A return to the North Sea's bonanza

Why BP's decision to invest £4.5bn in the next stage of the Clair field, in the deeper waters west of the Shetland Islands, is a massive boost for the UK economy.

The North Sea oil and gas industry – which has fuelled prosperity in the UK for 40 years – is not ready to surrender its mantle to the upstart renewables industry, just yet. If anything, the recent £4.5bn investment announcement by BP, welcomed by prime minister David Cameron in Aberdeen and Scotland’s first minister Alex Salmond, shows that we still require the black gold to give us energy security for as long as possible.

And there is plenty of oil left in the North Sea tank. Bob Dudley, BP chief executive, announced that the oil major has joined partners Shell, ConocoPhillips and Chevron in receiving UK government approval for the second phase of development of the giant Clair field to the west of the Shetland Islands – the Clair Ridge development.

This is a £4.5bn project with BP saying oil reserves will last until 2050, which will give the renewables industry – and especially tidal and wave – a breathing space to find the funding and technological development that it requires.

The BP announcement covers the design, engineering and construction of two bridge-linked steel platforms which will reach an estimated 640 million barrels of oil equivalent, and provide hundreds of UK over the field life. This is in addition to the 600 people working directly on this project at present.

The field is planned to come on-stream in 2016, and will extend the productive life of the greater Clair area beyond the year 2050. Bob Dudley also announced a successful exploration and appraisal of an additional extension to the Clair Field, called “SouthWest Clair”, which confirms estimates for the overall Clair Field complex at over seven billion barrels.

The American boss of BP talked with passion about Aberdeen, where he lived and worked in the 1980’s. “The city vibrated then as the global centre of the offshore oil and gas industry,” he said.

“And it continues today to provide innovation and expertise for the global energy industry. I have heard the North Sea oil and gas industry described as the UK’s greatest post-war industrial success story. It is hard to disagree with that when you look at some of the achievements.”

Bob Dudley said that since late 1960s, the oil and gas industry has invested approaching £300bn in exploration drilling and field developments. A similar figure has been paid into the UK Exchequer in corporate taxes. BP alone has invested around £35bn into the UK North Sea, and has contributed over £40bn to the Government in taxes.

More than 40 billion barrels of oil and gas equivalent has been produced from the UK Continental Shelf, and the industry still supports almost 450,000 jobs in the UK. However since 2000, UK production has been in a “decade of decline” – steeper than many predicted.

Although around 90% of the UK’s oil demand, and well over half of its gas demand, is still met by British supply – today’s production is only around half what it was a decade ago. “BP now sees the potential to maintain its current levels of production in the North Sea until the year 2030,” said Dudley.

“What happens beyond 2030, is of course harder to predict, but we are currently working on projects that will take production for some of our largest fields out towards 2050. To date, BP has produced about five billion barrels of oil and gas equivalent from its North Sea acreage. Based on current estimates, we believe we have the potential for at least three billion more. Realising this potential will not be easy or straightforward, but we believe we are laying the foundations for success.” BP is employing enhanced oil recovery techniques, and looking to take that technology even further as it plans new field developments.

“We are investing huge sums to improve the reliability of our platform and pipeline infrastructure – so that they can operate efficiently for many years to come. We are also determined to progress those projects that remain economically strong, to bring much-needed energy security, revenue and jobs to the nation.”

Over the next few years, BP will be bringing on stream four new UK field developments. These projects represent almost £10bn of new investment into the UK Continental Shelf by BP and its partners.

This is in addition to the £1.5bn invested annually to operate and maximise recovery from the existing fields, and to maintain platforms, plants and pipelines. In the central North Sea, BP and RWE have also reached a significant milestone in the development of the Devenick gas field which will be tied back to Marathon’s East Brae platform.

The 600-tonne Devenick module constructed at the McNulty yard in South Shields has been successfully lifted onto the East Brae platform. This £550m subsea development provided more than 1,000 design, engineering and construction jobs in the UK, and when it comes on stream, will make a major contribution to the UK’s gas supply needs – meeting about 2-3% of demand.

“This investment reflects our confidence in the region, in our UK suppliers and service providers, and in the fantastic people we have working for us in our North Sea business,” said Bob Dudley.

“In our industry, there will always be challenges to overcome, and rightfully, we focus the majority of our time and attention on overcoming those challenges and running safe and reliable operations.”

The investment by the major players brings many positives but poses a challenge for the renewables sector. It means there will continue to be a battle for top-level engineering talent, where the oil and gas industry requires a raft of young engineers as the older hands of the international oil industry reach retirement.

But there are also early signs that the oil majors are thinking more about how renewables fits into their wider portfolios. The summer sale of SeaEnergy PLC to Repsol, an integrated Spanish energy firm for £39m is a significant deal for the UK’s developing offshore renewable sector.

“The deal delivers a £30m return on SeaEnergy’s modest investment in SeaEnergy Renewables, which was only established three years ago,” says Chris Gotts, of leading law firm Burness. Gott, who was corporate finance adviser on the deal, says SeaEnergy Renewables had 1.5GW interest in three offshore wind farm projects off the east coast of Scotland.

He says it was the first merger and acquisition in relation for a UK Round 3 or Scottish territorial offshore wind farm and it shows that oil and gas companies are looking seriously at entering the market.

“The oil and gas companies undoubtedly have a role to play with their significant expertise and experience in such areas as deepwater design and construction, contract procurement and offshore health and safety,” he says.

The recent BP deal can only help create the environment where oil and gas and renewables become a much more integrated way ahead for the UK.