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Euan Mearns: The Scottish Referendum & The Energy Question

Euan Mearns, Energy Matters

Energy and the future of North Sea oil & gas have not figured at the top of the Scottish referendum debate. This post examines three issues that are at stake 1) future exploration potential 2) offshore fracking and 3) remaining reserves.

On 18th September 2014 (in a few days time), Scotland will vote on the following question:

Should Scotland be an independent country?

Answer YES and the vote is for independence, answer NO and the vote is to stay with The United Kingdom. Energy has not figured at the top of the debating issues that have been dominated by currency union, the economy and disaffection with Westminster. The future of North Sea oil has been on the second tier but periodically gets thrust into the limelight, normally on the back of sensational headlines about the future. Part of the current reality is that Aberdeen is in the early stage of cyclical recession, brought about by declining production and soaring costs now exacerbated by Brent sliding below $100/ barrel. Redundancies have already begun. In this post I want to examine three issues that have been in the news 1) future exploration potential 2) offshore fracking and 3) remaining reserves.

Figure 1 The history of UK Offshore Field discoveries according to this UK government source. Three main discovery cycles are evident, the third centred on 2007 riding on the back of rising oil prices. The UK is now at a discovery rate cycle low not witnessed since 1968. In recent commentary the highly respected Professor Alex Kemp of the University of Aberdeen saw on average 3 discoveries per year over the next 30 years which is a rather cautious but credible estimate.

Exploration Potential

The local Press and Journal (P&J) carried a story on September 10th with the headline:

Economist predicts oil bonanza

Professor Alex Kemp amongst other things forecast that there may be 99 new fields discovered in the next 30 years. So let’s place this bonanza in context. Figure 1 shows the history of UK offshore field discovery. Since 1965, on average 12 fields have been discovered per year. The best year was 1989 with 29 discoveries. That was a bonanza! Professor Kemp’s forecast for the future is for 3 discoveries per year, one quarter of the historic average.

Another important consideration is the size of discoveries. I have not had time to collate this, but rest assured that the average size has declined dramatically with time. On average, future discoveries will be much smaller than those made in the past.

Figure 1 shows three clear discovery cycles and we are now at the cyclical low. Companies have for the time being run out of ideas and money. But that will change and the industry will pick up again in the years ahead, as new exploration plays are developed and new technology is brought to bare.

Professor Kemp had a letter in the P&J on 12 th September complaining that the paper had misrepresented his views saying amongst other things:

In Wednesday’s P&J, there was a headline attributed to myself predicting an “oil bonanza” from the North Sea. Nowhere did I say this. In our research, our economic model predicts that investment will fall off in the near future, while oil/gas production could increase for a few years, but then enter long-term decline. The total recovery we predict to 2050 is in the 15 to 16.5 billion barrels equivalent range.

By 2050, production is in the 200,000 to 250,000 barrels oil equivalent range.

I have had my disagreements with Prof. Kemp over the years but I do agree with the gist of this statement. Oil and gas production will rise a little in the years ahead with major projects like Clair phase II and Laggan fields coming on line. But then underlying decline of the whole basin will take production down. The North Sea will still be producing in 2050 but at much reduced levels that are very difficult to predict today.

Hopefully Figure 1 provides some context. Yes the North Sea has a future  but that future is quite dim compared to the past. Aberdeen will continue to prosper for decades providing services to the oil industry in Africa and Asia.

Offshore Fracking

Before the UK has even successfully drilled, fracked and tested an onshore well in “shale gas” or “shale oil” there is talk of an offshore fracking bonanza. The target is the Kimmeridge Clay Formation that is the organic and clay rich source rock for most of the oil and gas found in the Central and Northern North Sea. This is one of the richest source rocks in the world and it is certainly true that where it is buried to depths of 10,000 feet or more that it will contain abundant oil and gas. The problem is how to get the stuff out since the Kimmeridge Clay is a mud rock (true shale) where the permeability is so low that oil and gas will not flow. Fracking is designed to fracture the rock so that a portion of the oil and gas may be exploited. Let me provide some context.

In the olden days of giant conventional oil fields, initial flow rates from wells in excess of 20,000 barrels per day was the prize exploration companies were looking for. Forties Field had peak production rates in excess of 600,000 bpd back in the late 70s.

So now let’s consider shale.

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