North Sea oil production Forecast

UK Government North Sea Fiscal Receipts

Source: DECC, UK Office for Budget Responsibility, “Fiscal Sustainability Report 2014”, Prienga (author’s) estimates

This is the scenario which I would recommend to a voter in Scotland as most likely. The North Sea will continue to decline at an elevated, but not draconian, pace. Oil prices will increase. But as seen in the last decade, cost increases will outpace revenue increases, for the reason that consumers’ willingness to pay more for oil, beyond the carrying capacity value of $115 / barrel, will be limited to GDP growth and efficiency gains. That is, the pace at which North Sea geology is deteriorating is likely to remain greater than the growth rate of global purchasing power. As a result, North Sea economics will deteriorate. In the worst case, fiscal receipts all but dry up by 2020; in the better case, they dwindle to insignificance by 2025.

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The oil business in Scotland is more than just the UK North Sea fiscal receipts. It is, even more importantly, the oil field services business, centered around Aberdeen. How will Aberdeen fare in the coming years?

Aberdeen supplies more than just the UK offshore oil sector. It also delivers the highest quality and most sophisticated oil technologies and services around the globe.

About half of supply chain sales in Aberdeen are to the UK North Sea, and another 10% or so are to Norway. These will decline in line with oil production in these two regions, although revenues to an extent will be supported by North Sea decommissioning and on-going maintenance activities. Still, this side of the business will see declines on average.

Non-Norwegian exports constitute the other half of the market, and this portion should remain in somewhat better shape. The principal export regions are Europe, Africa and the Middle East. UK firms would expect to win work in deepwater Mediterranean gas fields off the coasts of Israel or Cyprus, for example. In Russia, UK firms might provide material support to Arctic projects. In Africa, Angola is the key market, with as yet unknown pre-salt potential there. Nigeria could be a strong market if politics become more tractable there, and LNG in Mozambique is likely to bring work to Aberdeen. In the Middle East, the Red Sea is the new frontier. Its deepwater potential is not yet well understood, but should that region develop, UK firms would be first in line and Aberdeen would profit.

Having said that, deepwater has not really lived up to its potential. Angola’s output has hardly budged; Nigeria’s offshore production has declined. The US Gulf of Mexico is seeing production gains, but Brazil is likely to be adversely affected by the re-election of Dilma Rousseff as President of Brazil. Ukraine has compromised Russia's Arctic offshore development. All of these have a greater or lesser negative effect on the UK oil field services supply chain.

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