The oil price is struggling to stay above $30/barrel, little more than a quarter of the price 18 months ago. Recent forecasts for the U.K. industry have become much gloomier as a result. As recently as three months ago, industry association Oil & Gas U.K. predicted 79 platforms would close by 2024. Several major consultancies have since suggested that it might be more like twice that. So how pessimistic is it reasonable to be?
First the big picture. Since the first significant oil and gas production in the U.K. in the 1960s, 28 billion barrels of crude oil and more than 2.4 trillion cubic meters of gas have been extracted, mostly from the North Sea. According to the latest estimates, a further 3 billion barrels of oil and 0.2 trillion cubic meters of natural gas are proven to be recoverable—plus about the same again in probable reserves. That may be a fraction of what has gone, but it still amounts to revenues of around 200 billion pounds (about $285.8 billion).
The viability of the sector fundamentally depends on the oil price. There are large discrepancies between what economists think will happen to the price next, but most agree it is unlikely to return to its pre-crisis level of around $110/barrel in the medium term.
The UK Reaction
The immediate reaction of U.K.’s oil and gas producers has been to continue production at the same pace. In the third quarter of 2015, total oil production increased by 7 percent year-on-year and drilling activity remained stable. That’s not to say there has been no reaction—65,000 out of 440,000 jobs had gone by last September and capital investment is thought to be falling substantially. Without question, the business climate has fundamentally changed.
The high operating costs in the North Sea are a central concern. Even under more favorable prices, the industry would have a competitiveness problem relative to other regions. It costs around 17 pounds ($24.3) to extract a barrel of oil, among the highest in the world.
