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U.K. to take 2013 oil hit before North Sea recovery

Nexen’s Galaxy III offshore rigs with the newly installed fourth platform in the foreground in the North Sea are seen in this May, 2010, photo. Declining North Sea oil production has undermined the British government’s attempts to kick-start growth and helped push the $2.5-trillion (U.S.) economy to the brink of a “triple-dip” recession.


Britain's stagnating economy will take another hit from waning U.K. North Sea oil production this year before a mini-recovery takes hold in 2014, removing a handbrake on medium-term growth in the world's No. 6 economy.

Declining North Sea oil production has undermined the British government's attempts to kickstart growth and helped push the $2.5-trillion (U.S.) economy to the brink of a "triple-dip" recession.

But after three years of gloom, from 2014 onward oil production could become a bright spot for the economy: industry body Oil & Gas UK forecasts a historic pick-up in output, fuelled by a surge in investment.

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"The wave of investment is coming to deliver a lot of new production in the years ahead," Oil & Gas UK's economics and commercial director Michael Tholen told Reuters.

A rise in production from next year would be the first since 1999, and could aid the economy's return to growth, which is expected to be one of the main issues in the 2015 election.

But before any recovery, there will be another dip.

Oil and gas production will fall by between 3 and 6 per cent this year, the industry group said in its annual activity survey published on Monday, on top of a 14-per-cent decline in 2012.

Once a major boon for the British economy and sterling, oil and gas production has fallen by about two-thirds since 2000.

Falling oil production held back growth by 0.2 percentage points of gross domestic product last year, Office of National Statistics data showed, having already acted as a drag in the previous two years.

Moody's cited sluggish growth as the main reason for stripping Britain of its top-notch triple-A rating.

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North Sea revenues started pumping in the mid-1970s, helping turn around British government finances under former prime minister Margaret Thatcher after a tough decade in which Britain went to the International Monetary Fund for a loan in 1976.

Though in decline, the oil industry still plays a significant role in the British economy, providing an estimated 440,000 jobs and accounting for almost one quarter of total corporation taxes received by the Exchequer in the 2011-12 financial year.

Britain's production will rise to around 2 million barrels of oil equivalent per day by 2017, up from 1.55 million in 2012, the group forecast.

Investment in the North Sea hit £11.4-billion ($17.4-billion U.S.) in 2012, its highest level for 30 years, said the group, and will rise to £13-billion in 2013, continuing its increase from a 2009 trough.

"By 2015 you've got a massive amount of production coming in. They are big chunks of production. That's happening," Mr. Tholen said.

New fields such as Total SA's Laggan-Tormore project and Nexen's Golden Eagle development will be key to helping lift production in 2014.

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The last two years have been particularly bleak for the aging North Sea province. Production plunged by a third from 2010 to 2012, exceeding Oil & Gas UK's expectations of a more muted decline.

To blame was a shortage of new developments in 2008 and 2009, which started to bite into output in 2011. There was also a gas leak at Total's Elgin field which shut down around 3 per cent of British output last March, and a long maintenance period on the country's biggest field, Buzzard.

Total said in January that Elgin would start pumping again within weeks, but warned that it may not reach full capacity for months or even years.

Production falls were also a result of the old age of North Sea structures. Fields have been taken offstream for unplanned maintenance on older platforms, and to check and improve structures in the wake of the Gulf of Mexico oil spill in 2010.

"There's been a massive amount more maintenance in the last few years," Mr. Tholen said.

Maintaining the North Sea's revival beyond 2017 depends on exploration, said the survey, noting that new discoveries were not keeping pace with the reserves going into production.

Britain's part of the North Sea has in recent years been overshadowed by success in Norway, where a string of big discoveries including the Johan Sverdrup field, 2011's biggest find globally, has contrasted with smaller finds in U.K. waters.

"The real issue is, we've been drilling fewer wells," Mr. Tholen said, explaining that a third fewer wells were drilled in the period 2009 to 2012 compared with the previous four-year period.

The survey forecast that exploration drilling would pick up this year, rising to 37 wells compared with 24 in 2012, giving Mr. Tholen hope of more discoveries in Britain.

"We're rapidly eating into the cupboard, we need to restock it," he said, noting that Johan Sverdrup was not far from the U.K.-Norway maritime border.

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