Commodities 2024: UK North Sea to see oil mini-revival in 2024 despite tax row

A drive to boost UK energy security is providing some reassurance for a North Sea industry buffeted by tax hikes, environmental opposition and reservoir decline, amid signs of a mini-recovery for oil in the coming years.

Never known for over-exuberance, the North Sea industry's mood has worsened of late. Oil output is in sharp decline -- it fell 12% year-on-year in the first nine months of 2023 to 720,000 b/d -- and the industry has struggled to cope with a 35 percentage point increase in headline taxation under the 2022 Energy Profits Levy.

In terms of the oil grades that contribute to the Platts Dated Brent benchmark, loadings of Brent blend dropped to not far off 20,000 b/d at times in recent months -- a far cry from their heyday, reflected in the growing weight of Norwegian and US oil in the European market.

The Ninian field -- a cornerstone of remaining Brent blend production after the closure of the Brent field itself in 2021 -- has also been earmarked for decommissioning by Canadian Natural Resources.

The CEO of Houston-based APA Corp, John Christmann IV, said in August he didn't see "any stability" in the UK business environment. The company -- previously called Apache and still a contributor of Forties crude -- would henceforth prioritize "safety and [asset] integrity and managing decline," with little prospect of new investment, he said.

Since then, the oil price outlook has deteriorated, and gas prices have fallen back closer to pre-pandemic levels. The 2024 S&P Global Commodity Insights "base case" for Dated Brent is $85/b, up marginally from $82.73/b on average so far in 2023.

Political backing for the sector remains precarious as the opposition Labour Party -- tipped to win elections in 2024 -- has pledged to ban new license issuance as it prioritizes net-zero targets.

Industry group Offshore Energies UK says 45% of 2022 upstream production came from fields that are earmarked for decommissioning by the end of the decade. Annual decommissioning spending could outstrip production investment as soon as 2025, it says.

"The outlook for investment in the UK has not been positive since the Energy Profits Levy windfall taxes... and in the face of weakening oil prices, sentiment toward further investment is set to be weaker still," Ian Conway, executive director of research and analysis at S&P Global Commodity Insights, said. "More, smaller oil and gas projects would undoubtedly be sanctioned if fiscal terms were significantly improved."

Oil glimmers

However, some underlying priorities are reasserting themselves, including the need to save high-skilled, high-paid oil and gas industry jobs, and stem dependence on imported energy, particularly LNG.

And there are signs of heightened interest not only in gas, but oil too, after several years in which oil was viewed with suspicion by regulators, despite often coming from the same North Sea fields.

UK oil output is forecast to recover slightly over the next two years, before falling to 660,000 b/d in 2030, including condensate and NGLs, according to analysts at S&P Global Commodity Insights.

Equinor's decision in September to go ahead with the $3.8 billion Rosebank project in the West of Shetland area, initially targeting 245 million barrels of crude, was hailed by the government as a win for Scotland's economy and for energy security, with Labour pledging to honor the decision.

Regulators have made clear an earlier strategy that prioritized maximizing the economic value of the North Sea has been superseded, and emissions-intensive projects need to be reworked. "Twentieth century" designs are "not going to pass muster," Tom Wheeler, the North Sea Transition Authority's director of operations, told S&P Global Commodity Insights in September.

This entails designing facilities such as Rosebank for "electrification," meaning they must be able to "plug in" to future low-carbon power sources such as wind farms or the national grid to generate heat and power needed in the production process. The industry "are going to need to be producing the cleanest oil and gas anywhere -- perhaps outside Norway," Wheeler said.

Yet some companies are rising to the challenge. Independent Orcadian Energy has revamped a 79 million barrel heavy oil proposal known as Pilot to include wind power, and aims to submit a development plan for approval in 2024 with Malaysian partner Ping Petroleum -- one of several heavy oil fields seen as offering potential.

September also saw regulatory approval for BP's 30 million barrel of oil equivalent Murlach project, which will boost Forties volumes; BP senior vice president Doris Reiter says the company will focus on "projects which can be developed efficiently, using existing infrastructure."

Mid-sized producer Serica Energy, buoyed by earnings from the Rhum gas field, also plans further drilling at the Bruce, Keith & Rhum hub, a significant contributor of UK gas supply. Serica is also turning its attention to oil -- arguing oil prices have shown more stability -- and recently acquired oil assets tied to the Triton platform. It went on to buy a 30% stake in Buchan, an oil project shut down in 2017 due to issues with the facilities. Operator Jersey Oil & Gas aims to submit a redevelopment plan for Buchan, targeting 100 million boe, in 2024.

Investment outlook

Analysts point out recently approved projects such as Rosebank can benefit from a 91% tax break on capital expenditure until 2028, when the Energy Profits Levy expires. A complete revamp of the system might suggest taxing emissions alongside revenues, as in Norway, they point out. But given the complexity of the system and tendency for incremental change, the industry seems more focused on stressing the role of the oil and gas sector – and its cash – in future energy transition plans.

On Labour's plans to end North Sea licensing, "if it is clearly demonstrated that it's in the national interest to have new licenses, because it supports jobs, because of energy security, because actually it does create the platform for the energy transition, then surely that's something a government would support," Offshore Energies UK CEO David Whitehouse said in September.