An Analysis of the UK North Sea Production

By Glenn R. Morton

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Headlines over the past few days in the UK newspapers (this is written July 1, 2003) are discussing the immanent decline in UK oil and gas production and what the implications are for their economy. An article in the Guardian states:

"Britain's homes could be without light and heat for long periods by 2020 with the government being forced to repeat the 1974 imposition of power cuts by rota, a doom-laden report by the Institution of Civil Engineers (ICE) says today."
    "By then, 80% of the gas to fuel Britain's power stations and domestic central heating will be piped "from politically unstable countries thousands of miles away." Mechanical failure, sabotage and terrorist attack would lead to power cuts within days, the report says." http://www.guardian.co.uk/uk_news/story/0,3604,988588,00.html

The article notes that currently the UK gets 32% of its electricity from coal, 23% from nuclear38% from gas and 4% from oil.  By 2020, only one of the present nuclear plants will be operating and both Norway and the UK will be out of natural gas.  And the government simply doesn't take it on board.  The article notes:

"Mr Anderson added: "The government simply is not taking on board the generation mix that will be needed beyond 2020 if security of supply and meeting our environmental commitments are both to be achieved. A return to the blackouts that marked the three-day week and the country grinding to a halt are very real possibilities in less than 20 years time.""
    "The report comes four months after the government's energy white paper claimed that future gas supplies were not a problem. This week the energy regulator Ofgem is considering an inquiry into interruption in the gas supply last week at 152 sites due to shortages." htttp://www.guardian.co.uk/uk_news/story/0,3604,988588,00.html

Another article, written last October, 2002, notes that Britain will have to get its gas from Russia or the Middle East.  but the pipelines coming from those areas will go through other countries who will also be energy hungry. http://www.thisismoney.com/20020901/nm52594.html.  If there is a supply disruption or curtailment, Britain will be at the end of the pipeline and will preferentially suffer.  How did Britain get to this point?  One needs to understand the history of the North Sea.

Oil was found in the North Sea in 1965. Production started in 1967. It was really small potatoes in the beginning until the discovery of the 175 million barrel Arbroath and 380 million barrel Galleon fields in 1969. And the next year an even bigger prize was found, the nearly 3 billion barrel Forties Field.  Discoveries continued briskly throughout the early 1970s with the 1971 discovery of the 2.5 billion barrel Brent field, the 1972 discovery of the billion barrel Beryl field, the 1973 discovery of the 1.1 billion barrel Piper field and the 1974 discovery of the 1.4 billion barrel Ninian field. These 7 fields held 1/3 of the all the oil in the UK North Sea. By 1974  one half of all the oil that would ever be found in the UK North Sea had been discovered. It wasn't until 1977 that the platforms were set and the pipelines built which would bring these huge discoveries to the market place. Production took off in the late 1970s and increased until the mid 1980s when the huge quantities of oil flowing out of the Viking graben caused the price of oil to collapse.  Production was reigned in until the early 1990s when it began to increase again, peaking in December 1998. Since then production has been declining at around  11% per year. We will examine why this is. 

The chart below shows a comparison of the oil discovered and the oil produced.  The fascinating thing about this picture is that since 1979 there have been only 2 years in which the oil industry found more oil than it pumped out of the ground!  Try this on your bank account and see how long you have money there.

Since it is absolutely impossible to produce more oil than one has discovered, the area under both the discovery curve and the production curve must be equal.  When we fail to add reserves (as in the past 5 years) we are depleting the oil reserves at a rapid rate. Eventually in order for the production area not to exceed the area under the discovery curve, the production must decline.  It is as simple as that as to why the North Sea production is dropping.

Another way to look at his is by using the curve of cumulative discovery, cumulative production and then subtracting them to see how much oil is left to be pulled out of the ground.  The picture is illuminating.

The change in color along each curve is the predicted path for the future given the current rate of decline in production and current discovery rate. At the rate oil is being pumped out of the UK North Sea there won't be anything left to speak of by 2010-2015.  Below is a chart which shows why the UK North Sea is about to decline dramatically in production. Each color band represents the production from a single oil field. You can follow a band from the 70s and see that it gets smaller and smaller towards the present. This is because with each passing year, the production declines until the field must be abandoned.  In 1980 10 fields produced around 1.3 million barrels per day. But in 2000, it takes about 30 fields to produce the same amount of oil. In another 20 years, assuming there were no economic limits to what will be produced, it would take 90 fields.  But the problem is that with each step up in the number of fields required to maintain production, the recoverable oil gets less and less. There is a point where a field is too small to be developed because it would take more money to produce the oil than one will get out of the oil. And this is why the North Sea has begun its decline.

 For those who like numbers, here are the Department of Trade and Industry monthly production figures for oil from the UK North Sea from December 1998 (which was the highest ever) to May, 2001. One can clearly see the downward trend. In 1999 there were 10 months with greater than 11 million tonnes. in 2000 there were only 2 months with production greater than 11 million tonnes but 10 months greater than 10 million tonnes.  In 2001 there have only been two months so far with production greater than 10 million tonnes. The region which caused the 1986 oil price collapse is about to disappear bringing higher oil prices with it.

Production Thousands of Tonnes

One other significant note of interest. Norway seems to have peaked production and is now headed down.  Even Norway expects this. In the "Forecast" section of this document, one can see what Norway expects.  The page is http://www.npd.no/engelsk/npetrres/petres2001/

Below is a graph showing Norwegian Discoveries year by year (the jagged red curve) the unproduced reserves (pink curve) and the production rate per year (blue curve).  All units are in standard cubic meters. One can see immediately that it has been 22 years since major reserves were added to the Norwegian production.  One can also see that the production curve has been basically flat since 1996.   Secondly, one can see that the unproduced reserves have been on a downward trend since 1987.  Thus, Norway has reached oil production peak.  So far this  year, liquid hydrocarbon production is absolutely flat compared to last year.  Since fields have a natural decline, it is therefore probable that Norwegian production will be slightly down this year compared with last year.?

One other fact of note has just been announced by the Norwegian Petroleum Directorate.  In late June 2003, they announced a reduction in the reserves they expect to produce by 7%.  This is a significant quantity of oil. The web site also believes that they will not be able to recover 50% of the oil in the current fields and they worry now that they will not be able to find and produce much of the undiscovered oil they had counted on.  The details are at: http://www.npd.no/English/Aktuelt/Nyheter/ressursrapport_2003_p_melding.htm