I was amazed during the year to read some of the inaccuracies written about the oil industry and how us Scots would instantly become wealthy if we broke away from the rest of the UK. I work in the oil industry and one of the reasons that I voted “no” in the referendum was the blatant exaggerations and, some may say, untruths that I read from the Yes campaign. I thought that I’d put together a document with some truth about the industry. I have named sources throughout so that people can do their own homework if they wish and have told the absolute truth as I see it. I am not connected to any political campaign. I hope you find it interesting.
Firstly, two graphs. The top plot shows that oil production from the UK is on a downward trend. Plots created by the Scottish Government including a forward prediction show a miraculous near-instant increase from 2014 but I’m afraid that I don’t believe it.
The second plot shows the oil price this century. For reference the price in 1998 hit a low of less than $10/barrel and the price today is ~$66. Between 2011 and earlier this year we have seen sustained high prices but the old volatility (caused by over-supply, or a stagnating Chinese economy?) appears to have returned.
These plots are backed up with data in the following link:http://euanmearns.com/uk-north-sea-o...ction-decline/
The third plot shows the revenue from oil and gas taken by the UK government. Revenue depends on two main factors – the amount of oil produced (which is, as shown earlier, generally declining) and the price realised for the oil, which was very high in 2008/2009, and high from 2011 to early 2014. One thing to notice is that the tax has peaked at around £12 billion – certainly nice to have but not enough to run a country. The tax revenue was around £5 billion in 2012 and will have dropped this year due to lower production and lower oil price.
Remember that the profits of the likes of bp and Shell (which are rather high. Shells profit was £3.6 billion for the third quarter 2014) is mostly from overseas, where they operate in countries with larger reserves such as Nigeria. This profit is not all taxed in the UK, and if Scotland broke away from the UK you can bet that bp and Shell would not have their corporate headquarters in Edinburgh, Glasgow or Aberdeen.
Also remember that not all of the taxation in the plot above is from Scottish fields, some is from fields off of England. I don’t know the split and won’t take a guess.
The Labour government under Tony Blair imposed an extra 10% corporation tax on oil and gas operators. This was followed by another 10% rise under the current coalition, taking the corporation tax up to 60%. Therefore, the oil business is taxed more heavily than any other in the country. Oil and Gas UK estimates that oil operators are taxed at between 62% and 81% overall. There are tax breaks for certain types of activities (such as high pressure/high temperature exploration drilling), but tax is a complicated calculation that I don’t know enough about in order to explain it. I do know that some fields are running at a loss with the oil price at $66/barrel and that many of the smaller companies in the North Sea are struggling right now.
Cost of An Oil Well
The average cost of an oil well has increased significantly during this century. A very simple oil well now costs ~£25 million. More complicated wells, into high pressure/high temperature environments and possibly 20,000ft long, will cost over £100 million. This is an expensive business with no guarantee of oil at the end of the drilling campaign.
Production from Clair Field
It was widely reported earlier in 2014 that the Clair Field was producing 120,000 barrels of oil per day, and this figure is even mentioned in a website called “Business for Scotland”, which was strongly pro-Independence. The most this field has ever produced on a monthly basis is 282,432m3/month, which equates to 57,306 barrels per day. The average production for 2014 is less than 19,000 barrels per day, a lot less than the 120,000 barrels per day. The maximum capacity of the platforms is 120,000 barrels per day, which is maybe where this particular exaggeration comes from. The figures in Business for Scotland are either the result of sloppy journalism or outright lying, but many appear to have taken them for fact.
Another source of confusion is how much oil can be produced from the field. It is generally agreed that the field contains somewhere between 5 and 8 billion barrels, but estimates of the percentage that will be produced are much lower. To put this in perspective, a good recovery factor in the North Sea is 50% and Clair is a much more technically challenging field than most. I have read that the estimated final recovery will be 8% (around 500 million barrels - nice to have but not enough to make us all rich).
How much of this production is profit? The simpletons view is to multiply barrels of oil by $100 or $60 or whatever and assume that it is all profit, when in reality a lot is spent on the operating cost and the original cost of the facilities (the cost of which are eye-wateringly expensive). As I mentioned, at $66/barrel a lot of fields in the North Sea right now are operating at a loss.
The full production history of the Clair Field can be found by searching in the link below:
The conversion from cubic metres to barrels is: 1m3 = 6.29 barrels.
More interesting facts about the Clair Field can be found in the following link:
ConocoPhillips are currently trying to sell their stake in the field. If this field was truly the best thing ever to happen to this country and will make every Scottish citizen rich, why are they trying to sell?
The Clair Field is big and it is valuable, but not as much as some folk make out.
Reserves in Other Countries
Someone on this site said that we could use the oil reserves in Scotland as a bargaining chip for the future. To quote:
“But you can't forget energy as in the future it will be between energy supplies and water resources that wars are fought and used as bargaining chips.
Just look at what Russia is doing by threatening to turn off gas supplies and having friends take over a part of the Ukraine - that's what it will boil down to in the end and nothing else.”
According to Wikipedia the UK is 23rd on the list of proven reserves, and Venezuela (who are broke, by the way, because of government mismanagement) have 43 times as much. I’m afraid that the Scottish bargaining chip is rather small.
Hopefully at least some of you found this slightly interesting. If you have any queries I’ll do my best to answer them.