The US has Houston as its oil capital and the UK has Aberdeen. Wherever you go in the town, there are signs of the oil industry that has driven the economy of this town for over 30 years. Trucks drive through the city centre transporting lengths of chain as a thick as a child’s arm and piles of steel hawsers: both used in the heavy industrial business of extracting oil from below the seabed.
Although the Texans are proud of displaying their wealth with shiny skyscrapers and swaths of swanky suburbs, signs of prosperity are harder to find in Aberdeen. The streets are lined with branches of the Co-op rather than designer names. It may be the fact that Britain’s oil reserves are in decline that has resulted in Aberdeen’s parsimony. But those involved in the region’s oil industry are resolutely upbeat.
About 30bn barrels of oil have been pumped from Britain’s oil reserves, says Mike Tholen of the UK Offshore Operators’ Association. But there remains a further 30bn – so only 50% of the reserves have been exploited.
It may seem counter-intuitive, but it is the maturing of the oilfields that is driving the growth of Aberdeen. While the oil majors are not always interested in squeezing the last drop of oil from their fields, there are many smaller operators that specialise in extracting oil from mature fields.
“There are many more players on the market today than there were ten years ago,” said Jim Atack, managing director of Petrofac – an oil service company. The new players are either US companies who are transferring their expertise of managing mature fields in the Gulf of Mexico to the North Sea or British independent companies.
The development of service companies like Petrofac has made it possible for the smaller operators to develop the mature oilfields – known as brownfields, said Mr Atack. “The smaller operators do not have the necessary manpower to develop the sites alone which is where we service contractors come in.”
Pumping oil is not as easy as simply sinking a well. Crude oil is usually found in a large flat layer of porous rock. Although it is easy to remove the oil around the drill site, extracting more oil from the remainder of the reserve can be tricky.
To overcome this problem, oil companies will use other technological tricks, such as horizontal drilling and injecting water or gas to drive more oil out of the rocks. But these techniques are costly.
Alex Kemp, professor of petroleum economics at the University of Aberdeen, thinks conventional wisdom on the future of the North Sea is too gloomy. “Current forecasts underestimate future possible production.”
The main difference between Professor Kemp’s estimate and others, is the amount of incremental oil that could be produced – in other words the exploitation of the brownfield sites.
With the price of oil having rocketed by 73% since the beginning of this year to over $50 a barrel, this could be seen as a significant incentive for extracting the black stuff. “Oil companies are used to the price being highly volatile so are very cautious about what price they use to decide where to invest,” said Mr Atack.
The oil community is thought to be using a price of only $20-$25 a barrel to assess where to allocate capital in developing new wells. “There is a feeling that the supply and demand curve has changed forever and higher oil prices are here to stay,” said Mr Atack.
Higher prices will certainly encourage further development of brownfield sites, since it means that companies’ margins will remain healthy despite the higher extraction costs.
But a key to the success of the smaller companies is whether they can access the infrastructure of the North Sea. After all, there is little point in extracting gas or oil if there is no way of getting it back on shore. And the oil majors control the infrastructure. “In the past, negotiations between the smaller oil company and the oil major about access to the pipeline have caused projects to be delayed,” said Professor Kemp. It is hoped that a new code of practice will put an end to that.
In the future, the owner of the asset and the user will negotiate in good faith for six months. If they cannot reach an agreement after that, then the Department of Trade and Industry will be able to intervene and could approve an appropriate tariff.
Another initiative which has been welcomed by smaller oil companies is a new licence that gives companies access to parts of the sea floor but at a lower price and for a shorter period of time than traditional licences. The companies will then have a chance to prospect the site and decide whether to develop it.
Mr Atack is cheerful about the longer term future of Aberdeen. “I think the higher oil price and developments in technology will encourage an increasing number of players into the market,” he said. Developments in subsea technology will make a material difference to oil companies. Connecting oil wells on the seabed and even partially processing the oil will make life easier.
Remote monitoring of offshore platforms and the increasing sophistication of the service industry as it matures will also contribute to future growth.
The message from Aberdeen is clear – our overall oil reserves may be in permanent decline but there is still plenty of money to be made and no need yet for despondency.