Cost Control Key to North Sea Production Growth
Gregory DL Morris
Friday Oct 13, 2017  

The North Sea is back. Again. Having already been written off once in the 80s and survived, North Sea production is now seen to be recovering even in the Era of Shale thanks to the lower cost structures brought by independent operators. Those were part of the assessments presented by S&P Global Platts at the firm’s annual client conference in New York Oct. 12.

“It is always tough for the majors to make non-shale projects make money,” said Mark Schwartz, managing director of scenario planning and analytics at S&P Global Platts. “It is just difficult for the big companies. But we are starting to hear anecdotes of significant cost savings by independents, particularly in the North Sea. Over the past two or three years the biggest downshift in costs has been in shales. But it is quite possible that the biggest downshift in costs we hear about in the next two or three years could be in the North Sea.”

Schwartz recalled that when the price of oil collapsed in 1986 “everyone said ‘that’s it for the North Sea.’ But the operators sent their engineers to the drawing board and they found ways to find and produce more cheaply. That is exactly what the operators there are doing again now.”

At the same time, persistent North Sea operators may benefit from higher prices for Brent crude, at least in the near to medium term. “It is possible for new Brent highs,” said Gary N. Ross, head of global oil analytics and chief energy economist for S&P Global Platts. “Brent could have a 6 handle on it in the near term.”

 That is because the bulk of the global surplus is gone, Ross stated.

“The global surplus was at one point as high as 600 million barrels. Now the official Opec number is 170 million barrels, but we believe that is way too high. They are basing their estimates on the preceding five-year average. They have not adjusted for the huge volume now needed for infrastructure stock in the all the massive pipelines and terminals that have been built in the U.S. They have not adjusted surplus levels for the U.S. being an exporter.”

In the medium term, Ross said Brent is likely to come back under pressure later in 2018, but that long term “we will see Brent at $70 or even $80 a barrel. That is because all the major projects that were planned and funded when Brent peaked well over $100 a barrel. Now all the news is killing sentiment for investment, which sets the stage for a supply surprise.”

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