned for exploitation since East Brae in 1990. Gas is expected to started flowing from the development in 2019 and continue for at least 13 years, with peak production of 60,000-90,000 barrels per day, Maersk Oil said.

Maersk Oil said the project is expected to support an estimated 6,000 UK jobs and create more than 400 direct jobs.

The oil and gas industry is worth £35bn annually to the UK economy, but it has been reeling after a crash in global prices saw them fall from more than $100 a barrel a year ago to less than half that figure.

This has resulted in thousands of job lay-offs and cuts to pay and conditions from oil firms. Just last week, Maersk unveiled plans to axe up to 200 jobs by halting production on its Janice installation in the second half of next year.

Aberdeen-based oil services giant the Wood Group revealed last month it has cut about 1,000 UK jobs – about 10 per cent of its UK workforce – as a result of the impact of the oil price crash and a Scottish Parliament report suggested the current crisis could see 15,000 jobs axed out of the 200,000 posts based north of the Border.

Scotland’s energy minister, Fergus Ewing, said the development brings “welcome investment, jobs and supply chain opportunities”.

He added: “As the largest new field in a decade, it also demonstrates that there remain considerable opportunities to extend production for decades to come.”

But Mr Ewing demanded UK government action to encourage firms to search for further oil and gas finds in the North Sea. It follows a keynote report by oil and gas tycoon Sir Ian Wood last year which said this would be crucial to secure the future of the North Sea.

Mr Ewing added: “It is vital that the Chancellor urgently consults on measures which support exploration – a commitment that the UK government made in December 2014 but have yet to deliver.

“The benefits from exploration not only boost future production, but will also be felt across the supply-chain and the wider economy.”

Last year, North Sea exploration reached its lowest level in at least two decades, with only 14 explorations wells drilled, compared to 44 in 2008.

The Scottish Government is now demanding an overhaul of the regulatory and fiscal regimes in the North Sea which would provide greater tax breaks for firm and make it economically viable for them to invest in further exploration.

Mr Ewing added: “We are extremely concerned that, as reported this weekend, there are a large number of fields which may be forced to stop production prematurely – when there is a great deal of oil and or gas to be extracted. Since both the UK and Scotland have objectives to maximise recovery, the premature cessation of production could be one of the most costly policy failures in the UK government’s history due to the potential loss of future tax revenue.”

Jakob Thomasen, chief executive of Maersk Oil, said the announcement will “support UK economic growth.”.

He added: “Culzean is the latest in a series of large investments by Maersk Oil in the North Sea where we are active in Denmark, Norway and the UK – reflecting our commitment to the future of the region.”

Oil & Gas UK’s chief executive, Deirdre Michie added that UK demand for oil and gas is likely to remain unchanged until 2030 at least.

She added: “This investment by Maersk Oil in this technically demanding high pressure high temperature field is very encouraging at this challenging time for the industry and reinforces the fact that the UK Continental Shelf continues to have much to offer.”

Labour’s Lewis Macdonald MSP added: “This is welcome news for the North-east and for the whole of Scotland and shows that the industry still has confidence to invest in new projects in the North Sea.

“There are still issues that need to be addressed in the industry and Scottish Labour will continue to call for as much support as possible from both the UK and Scottish Governments to keep skilled jobs from the oil and gas industry in Scotland.”

ANALYSIS

David Bell: Playing the long game and waiting for the price of oil to start climbing again in the years ahead

GOOD news stories about the North Sea have been hard to find for the last year. So yesterday’s announcement of the development of the Culzean gasfield in the central North Sea has come as a welcome relief.

It is scheduled to provide around 5 per cent of total UK demand for gas from when it comes on stream around 2020-21 and is expected to remain in production for at least

13 years. The size of the field is estimated at the equivalent of 250-300 million barrels of oil equivalent. It is expected to create around 400 jobs directly and support a further 6,000.

There is potential for further discoveries nearby which could significantly extend the life of the field. The development of technologies to deal with the high pressures and high temperatures that are needed to exploit this discovery are likely to provide spin-off benefits elsewhere. The field is being developed by the energy division of the Danish conglomerate, Maersk, along with JX Nippon and BP. The total investment needed to bring the field into production will be around

£3 billion.

The tax breaks announced in the budget have played a significant role in the decision to go ahead with the investment. These are expected to save the North Sea oil and gas industry around £1.3 billion in the period to 2019-20. Nevertheless, with the price of oil languishing at around $50 per barrel, many existing North Sea fields are uneconomic. Production has fallen to less than a third of its peak of 4.5 million barrels of oil equivalent a day around

15 years ago.

World gas supplies have been boosted by the massive expansion of the US fracking industry. Due to the growing expertise of the industry in extracting natural gas from shale deposits, US stock levels are likely to reach a record high of around 4 trillion cubic ft this autumn. The development of shale gas extraction has been a key element in the downward pressure on oil and gas prices in the last year.

This pressure will only be increased by these burgeoning stocks. Presumably Maersk are playing the long game and counting for a return to significantly higher prices by the time that the Culzean field comes on stream.

• David Bell is professor of economics at Stirling University