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UK oil: selling worthless paper to chumps

Remember that shiny new multi-billion barrel oil discovery someone found off the coast of Scotland?  It turned out to be a damp squib.

This, more or less, has been the story of UK oil and gas for the last decade.  The myth is that there is still a vast quantity of undiscovered oil and gas sitting beneath the UK continental shelf, and that new technologies and drilling practices will soon have the black gold flowing again.  The reality is that North Sea production peaked in 1999 and has declined by 60 percent since then.  We have found and drilled all of the big deposits, and are now scrambling around for deposits that are so small, expensive or difficult to access that nobody bothered with them until Britain became a net importer of oil and gas a few years ago.

The single biggest problem for the North Sea industry today is securing investment capital.  The collapse in oil prices from mid-2014 resulted in the North Sea industry losing money for the first time.  At one point the entire industry was worth less than Marks and Spencer (a UK retail chain).  With the heady boom years of the 1980s and 90s receding in the rear view mirror, the oil majors selling off the majority of their North Sea holdings, and no sign of higher oil prices it is much harder to convince investors to speculate on opening up new oil and gas deposits.

The industry’s response to this has been to borrow a practice from the fracking industry playbook – overstate your recoverable reserves.

The US fracking industry is notorious for making ridiculously exaggerated claims about its profitability in its press releases and investor briefings while meekly reporting far more modest estimates to the US Securities and Exchange Commission (which can prosecute them if they misreport their reserves).  The result was that less than a decade’s worth of oil and gas was misrepresented as “Saudi America” and the “century of energy independence.”

In the UK, too, this approach to selling worthless paper to chumps is becoming the norm.  Whether it is the billions of barrels of sweet crude sitting beneath Gatwick airport, the centuries of shale gas beneath Cheshire, Lancashire and Yorkshire, or the supposed ultra-deep water oil deposits in the Northeast Atlantic, the sales pitch is always the same: generate a media storm by massively over-claiming how much oil a field contains in order to dupe investors into funding your project.

Media coverage of Hurricane Energy provides a recent example.  A month ago the BBC was reporting that Hurricane had made the “largest undeveloped oil find in UK waters.”  The new deposit could contain a billion barrels of recoverable oil – far greater than the average discovery of just 25 million barrels made in recent years.

To be clear, none of this was false.  Nevertheless, the way it was packaged in the media amounts to little more than fake news.  On May 8 2017, Hurricane published its Competent Person’s Report into the field.  This showed that best estimate of the amount of oil that it is technically possible to recover was 523 million barrels (half of what was stated in the media) even though the amount of oil beneath the ground ranges from 1.5 to 3.3 billion barrels. Nor is this the end of the story.  There is a big difference between what is technically possible and what is economically possible.  Hurricane’s fields are not in the North Sea, they are in deep (and rough) waters in the Atlantic west of Shetland.  There’s a reason why the big oil companies left those oil deposits alone – they are expensive and there are cheaper deposits to be found elsewhere.  Hurricane’s best estimate of the amount of oil that can be profitable recovered is just 37.3 million barrels, and this could turn out to be as low as 28 million barrels – roughly 8 hours’ worth of global oil consumption: that’s going to be a big disappointment to any pension fund managers who thought they were buying a stake in a multi-billion barrel oil project – the difference between $45 billion and just $1.7 billion.

Sure, a stake in a $1.7 billion project is not to be sniffed at.  Like all gambles, it might pay off.  But nor is it the sure-fire bet that the media coverage suggested.  And while it is important to the companies involved less than a day’s worth of oil to be recovered over six years is barely worth a mention in global terms.

The reality is that the global oil industry is reaching the end of its shelf life.  New discoveries are now replacing a just tiny fraction of the oil that we consume.  Those discoveries tend to be in small, difficult to reach fields at the limit of the industry’s technical capabilities.  On the other side of that equation is a global economy mired in debt and so damaged by the post-2008 depression that global consumption cannot withstand prices above $50 per barrel.  This renders the size of any new discovery practically irrelevant.  All that matters is how much of that oil can be profitably produced and sold at a low price.  And the sad answer to that question for declining economies like the UK is; not very much.

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