Adapt or die: Challenge for North Sea oil industry

Latest figures from Oil & Gas UK show that predicted reserves are in the region of 24 billion barrels of oil equivalent. Production declined by 14.5 per cent in 2012 and, although it is expected to rise slightly this year, there has been an overall downward trend since 2000.

At the same time, costs are increasing. 2013 saw operating expenditure rise by 15.5 per cent to a record £8.9 billion and it is predicted to be higher this year.

Declining production and increased costs are not necessarily terminal as long as prices rise accordingly. This cannot be relied upon, so a better option is to find new oil and/or extract existing reserves more effectively.

The problem with finding new reserves is they are becoming more economically challenging. The past three years have seen the lowest exploration levels in history and project performance has been poor, in terms of cost, schedule and promised volumes.

There is also scope to extract existing reserves more effectively either by reducing field lifting costs by focusing on profitability over production, which will require a fundamental change of mindset, or by concentrating on production, not just by improving efficiency, but also understanding true production potential and driving to deliver that.

Adaptability is key, and by better integrating functions and operations, overall performance can be improved, from selection of locations to flowing the well

New technology will play an important role, but the sector must also revise its approach. The development of deeper, service level-based relationships will help promote long-term investment in technology, and government must provide a framework that supports investment in R&D and its application in a mature market.

These factors require a long-term view of asset development, which is often at odds with the shorter timeframe of shareholders wanting a return on investment.

All of the above are possible, but having spent the past 25 years working in exploration and production, I know their implementation is not going to be easy. As an industry, we aren’t known for proactively adapting to changing circumstances. This is no better evidenced than in the UK sector, where high staff turnover and localised wage inflation are a consequence of reluctance by the industry to address the root causes of a clear skills shortage.

But it can be done. Our clients, particularly those in the United States, have taken advantage of rising oil prices in unconventional plays, adopting proactive approaches. Adaptability is key, and by better integrating functions and operations, overall performance can be improved, from selection of locations to flowing the well.

As costs rise, reserves decline and infrastructure ages, “business as usual” is no longer a viable strategy. Change is challenging, but instead of regarding it as a burden, the North Sea oil sector must use it as an opportunity to innovate and improve efficiency, and thus become a more attractive investment opportunity.

If it doesn’t, companies’ futures and thousands of jobs will be at stake.

Gavin Hall has more than 25 years of management consulting experience serving exploration and production clients across the globe. He is currently managing director of MTG Europe, specialising in operations improvement.