OIL and gas firms could decide to close down around one in six fields in the UK North Sea this year as the crude price plunge leaves the future of the area hanging in the balance, experts have warned.
The Wood Mackenzie oil and gas consultancy has predicted firms could decide to bring forward the decommissioning of up to 50 fields this year after the oil price fall left them making losses on production from them.
The Edinburgh-based firm reiterated predictions that around 140 fields could close over the next five years representing about half of the total, barring a dramatic improvement in market conditions.
The closures will leave firms facing a £55 billion bill for the work on decommissioning the fields, which will involve removing hundreds of offshore platforms.
Wood Mackenzie believes the UK could become a world leader in the emerging global decommissioning market as a result of the expertise that firms will develop as a result.
It said many other countries will be watching how the UK oil and gas industry leads the great global decommissioning challenge.
However, the prospect of a decommissioning bonanza in future may provide scant consolation at a time when the once might North Sea oil and gas industry is experiencing a downturn of unprecedented severity.
With oil and gas firms slashing spending in response, the impact has been felt across the supply chain resulting in thousands of job losses.
Shell has already cut 500 North Sea jobs since the crude price started tumbling in 2014.
The company has made clear it wants to reduce investment in mature fields in the North Sea where it has said operating costs are too high.
Ian Thom, senior research manager for the UK exploration and production sector at Wood Mackenzie, said: “The lower for longer oil price environment compounded by the maturity of the basin means that continuing production of certain fields in the North Sea region is no longer viable. We expect companies will not be able to keep producing UK fields at a loss, and decommissioning activity will ramp up as a result."
There are only a limited number of projects under development in the UK North Sea where around 320 fields are producing currently.
Wood Mackenzie said if no further investment materialises, the future of the North Sea could hang in the balance.
The company said the work involved in decommissioning 140 fields would be complex and challenging.
It would include the removal of around 340 platforms, with a combined weight of over 5,600,000 tonnes, and over 3,000 development wells.
“Due to limited decommissioning activity completed to date …, many companies will be required to get up the learning curve quickly. New technologies may be able to reduce costs, but their impact is still emerging,” said Wood Mackenzie.
The company predicted last September that around 140 North Sea fields could close within five years based on the crude price recovering to $85 per barrel.
Oil prices have fallen since then.
The latest analysis concludes that more fields are likely to close this year than expected previously.
Wood Mackenzie has cut its long term oil price forecast to $70/bbl. This is in spite of the partial recovery in the price of Brent crude to $49/bbl from $27/bbl in January.
Mr Thom noted that North Sea firms have achieved big cost savings in recent months.
But they have decided to close five fields already this year.
Tax changes introduced in the 2016 Budget did little to improve company cash flows as few are currently making taxable profits, but improved field valuations.
A survey of oil and gas firms and advisors by law firm Ashurst found private equity firms are expected to increase investment in Europe, where many assets are up for sale.
Eighty three per cent of respondents expect a 'substantial' increase in mergers and acquisitions activity in the next three to five years, as some firms look to sell assets or agree mergers in response to the low oil price.
The consensus view of respondents was that Brent crude would rise to $53/bbl by the end of this year. It fetched $115/bbl in June 2014.
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