Peter Jones: The truth about oil? Nobody knows

The cost of getting a barrel of oil out of the North Sea had rocketed to 17 pounds in 2013. Picture: Getty
The cost of getting a barrel of oil out of the North Sea had rocketed to 17 pounds in 2013. Picture: Getty
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SCOTTISH INDEPENDENCE: Forget all the estimates about the reserves left in the North Sea; it’s nearly impossible to predict, writes Peter Jones

So, how much ruddy oil is out there under Scottish waters? In one very real sense, the answer to that question doesn’t matter a whole lot. For the important question is this: how much more oil can be extracted at a profit? And to that question, anybody who tells you that they know the answer is a liar.

Moreover, there are umpteen reasons why it is stupid to confidently assert that 24 billion barrels of oil will be produced from Scottish waters over the next 30 years. They won’t be.

Try substituting the word “gold” for oil. How much gold is there in Scotland’s mountains? There may be tonnes of gold out there. But as we know from the long-running efforts to get a gold mine working near Tyndrum, it is so thinly spread that getting it out involves too much work crushing rock and sifting through the debris for it to be profitable unless the gold price is at record levels. And that’s without considering whether the environmental damage is worth it.

Something of the same applies to oil. Read through the regular reports published by Oil & Gas UK, the offshore industry’s trade and lobbying body, and, sure, you will find that it estimates that there are 16-24 billion barrels of oil equivalent still to be produced.

Let’s set aside the fact that between three and nine billion barrels of the black stuff in this estimate has not yet been discovered, and move on to the fact that the estimate covers all UK waters. That includes the Irish Sea and the Southern North Sea, which are not Scottish. So you have to take off about 10 per cent of the total, which takes you down to about 21.6 billion barrels at the upper end.

Secondly, note that word “equivalent”. It means some of what they are talking about is not oil, but gas. In 2013, according to Scottish Government statistics, total UK hydrocarbon production was 77 million tonnes, of which Scotland’s share was 58 million tonnes, or 75 per cent. The Scottish 58 million tonnes breaks down, according to the statistics, into 42 million tonnes of oil and natural gas liquids and 16 million tonnes of gas. So, in volume terms, gas is 38 per cent of the total.

But gas is roughly half the price of oil. And since what we are ultimately interested in is figuring out what tax revenue the remaining resource might yield, we need to make an allowance for some of these barrels of oil equivalent being gas. Gas production is declining a bit faster than oil production, so a reasonable assumption, allowing for it dwindling to about 20 per cent of total production to come, is that 30 per cent of what is still to be produced is gas.

That brings you down, in value terms, to there being 18.6 billion barrels of oil value equivalent to come from Scottish waters. That is still quite an impressive total. But it is stupid to think that this is guaranteed to come out.

Read through the 2014 Oil & Gas UK activity report, and you soon see why. It says: “Whilst there are over ten billion barrels of oil equivalent currently in company plans, four billion boe of these have yet to secure investment.

“Improving recovery from existing fields and an active exploration programme to find new resources has the potential to add at least another ten billion boe, but none of this will be easy. The UKCS [UK Continental Shelf] still holds significant potential – but only if the business conditions for investment in exploration, appraisal and development are right.”

And what does the report say about those business conditions? It is distinctly gloomy about “conditions for investment in exploration”, saying: “This year, 25 exploration wells are planned, which still falls far below the 44 drilled just six years ago, and even if all the wells proceed, the rate of drilling is too low to recover even a fraction of the potential resources.”

Too low to recover “even a fraction”? That doesn’t sound like an industry brimming with confidence that 24 billion barrels will be produced. Such exploration as there has been has had pitiful results lately – discoveries of 80 million barrels in 2013 and only 20 million in 2012.

No wonder confidence levels, as measured by an Oil & Gas UK industry survey, have steadily dropped over the past few years to be at their lowest level since 2009. That was when oil prices averaged $62/barrel over the year. But now they are about $100/barrel.

Prices up, confidence down; what’s going on? In two words – rocketing costs. In 2012, it cost £13.50 on average to get a barrel of oil out of the North Sea, but by 2013 this had gone up to £17. The number of fields where costs now average above £30/barrel extracted has doubled. “This is unsustainable,” says the industry activity report. Taxes, too, have gone up since 2009, hiked in 2010 so we could pay less for our car fuel. This is not only a reason that confidence levels have dropped but also a pointer to the increasing likelihood that taxes are going to have to be cut if we are going to get anywhere near those 18.6 billion barrels of oil value equivalent.

Finally, note that in the past month, the Brent Crude price has ranged between $101 and $107/barrel, while the spot price dipped to $99/barrel on 18 August. Note also that these prices are in US dollars and, again in the last month, the exchange rate has varied between $1.55 and $1.71 to the pound. That means a producer lucky enough to sell oil when the price was at its highest and the pound at its lowest would have got about 15 per cent more for their barrels than someone selling at the wrong time.

That unpredictability of final value on top of rising costs is why the business mind of Sir Ian Wood, after a lifetime in the industry, thinks we will be doing well to get another 16.5 billion barrels out. Put the known facts set out above together with business logic, and that’s what you get.

Things might change, new big cost-cutting technologies might appear, and some hitherto unknown giant oilfield might be discovered. But to bet on that looks stupid.