Judging by the headlines last week, Britain was well on its way to an oil-powered future. The discovery of what may or may not be a billion barrel field was presented as the start of a new golden age for an oil industry that displays all of the hallmarks of terminal decline. However, even if the billion barrel prediction proves correct, there is good reason to hold onto your wallet for the time being.
In a sober reflection on last week’s hype, Andrew Ward and Nathalie Thomas at the Financial Times present good reasons to be cautious. The most obvious point they raise about the “new” discovery is that it is not in the North Sea:
“Oil industry leaders have been pinning their hopes on the west of Shetland region to breathe new life into UK production since the 1990s, when BP began developing a trio of fields — Foinaven, Schiehallion and Clair — on the Atlantic frontier.”
There are good reasons for being cautious about investing in oil recovery in such an unforgiving part of the planet:
“Other companies were slow to follow, deterred by hostile weather, lack of infrastructure and relatively deep water compared with the North Sea.”
In addition, the geology west of Shetland may mean that most of the oil will stay in the ground:
“Hurricane’s discoveries are in a layer of rock called ‘fractured basement’, beneath the softer sandstone from which most North Sea resources have been recovered. ‘The jury is still out as to how much of this oil will be economic to produce,’ says Keith Myers, head of Westwood Global Energy Group, a consultancy.”
Indeed, the only reason that the “new” field is being drilled is because oil companies believed the 2011-14 hype about oil prices staying high indefinitely:
“Yet, while these projects promise a fillip to UK production, they are a legacy of investment decisions made during the era of $100-a-barrel oil.”
At a time when the world is over-supplied with oil, other oil companies with holdings west of Shetland have been unable to find a means of economically recovering the oil:
“A test of the appetite among the oil majors will be Rosebank, a large field left untapped by Chevron since its discovery west of Laggan-Tormore in 2004. The US company in December cancelled a $1.8bn deal with Hyundai Heavy Industries for a floating production and storage vessel for Rosebank and re-tendered the contract in a bid to reduce the £6bn development cost.”
Assuming that Hurricane Energy can find a means of navigating around this list of problems, the impact of their discovery is unlikely to do much for the fortunes of Scotland or the UK. If prices rise in the near future, new oil from west of Shetland may arrest the decline of the industry for a few years. But with the North Sea fields entering the decommissioning phase the UK is going to be a growing net importer of oil for as long as other countries are prepared to sell it to us.