UK Edition
A crack in the Forties pipeline that knocked out almost half of North Sea oil production has shown how fragile Britain’s energy security is. Without the crude and natural gas still pumped off the Scottish coast, the country would be almost entirely dependent on imports and a hostage to Russia’s new Opec grand alliance.
Funding critical oil infrastructure to replace vintage pipelines and encouraging investment offshore may not carry the same political kudos these days as backing renewable energy or low-carbon transport, but they have arguably never been more vital for the economy.
Other sectors such as financial services may be disrupted by the turmoil of Brexit, but North Sea oil and gas is an industry with very little exposure to a messy divorce from the European Union.
Despite its advancing years, the North Sea sector continues to supply just over half the country’s oil and gas needs. Production has recovered to around 1m barrels per day (b/d) and is expected to remain at this level until the end of the decade.
The Department for Business, Energy and Industrial Strategy also estimates that oil and gas will still account for two thirds of primary energy supply by 2035, regardless of the increasingly common sight of electric vehicles (EVs), or the forest of giant wind turbines wrapping their way around the English Channel.
North Sea crude also helps Britain punch above its weight in the energy world. BP and Shell – two of the country’s most valuable listed companies – historically have drawn strength from their presence in the region, investing in giant projects such as the prolific Brent field.
According to industry group Oil & Gas UK, over 300,000 skilled jobs are currently dependent on the sector and many of Britain’s major international engineering companies were first established to deliver critical services to the region in its heyday. After an investment blip caused by the downturn in oil prices in 2014, the North Sea is also undergoing a renaissance.
The development of new fields like Catcher, Kraken and Western Isles, along with the refurbishment of the Clair and Schiehallion areas west of Shetland has revitalised production. Combined, these fields are expected to pump around 380,000 b/d at peak levels.
The introduction of new, private equity backed players such as Chrysaor has also boosted confidence. Aberdeen remains Scotland’s economic capital because of the North Sea, while decommissioning of old facilities is revitalising former industrial heartlands on the north east coast of England.
And there is more oil still out there to drill for on the UK continental shelf. Even the most conservative estimates suggest there remain 20bn barrels of recoverable oil and gas under the seabed. Tapping this significant resource will be vital with oil expected to remain the world’s primary road transport fuel for generations to come, despite the gradual increase in the number of EVs on Britain’s roads and potential new supplies of crude from untapped areas like the Arctic. There are also few alternatives to the North Sea other than becoming more dependent on imports. Although the Government is trying to generate interest in developing potential oil and gas reserves onshore, these resources will never have the scale, or global impact, of the North Sea.
Tapping into shale deposits in the UK is also a toxic political subject given the environmental concerns and the scarcity of land for development. Meanwhile, exploration in even more remote British territories such as the Falklands is expensive and has had mixed success. The North Sea remains Britain’s best option to meet its primary energy security needs.
Although accounting for just over 1pc of total global oil supply, the area also remains critically important for international markets. The Forties pipeline outage in December led to a spike in global oil prices despite the world still remaining flooded with too much unwanted crude.
Dated Brent assessed by S&P Global Platts in London is arguably still the world’s most important and trusted oil pricing benchmark. Forties is one of five crude grades that make up Dated Brent. Quoted as the gold standard for the industry for over 30 years, it serves as the most accurate price reference for an estimated 60pc of the world’s near 100m b/d trade in crude.
Dated Brent survived the turmoil of the 2008 financial meltdown and the vicious oil price downturn triggered by US shale’s war with Saudi Arabia in 2014. It will also survive well beyond the tremors of Brexit. The oil trading community has changed over the years, from the early days of broking houses and oil majors, then banks, through to Chinese companies and now the smaller, more agile financial trading shops. But Brent’s home between the largely stable and secure economies of the UK and Norway makes it a good place to do business, always attracting new players. It places London at the heart of the world’s global commodity trade.
The North Sea is also Britain’s last line of defence against the whims of Russia and its new allies in the Organisation of the Petroleum Exporting Countries (Opec). Combined, these oil superpowers now control around 45pc of global oil supply. Moscow’s growing closeness to Opec’s oil-rich Middle East members such as Saudi Arabia is worrying British officials.
They fret the Kremlin will soon have the same level of control over international oil markets as it does over the supply of natural gas to Europe. Although in the worst case scenario new US supplies could provide an emergency lifeline, falling back on North Sea crude remains Britain’s best option in the unlikely event of a Seventies-style embargo, or major supply disruption.
Overall, the economic importance of the North Sea is also understated. Since 1970, £330bn in production taxes have been paid. The supply chain established around the North Sea exports services is worth £12bn annually. Higher oil prices that arise from the kind of disruptions caused by the recent Forties mishap are also a risk, pushing up inflation and hitting industrial output.
That is why investing in updating ageing infrastructure like the Forties pipeline makes sound economic and strategic sense. Guaranteeing the flow of oil from the North Sea is as vital for traders in the City as it is for oil rig workers in Aberdeen and motorists queuing up to refuel.
Andy Critchlow is head of energy news, EMEA at S&P Global Platts
Don’t write off the North Sea – it is our last line of defence