Total Starts North Sea Gas Project Despite Low Oil Prices
February 08 2016 - 1:20PM
Dow Jones News
LONDON—One of the last big North Sea projects sanctioned under
high oil prices has begun pumping natural gas, highlighting an
unexpected boom in U.K. energy production that analysts say is
unsustainable.
French oil company Total SA said Monday that a deep-water
natural-gas project west of the Shetland Islands called Laggan
Tormore will produce the equivalent of 90,000 barrels of oil a
day—almost 6% of the U.K.'s total output.
Laggan Tormore is part of $50 billion of U.K. offshore projects
that were commissioned in recent years when oil prices were $80 a
barrel or more. Now those developments are coming onstream, helping
companies working off the U.K.'s coast to pump an estimated 8% more
oil and gas in 2015, about 1.6 million barrels of oil equivalent a
day.
The U.K. North Sea was once one of the world's great oil basins,
with production that peaked in 2000 with 4.7 million barrels of oil
equivalent a day. The region is home to the Brent oil field that
underpins the global pricing benchmark and was the breeding ground
for technology that allowed oil companies to drill in deep, stormy
water.
The North Sea's fields have gone into a rapid decline in recent
years, with production falling to less than 1.5 million barrels a
day in 2014 as the fields emptied out. Squeezing out some of the
last petroleum there can be some of the costliest projects in the
world.
A project led by Total committed to invest $5 billion in Laggan
Tormore in 2010, when oil prices were $80 a barrel and rising. Few
projects of its size, scope and technical difficulty would be
launched now, with oil prices hovering around $30 a barrel,
analysts said.
Oil prices are trading some 70% below their peak in 2014, amid a
global glut of crude that far outpaces daily demand. The price
collapse has fueled concerns that the decline of North Sea oil will
accelerate.
At current oil prices more than one-third of fields are running
at a loss, said Mike Tholen, economics director at Oil & Gas
U.K., an advocacy group for oil companies.
"The question is what's next after the current wave of
investment has worked its way through," Mr. Tholen said.
Even before oil prices crashed from a peak of $115 a barrel in
2014, the North Sea was struggling. Escalating costs, dwindling
opportunities, technically challenging fields and a complex tax
structure had already posed significant challenges for the
companies.
One project still awaiting sanction is the Rosebank development
led by Chevron Corp. In 2013, Chevron delayed its final investment
decision on Rosebank, also west of the Shetlands, because of rising
costs.
Chevron said the company remains focused on improving the
economics of the multibillion-dollar development and is still
conducting additional engineering work.
"It is premature to make any statement on a final investment
date for the project," the company said in a written statement.
Companies have cut back on exploration drilling, which means
there will be fewer opportunities to tap in the future. Last year,
companies were forecast to have drilled only 14 exploration wells,
down from about 40 in 2014, according to Oil & Gas U.K.
Much of the infrastructure—the pipes, platforms and processing
facilities that keep the oil and gas flowing—is old, requiring
constant maintenance and repairs. The smaller companies that work
on squeezing the last drops from older fields have struggled to
raise the necessary financing because of the lower oil prices and
have scaled back work.
The total volume of oil and gas produced on the U.K. Continental
Shelf, typically known as the North Sea, rose 8.6% in the first 10
months of 2015, compared with a year earlier, according to the
U.K.'s Department for Energy and Climate Change.
Output in November and December historically tends to be more
stable, which would result in a full-year increase of 8%, Oil &
Gas U.K. said. Oil and gas output totaled 1.49 million barrels of
oil equivalent a day in 2014.
The aging North Sea basin has been in production since the
1970s.
Utility SSE PLC of the U.K. and Dong Energy of Denmark also have
stakes in Laggan Tormore.
Write to Selina Williams at selina.williams@wsj.com and Inti
Landauro at inti.landauro@wsj.com
(END) Dow Jones Newswires
February 08, 2016 13:05 ET (18:05 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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