UK economy to take oil hit in 2013 before N.Sea recovery

Sun Feb 24, 2013 7:01pm EST

Related Topics

* Oil & gas production to fall 3-6 pct in 2013 -Oil & Gas UK

* Industry body survey says output down 14 pct in 2012

* Production seen rising in the period 2014 to 2017

By Sarah Young

LONDON, Feb 25 (Reuters) - Britain's faltering economy will take another hit from declining UK North Sea oil production this year before a mini-recovery takes hold in 2014, removing a handbrake on the country's growth in the medium term.

Waning North Sea oil production has damaged attempts by Britain's coalition government to stimulate growth, weighing on the economy in 2012 and bringing the country close to a "triple-dip" recession.

But after three years of gloom, from 2014 onwards oil production could become a bright spot for the economy, with industry body Oil & Gas UK forecasting a historic pick-up in output, fuelled by a surge in investment.

A rise in production from next year would be the first since 1999, and could aid the UK economy's return to growth, helping the Conservative-led government meet budget targets and bolstering the party's chances of winning a 2015 election.

Before any recovery, however, there will be another dip. Oil and gas production will fall by between 3 and 6 percent this year, predicted the industry group in its annual activity survey published on Monday, on top of a 14 percent decline in 2012.

Falling oil production held back growth in GDP by 0.2 percentage points last year, Office of National Statistics data showed, having already acted as a drag in the previous two years, demonstrating its dampening effect on the headline figures, despite the industry's huge investments and provision of jobs and tax revenues.

"The wave of investment is coming to deliver a lot of new production in the years ahead," Oil & Gas UK's economics and commercial director Michael Tholen told Reuters.

Britain's production will rise to around 2 million barrels of oil equivalent per day by 2017, up from 1.55 million in 2012, the group forecast.

Investment in the North Sea hit 11.4 billion pounds ($17.4 billion) in 2012, its highest level for 30 years, said the group, and will rise to 13 billion pounds in 2013, continuing its increase from a 2009 trough.

New fields such as Total's Laggan-Tormore project and Nexen's Golden Eagle development will be key to helping lift production in 2014.

DARK DAYS

The last two years have been particularly bleak for the ageing North Sea province, where oil has been pumping since the 1970s. Production plunged by a third from 2010 to 2012, exceeding Oil & Gas UK's expectations of a more muted decline.

To blame was a shortage of new developments in 2008 and 2009, which started to bite into output in 2011. There was also a gas leak at Total's Elgin field which shut down around 3 percent of British output last March, and a long maintenance period on the country's biggest field, Buzzard.

Total said in January that Elgin would start pumping again within weeks, but warned that it may not reach full capacity for months or even years.

Production falls were also a result of the old age of North Sea structures. Fields have been taken offstream for unplanned maintenance on older platforms, and to check and improve structures in the wake of the Gulf of Mexico oil spill in 2010.

"There's been a massive amount more maintenance in the last few years," said Tholen.

EXPLORATION FOCUS

Maintaining the North Sea's revival beyond 2017 depends on exploration, said the survey, noting that new discoveries were not keeping pace with the reserves going into production.

Britain's part of the North Sea has in recent years been overshadowed by success in Norway, where a string of big discoveries including the Johan Sverdrup field, 2011's biggest find globally, has contrasted with smaller finds in UK waters.

"The real issue is we've been drilling fewer wells," Tholen said, explaining that a third fewer wells were drilled in the period 2009 to 2012 compared with the previous four-year period.

The survey forecast that exploration drilling would pick up this year, rising to 37 wells compared with 24 in 2012, and giving Tholen hope of more discoveries in Britain.

"We're rapidly eating into the cupboard, we need to restock it," he said, noting that Johan Sverdrup was not far from the UK-Norway maritime border.($1 = 0.6555 British pounds)

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