north sea on track for new oil boom

http://www.theaustralian.news.com.au/story/0,25197,23817245-5005200,00.html

North Sea on track for new oil boom

Angela Jameson | June 06, 2008

THE North Sea could be on the verge of a second boom as companies search for new sources of oil and gas to take advantage of record prices.

The popular view is that Britain's share of the North Sea is in decline, with energy reserves diminishing rapidly about 35 years after the oilfields were first exploited.

However, there is a growing body of opinion that suggests that proven oil reserves have long been underestimated.

Since the discovery of oil in the North Sea, the equivalent of 37 billion barrels of oil have been extracted from Britain's Continental Shelf, leaving up to 25.5billion barrels still to be recovered. However, industry experts believe that the remaining reserves exceed current estimates by as much as a fifth.

New technology and the rising price of oil mean that it is now economically viable to drill fields once considered too difficult or too remote.

Richard Pike, chief executive of the Royal Society of Chemistry, argued in Petroleum Review this month that true proven reserves for the world might be nearly twice the conventional figure. Mr Pike said that the current industry practice of reporting proven reserves alone was purely an historic convention that bore little relevance to what was actually produced.

There are many reasons why companies like to be conservative in reporting oil reserves, not least because it helps to maintain a high oil price. When Shell had to cut estimates by one fifth in 2004, it had a devastating impact on the company's share price and cost the members of the senior management team their jobs.

There are also concerns that if reserves are played up, politicians immediately set about calculating how much money they can get out of the oil companies.

But there is growing evidence to show that the proven reserves in the North Sea's oldest fields are, in fact, rising. Professor Peter Odell, of Erasmus University in the Netherlands, believes that supplies of oil will flow for decades to come and that there will be new finds in parts of Britain's Continental Shelf that have never been examined in any depth.

This view would appear to be supported by the announcement last month by Dana Petroleum, an independent British company, that it had found a new oilfield in the North Sea at West Rinnes. The suggestion that the North Sea could harbour more oil than was previously forecast will cheer the Government, which made a surprise change last week to North Sea taxes, designed to boost falling investment levels in Britain's Continental Shelf.

Investment in the shelf dropped by pound stg. 1 billion ($2 billion) in real terms to pound stg. 4.9 billion last year but much of the investment is coming from new entrants that are smaller and more dynamic than the behemoths of Shell and BP. Smaller companies with lower overheads are prepared to go after smaller pockets of oil, knowing that they can still make a decent profit.

Five years ago BP sold the Forties field to Apache Corp.

Since then Texas-based Apache has spent $US2 billion ($2.1 billion) on the field and has fundamentally re-evaluated how much oil still exists.

At the time it was sold, the Forties Field was showing its age and had pre-developed reserves of about 150 million barrels. Last year Apache reported pre-developed reserves of 200 million barrels. New technology, including better drilling techniques, means fields once considered exhausted are now worth a second look.

Talisman Energy, which also operates in the North Sea, said it was now drilling wells that it could not five to 10 years ago.

Oilexco, a Canadian oil exploration company, drilled 39 out of 140 exploration and appraisal wells in the North Sea last year, despite the rising costs of drilling rigs and equipment.

Oil & Gas UK, the industry lobby, is typically reluctant to shout about this possibility. Mike Tholen, its economics director, said: "Oil & Gas UK estimates that up to 26 billion barrels of oil and gas remain to be recovered from the North Sea but none of these volumes will be easy to recover. Securing investment to develop and extract them relies on international investors perceiving the UK as a competitive place to do business."

While the debate about the level of reserves continues, the fact is that oil and gas output from the North Sea has been falling by about 3 per cent a year since 2006, to 2.8 million barrels per day last year.

However much higher the price of oil climbs, the North Sea must still compete for investment with many other cheaper locations in the world.