A new study by Professor Alex Kemp and Linda Stephen of University of Aberdeen highlights the possible levels of oil and gas production, field investment, decommissioning activity in the UKCS following the collapse of oil and gas prices.
This study has examined the prospects for activity in the UK Continental Shelf (UKCS) following the dramatic collapse in oil and gas prices.
The economic modelling has been undertaken with oil prices of $25, $35 and $45 in real 2020 terms and corresponding gas prices of 20 pence, 25 pence and 30 pence, again in real terms. These prices increase yearly at an inflation rate of 2.5% p.a.. Thus the $25 price in MOD terms becomes $52.4 in 2050, the $35 price becomes $73.4, and the $45 price becomes $94.4.
The modelling was undertaken with several large, updated databases covering (1) sanctioned fields, (2) current incremental projects, (3) probable and possible fields, (4) technical reserves, and (5) future discoveries. There are over 400 fields in the category of technical reserves. The investment hurdles employed to assess new developments reflects the current significant capital rationing facing the industry. The modelling and results cover the period 2019-2050. The results highlight the numbers of developments, oil and gas production, development expenditures, operating expenditures, and decommissioning including timing of the activity and the costs involved.
From the charts showing total hydrocarbon production, it is clear that there is a sharp decline in total production over the period especially for the sanctioned fields and the decline is faster at the lowest prices. The decline rate is sharper for gas production than it is for oil production.
For oil at the $25 real price 4,760 million barrels may be economically produced but fields containing 2,251 million barrels (which is more than 32% of all available oil) fail to pass the hurdle.
For gas at the 20 pence real price 2,167 mmboe may be economically produced but 1,432 mmboe (which is almost 40% of all available gas) fail to pass the hurdle.
For total hydrocarbons at the $25 price 7,181 mmboe may be economically produced but 3,963 million barrels (which is more than 35% of all available hydrocarbons) fail to pass the hurdle.
For oil at the $35 real price 5,693 million barrels is potentially produced but 2,430 million barrels (which is almost 30% of all available oil) fail to pass the hurdle.
For gas at the 25 pence real price 2,374 mmboe may be economically produced but 1,922 mmboe (which is almost 45% of all available gas) fail to pass the hurdle.
For total hydrocarbons at the $35 real price 8,334 mmboe may be economically produced but 4,630 million barrels (which is almost 36% of all available hydrocarbons) fail to pass the hurdle.
For oil at the $45 real price 7,120 million barrels may be economically produced but 1,945 million barrels (which is more than 21% of all available oil) fail to pass the hurdle.
For gas at the 30 pence real price 3,065 mmboe may be economically produced but 2,000 mmboe (which is more than 39% of all available gas) fail to pass the hurdle.
For total hydrocarbons at the $45 real price 10,529 mmboe may be economically produced but 4,171 million barrels (which is more than 28% of all available hydrocarbons) fail to pass the hurdle.
At the $25 real price annual development expenditure at 2020 prices falls below £1,000m by 2029. Development expenditure could total £28,934m over the period. At the $35 real price annual development expenditure falls below £1,000m by 2040. Development expenditure could total £35,431m over the period. At the $45 real price annual development expenditure falls below £1,000m by 2039. Development expenditure could total £52,809m over the period.
Operating expenditure falls sharply at all prices. At the $25 real price operating expenditure could total £86,339m over the period but it falls to less than £2,000m per year by 2033. At the $35 real price operating expenditure could total £98,999m over the period but it falls to less than £2,000m per year by 2035. At the $45 real price operating expenditure could total £121,048m over the period but it falls to less than £2,000m per year by 2042.
With lower prices fields become uneconomic earlier, and so decommissioning occurs earlier. Fields cease production before they are fully depleted and the lower the price the higher decommissioning costs are as a percentage of total costs. Brown field investment and near field small discoveries may be lost once a potential host field is decommissioned. With decommissioning cost amounting to more than £37,000m over the period and companies and government facing a cash shortfall it’s likely that the industry and government may prefer to delay decommissioning.
This study uses costs as before the effects of the Covid-19 crisis were fully understood. Given the current restrictions on travel and the social distancing rules it is likely that some costs will increase. The future of the UKCS at the oil and gas prices employed in this study depends critically on technological innovations which can significantly enhance productivity.
- G. Kemp and Linda Stephen, “Prospects for Activity in the UKCS after the Oil Price Collapse”, North Sea Study Occasional Paper No. 147, April 2020, University of Aberdeen Business School, pp. 57 https://www.abdn.ac.uk/research/acreef/working-papers/
Contact:
Professor Alex Kemp
Professor of Petroleum Economics
Director, Aberdeen Centre for Research in Energy Economics and Finance (ACREEF)
University of Aberdeen Business School
Edward Wright Building
Dunbar Street, Aberdeen, AB24 3QY
Tel (home): 01224 484128
E-mail: a.g.kemp@abdn.ac.uk