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UK faces future without North Sea oil

LONDON, Jan 14 (Reuters) - North Sea oil, the precious resource that has contributed hundreds of billions of pounds to the UK economy, is slowly slipping into history -- so should Britain panic?

Oil output is set to halve in less than a decade from now if current rates of production continue. And when oilwells that produce over two million barrels per day (bpd) run dry, everything could be hit from big business to household heating bills.

"When the oil runs out, several areas -- tax revenues, the service industry, employment and trade figures -- will all be impacted," said Tony Wood, economist at Royal Bank of Scotland.

Industry group the UK Offshore Operators Association (UKOOA) said on Wednesday output would decline fast in coming years as extraction costs rise. It projected 2004 output atjust 3.7 million barrels of oil equivalent per day from over four million last year.

Since the late 1960s, North Sea energy has contributed over 200 billion pounds ($367 billion) to Britain's tax revenues, attracted the same amount in investment and cut Europe's reliance on Middle East imports.

Oil helps balance Britain's trade, buoys the pound and supports hundreds of thousands of jobs across the country.

So it was a nasty shock when a North Sea oil output dip in September handed Britain its first oil trade deficit since 1991. It usually runs a monthly oil surplus of about 400 million pounds.

The September deficit was later amended to a small surplus but the episode showed how oil buoys Britain's trade figures.

"By 2030 the swing from net exports to net imports will generate a major additional annual burden on the balance of trade of 20-25 billion pounds a year," said Peter Odell, Professor Emeritus at Rotterdam's Erasmus University. "This could add 65 to 85 percent to the level of deficit on trade."

BUT OIL SMALL PART OF UK ECONOMY NOW

But many economists scoff at doom-laden forecasts of energy blackouts, crippling trade deficits and supply security worries. They say the loss will be just a hiccup for Britain, which had a diversified and developed economy long before it struck oil.

They also point to the fact that the world's largest economies, the United States, Japan and Germany, are all net energy importers.

"Every petroleum basin eventually declines and people have been predicting the North Sea's death for years now," said Robert Skinner, head of the Oxford Institute for Energy Studies.

"The UK will have to look elsewhere for the rents it is getting now from oil but this challenge won't come overnight."

Indeed, the UK economy is less dependent on oil than it was 30 years ago because of a decline in manufacturing, better energy efficiency and a higher share of renewable sources such as wind and hydropower in the energy mix.

Oil and gas output currently accounts for about two percent of the economy. In contrast, services provide two-thirds of gross domestic product while tourism accounts for five percent. And the amount of oil used relative to GDP is falling.

Despite population and economic growth, UK oil demand fell to 1.6 million bpd in 2002 from 1.77 million bpd in 1992. It contributed five billion pounds last year in tax but its share in overall receipts was only a little over one percent.

"Manufacturing is not as important a part of the UK economy as it used to be and it is likely to shrink even more in coming years," Wood said. "Less oil is being consumed per capita."

But the inevitable future oil and gas imports will add considerably to the overall goods and services deficit which stood last year at about 48 billion pounds.

"To avoid huge trade deficits, we will have to boost our non-oil exports," said Ray Barrell, economist at London's National Institute of Economic and Social Research.

SQUEEZING OUT OIL

Skinner believes the life of North Sea oil could be considerably extended if players were encouraged to squeeze out reserves previously seen as uneconomic.

UKOOA says half the country's reserves -- up to 32 billion barrels of oil equivalent -- are yet to be produced.

"It would be a shame to walk away from the remaining oil. The government must provide incentives to use new technology and maximise utilisation of the resource," he said.

In any case, he added, the skills acquired in North Sea exploration will be put to good use in new offshore frontiers such as Angola and the Caspian Sea.

"The North Sea experience has been very impressive," Skinner said. "We will keep exporting this expertise, that will be the enduring legacy of North Sea oil."

Copyright 2004, Reuters News Service

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