UK offshore outlook remains gloomy

As the UK offshore industry struggled to emerge from last year's economic slump, dubiously hopeful headlines began recurring in the trade press. The promise of a "Third Age" for the province had the ring of a sector trying to win itself over to the idea that the future wasn't as bleak as it seemed.

Numbers told the truer tale. Many months after the US Gulf Coast market had shaken off the gloom of the global downturn, rig market observers still had were reporting North Sea counts languishing at historic lows.

Taking the long view became a necessity in Aberdeen.

When oil shot up to $30/bbl and little improvement was seen on the orderbooks of North Sea contractors, frustrations grew. Sluggish activity levels were explained away first by the time lag between the price recovery and E&D activity gearing back up, then by the $10/bbl still being used as a floor for new developments.

The UK offshore crisis has, in a sense, been lying in wait for as long as the sector has existed. That there is no shortage of oil on the UK continental shelf is clear. Industry consensus puts remaining technically recoverable oil reserves at around 26 billion bbl, roughly as much as has been produced. One main problem-traceable to the earliest licensing rounds-is that much of it lies on stranded acreage.

Fallow initiative

The first attempt to alter the reality that operators awarded blocks in those first rounds are not obliged to relinquish them before 2010 at the earliest, if undeveloped, came last year with the government-industry Lift asset-trading website. The second-February's "Fallow Initiative"-is making more of a difference.

The use-it-or-lose-it scheme is starting to bear fruit. Of 199 blocks first classed as fallow, three have been drilled, 19 now have "firm" drilling plans, 77 will see new geophysical work leading to an "action plan," and 38 have or will be given up in the next year.

To independents hungry for acreage and work-starved UK contractors, the associated bluer economic skies must seem distant indeed. One US investment banker based in Aberdeen emphasized the scheme wouldn't radically change the behavior of majors in "harvest mode" in the North Sea because it relies "too much on the carrot and not enough on the stick."

Sharing blame

Government must bear primary responsibility for leaving the issue of stranded acreage unchallenged until now. Still, oil companies on the recovering UKCS cannot consider themselves blameless. Even when it became clear commercial push would come to shove, few felt compelled to surrender prospective acreage when reduced post-recession head counts were demanded by "high-return projects" elsewhere.

With most majors reporting record first quarter earnings in a climate where shareholder satisfaction is king, it is hard to muster a counter-argument. The North Sea oil business has often seen itself in evolutionary terms; perhaps it should start planning for the eventuality of Big Oil's move "beyond petroleum." BP CEO John Browne says his company aims "to renew the life of established provinces which on the basis of old approaches would already have reached the end of their useful life." Sounds promising for some-and stirs new hope for the UK offshore industry as a whole, too.