If cost reduction in the industry goes far enough, it could start to unlock new projects, with net positive effect for the industry, the industry’s leading economist said last night (23 June) in Aberdeen.
But, both Professor Alex Kemp, who was marking 50 years of working in petroleum economics at the University of Aberdeen, and senior executives also attending the event, said research in and use of new technology would have to play a key role.
Professor Kemp started his tenure at the university right at the very beginning of the North Sea oil and gas industry. Just a little over 50 years ago, the first discovery was made – the West Sole field in the southern gas basin, said Andy Samuel, the CEO of new industry regulatory body the Oil and Gas Authority (OGA) and a keynote speaker at the event. “Sony released its first tape recorder and the Beatles were at the top of the chart with day tripper. That year Alex started his 50 years here [at the university].” Since then, 11,000 wells have been drilled and some 43 billion boe produced.
While the event was celebratory of Prof Kemp’s milestone, as well as his achievements, advising governments around the world, writing the North Sea’s official history, and not to mention creating the university’s petroleum economics department, it was also reflective of the future of the industry.
The new regulator, the OGA, was called for at a time before the oil price slump, due to falling production and exploration rates in the industry. Since then, and the oil price slump, efforts have been put into improving production efficiency, increasing exploration, improving the fiscal regime and improving collaboration.
But, said Samuel: “I do believe it is really the behavior, the culture, that is going to make a difference or not. What we see is when people do collaborate there is more value. We all recognize there is inherent resistance to change. Are there too many initiatives perhaps and not enough focus or aligned action? There is a need for a single national compelling vision for UK oil and gas.”
He said it would be credible to reduce wells costs by half just by doing things better. This included sharing well data, an initiative around which has started on the UK Continental Shelf, alongside logistics and spare parts sharing initiatives. By reducing ownership complexity, small pools resources could be tapped.
Technology would also play a role where it came to some of the bigger discoveries waiting to be discovered. “Technology can unlock and find new fields,” he said. “I cannot emphasize how pivotal technology could be in creating this new future for maximizing economic recovery and to inspire the next generation. Big digital, big data, this what the next generation needs to hear. Let’s create a center of excellence for mature basin solutions. We must rekindle and recapture that excitement and imagination from the early days.”
Mark Thomas, North Sea region president for BP, said taking a long-term view, while perhaps not often not taken by the oil industry, was more important now than ever. “The North Sea really does find itself at a cross roads,” he said. “Decisions made today will set the tone for 10-15-20 years.” He also said technology would play a “crucial role,” such as real time data, improving safety, reliability and inefficiency.
Prof Kemp looked at historic data, comparing where we are economically today, compared to in the past. A key difference today is the high number and distribution of small undeveloped discoveries, with some 170 up to 15 MMbbl discoveries, containing a total 1.2 billion boe, and some 213 in the up to 20 MMboe category, totally 2 billion boe.
“We are now in a situation where a lot of quite small fields, many discovered quite a long time ago, and they are not on the planning horizon at the moment. The reserve base is substantial, but the distribution is very different [to before].”
The positive news is that in the past, oil firms have brought costs down. If they’re able to cut costs enough, it could spark investment in some of the currently uneconomic resources.”
Prof Kemp also looked at modelling the university had done into the UK’s taxation regime, based on $50/bbl oil prices, and concluded that to really have an impact on investment, a cut in the sector’s 30% rate of corporation tax would be needed. Current rates, which follow tax cuts made earlier this year, were actually reducing the incentives based on standard oil firm metrics, he said. But, a potential issue could be the Treaty of Rome, which rules against state aid.
For Prof Kemp, investment in technology is also key. “Research and development for the fossil fuel sector has gone down dramatically since the 1980s,” he said. “We do need more research and development work. The Oil and Gas Technology Centre (a new private sector initiative under ONE – Opportunity North East – with private and public sector funding) has to be welcomed. Giving substantial consideration to small pools would be a good idea.”
Encouraging asset integrity management, optimizing use of infrastructure, including terms of access, such as tariffs, as well as potentially looking to have government loan guarantees, and an emphasis on total value added, i.e. taking into consideration the value of the supply chain, were also highlighted by the professor.
For OE’s part, we’d also like to congratulate Professor Kemp for his achievements throughout his career as well as thank him for his contributions to OE, as well as his knowledge, company and humor.
Recent contributions to OE by Professor Alex Kemp
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