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Thread: The Oil Business in the UK

  1. #1

    The Oil Business in the UK

    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:

    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.
    Attached Thumbnails Attached Thumbnails OandG2.jpg   OandG1.jpg   OandG3.jpg  

  2. #2
    Wow, that's a long post! I've just skimmed over it... the question is: How long before our little bubble in the Northeast bursts and we have to content ourselves with 'normal' jobs and salaries?

  3. #3
    Cut n pasted i reckon... If it's all gloom and doom why stay and work out there?
    Ineos owner James Ratcliffe is training eastern europeans to do the refinery jobs cheaper so the jam on the dummy is getting less by the day.

  4. #4
    Don't dispute the figures but can I ask.
    Were all the drilling techniques used in today's oil production thought of when North Sea oil first began to flow?
    If not then who knows what will be achievable in the next 25-30 years.

    What's the saying - technological advancement is doubling every 2 years.
    So for a student starting a four year technical course this means that half the stuff they learn in first year will be out dated by their third year of study.

    So nobody can tell what will be achievable in the ten let alone twenty or thirty years time


  5. #5
    I work in the oil industry myself , before the election I was looking at the numbers being put forward by the SNP . I thought they were optimistic at best . Alberta's economy is , in large part , based on oil and now , to a lesser extent , gas . We have also paid the price for basing our budget on predicted oil prices . With todays oil prices ( $ 66 a barrel ) our economy is going to take a beating . The latest predictions are for a sub $ 50 dollar barrel by the end of January , that will have horrendous consequences for most Albertans . This will be my fourth time on the bottom of a oil glut , I learned my lesson thirty years ago the hard way , I just hope Scotland doesn't have to do it on a national basis .

    As for new technology and it's impact on oil production , it will enhance our ability to extract oil ( or bitumen ) in a more efficient way . The only downside , in Alberta at least , is that the easily accessible fields are already being exploited . We're now going after oil reserves that weren't economically viable in the past such as the Saskatchewan shale deposits and the Arctic offshore fields . Our advancements in extraction only make it feasible to maintain our production levels , not to increase them exponentially . And to be honest , if OPEC wants to ramp up production and sewer all of us with low prices , it won't make much difference anyway . Welcome to the oil patch brother , you'll get used to it lol . On the other hand , if there's another war in the sand box , it could hit $ 120 a barrel in the same time frame . Long story short , making long term plans based on oil prices is a very risky way to run a government , ask anyone over 20 in Alberta , we learned the hard way . I'm just saying .


  6. #6
    Another rig pig here...I would agree with the first post about oil in the UK...we need the frac operations to take off to take advantage of the southern gas fields.

    most of the "Yes" campaign was based on odd figures and pipe dreams. Thank goodness the people saw sense...I was gutted that I didn't get a vote as I was out of the country but I was confident our people would do is proud - which they did!


  7. #7
    By the way , that was a great post Feugh . Thanks


  8. #8
    Yes, it is a long post. Red-dot, it isn’t a cut and paste job. This whole issue has been on my mind for weeks so I took the time to do a bit of research and write down the facts as I see them. Why stay and work in the North Sea? Because I have a good job, I was born in Scotland and I’d like to stay here for the rest of my life.
    Tacbok, when will we all have to get other jobs? I don’t know. Anyone with their eyes open at the moment will know that job cuts in the North Sea are happening now, and this follows the usual cycle of: oil price falls, companies get rid of staff/contractors, oil price eventually comes back up, folk get new jobs. Some will leave the business entirely, some more will be in the position to retire and will do that instead.
    LuckyEddie, your point is a good one, there are new technologies out there that can potentially make a difference. Going back to the Clair Field, that is the only reason that it is flowing at the moment; it was discovered in 1977 but it wasn’t possible to get the oil out economically back then. BUT the new technologies will only be applied on fields that are marginal, and these will only be profitable when the oil price is high. More importantly, things will become much more difficult when the general infrastructure of the North Sea loses integrity. Eventually the large pipelines attaching all of the fields to “the beach” (such as the Forties Line) will become unusable and any oil that has not been produced by then will need to be produced by other means, such as off-loads directly to tankers. This is what happens with some fields today already. This doesn’t come free, reduces profits (and therefore the tax take) and makes fields more marginal. Again, these fields will only be profitable if the oil price is high. The oil pipelines were built when the very large fields were discovered in the North Sea in the ‘60s and ‘70s, I don’t believe that there are many of these left to be discovered so once the pipelines are gone they won’t be replaced.

  9. #9
    Quote Originally Posted by alberta boy View Post
    By the way , that was a great post Feugh . Thanks


    +1 I enjoyed reading that.

  10. #10
    As someone who has absolutely no idea of the oil industry can I ask, would anyone like to take a guess at Scotland's oil future ?
    As it stands today, how much longer will they be producing oil ? And if you're feeling really brave would you like to predict the future for the likes of Saudi ?

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