October 20, 2009 / 12:19 AM / 9 years ago

British economy between a rig and a hard place

SHEARWATER PLATFORM, NORTH SEA (Reuters) - Oil rigs dot the horizon, while above, an orange ball of fire gushes from the flame tower, reddening the cheeks of people standing on the helideck.

The Shearwater platform is seen beside the Safe Scandinavia, an accommodation barge for 500 workers conducting maintenance on the Shearwater platform, in this handout photograph taken on September 30, 2009, and received in London October 7, 2009. REUTERS/Ken Taylor/Royal Dutch Shell/Handout

“We’re coming out of a shutdown for maintenance. We need to flare the gas until we’re back to online,” shouts installation manager Jim Cook above the roar of the blaze and the hum of the power turbines below.

“Then we’ll be doing over 80,000 barrels per day.”

Flaring up for Britain’s economy is the prospect of an end to North Sea oil and gas, with no clear replacement.

Weak oil prices, rising costs, and very narrow fiscal leeway to offer oil majors tax incentives are encouraging some to quit just as Britain struggles to recover from financial meltdown.

“As oil revenues were going down, City revenues were going to take their place, but then all of a sudden City revenues have disappeared,” said John Curtice, politics professor at Strathclyde University.

“It’s part of the backdrop to the financial crisis — we have to find other sources of revenue.”

North Sea oil and gas revenues originally came when Britain’s economy was in such straits the government turned to the IMF for a loan in 1976: they funded the country’s economic restructuring under Margaret Thatcher.

By most predictions at the time, the North Sea should have stopped pumping a decade ago. It still pays more to government coffers than any industry including financial services.

Now oil executives say failure to provide incentives could mean the industry winds down in a decade or so, rather than deliver the 30 years of significant production its 25 billion barrels of remaining recoverable reserves is capable of.

“If we don’t get certain allowances ... we might have to consider what we might do or not do,” Christophe de Margerie, Chief Executive of Total, told a conference in Aberdeen last month.

Such comments may be routine in the game between oil companies and governments, but with Britain’s budget deficit expected to top 12 percent of GDP this year alone, there is very little wiggle-room.

Strathclyde University’s Curtice said there is little policy difference on the North Sea between the ruling Labour Party and the main opposition Conservatives, tipped to win an election due by next June.

“The Conservatives are not offering to cut the rate of taxation on the North Sea,” he said. “Nobody could afford to.”

Already down 44 percent from its 1999 peak, North Sea output could be further hampered by measures to cut carbon dioxide emissions in a new climate treaty in Copenhagen in December.

The added costs could prompt companies to leave a billion barrels of resources in the ground that would otherwise be extracted, says industry lobby Oil and Gas UK.

INFLATION

Shearwater sits in 90 meters of water on four steel legs, with a smaller adjacent platform housing the wellheads. Its main topside is nine storeys tall, can accommodate 93 workers and weighs as much as two large naval destroyers.

The facility cost over 850 million pounds ($1.35 billion) to build and came onstream in 2000. It would cost twice that figure to build now, a measure of industry inflation.

“We’re five facilities rolled into one. We’re a production platform, a refinery, an export terminal, a power generator and a hotel,” Cook said, standing with just a steel grid separating him from the North Sea, swirling 100 feet below.

The industry’s operating costs have also risen. Billions have been spent to improve safety, and labor has gone up. A dearth of qualified workers, partly due to staff cuts in the late 1990s when oil fell below $10/barrel, forced up wages.

Starting salaries for a newly qualified technician range from 40,000-46,000 pounds — around twice the average UK wage.

“I would recommend (the work) to my friends,” said Asia Hutchinson, a slight 19-year old in the final year of her training program, preparing to leave the accommodation module to work in the noisy jungle of pipes outside.

Rising costs are not unique to the North Sea, but in other regions they are offset by the potential for big discoveries.

Oil men say high taxation is another reason North Sea investment has fallen to 4.8 billion pounds in 2008 from 6 billion in 2006: older fields are taxed at up to 75 percent while most others pay 50 percent.

Norway — which has around three times the UK’s recoverable reserves in its side of the North Sea — levies around 70 percent, but offers offsets encouraging companies to channel profits into new exploration.

Countries such as Russia and Nigeria extract tougher fiscal terms but also offer richer hydrocarbon prospects, they say.

“There is an under-appreciation of the industry in the country,” said John Gallagher, head of Royal Dutch Shell’s UK oil production unit, which operates Shearwater.

A parliamentary committee in June called for tax breaks in a report that said prospects for investment were “bleak” and 50,000 jobs were at risk. The government rejected the call.

Some oil majors are already selling North Sea assets to European utilities and companies backed by sovereign wealth funds. The new investors are responsible for about 10 percent of North Sea oil and gas — almost double their output 18 months ago — with investments growing quickly.

The surge in oil prices in the past decade to a peak of nearly $150/bbl in July 2008, before falling to around $80/bbl now, has helped keep the North Sea alive. It pumps 2.5 million barrels of oil equivalent of oil and gas per day currently.

New projects need crude prices to be at $50/barrel to break even, says Oil and Gas UK.

While London-based BP last month announced a billion-barrel find in the Gulf of Mexico, average North Sea finds have shrunk to 20 million barrels and are only economic because the infrastructure is already there.

“There are plans to get around 10 billion barrels out but the other 15 billion barrels is in play,” said Malcolm Webb, Chief Executive of Oil and Gas UK.

CARBON CAPTURE

In the early 1980s, taxes from the industry contributed around 10 percent of government revenues and boosted a flagging pound, said Professor Alex Kemp of the University of Aberdeen.

“In the 1950s and 1960s, we ran huge foreign deficits but when the oil came onstream our balance of payments was transformed,” said Kemp, author of “The Official History of North Sea Oil and Gas.”

North Sea assets saved western oil majors including Shell and BP from shrinking to bit-players in the 1970s after they lost their richest-producing assets when governments in Saudi Arabia, Kuwait, Iran and Iraq nationalized their oil industries.

The harsh climactic and geological conditions forced them to develop technology that gave them an edge when, as easy fields ran dry, countries sought to exploit more difficult reservoirs.

North Sea expertise is a key reason Russia has invited majors to help develop Arctic reserves, in spite of the Kremlin’s policy of reserving big fields for state-controlled companies like Gazprom.

Against this backdrop, another agenda item for the Copenhagen talks that politicians have touted as potentially supporting the North Sea is a plan to create incentives to encourage carbon dioxide capture and storage (CCS).

Slideshow (2 Images)

Field owners would receive a fee for pumping carbon dioxide into their reservoirs and the gas could even prolong field life by flushing out more hydrocarbons.

Analysts caution that CCS technology is unproven and incentives agreed in Copenhagen may not be sufficient to cover the costs involved: a few industrial-scale projects are in operation including in Norway, Canada and Algeria, but none tests all parts of the capture process.

“We are determined to go as far and as fast as we possibly can with CCS,” British Energy Secretary Ed Miliband said last week.

Additional reporting by Christopher Johnson, Peter Griffiths and Daniel Fineren in London and Wojciech Moskwa in Oslo; editing by Barbara Lewis and Sara Ledwith

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