The price of oil increased from less than $3/B to about $11/B in late 1973-early 1974 (Arab Israeli war October 1973, Arab oil embargo and OPEC deciding to set the price of oil). There was another increase in the price of oil in 1979-80, from about $11/B to more than $40/Bl in spot sales and an average of about $37/B in 1980 (Iran’s Islamic Revolution and Iraq’s military attack on Iran).
These jumps in price led to a decrease in the demand for oil (consumer reaction, public policies, recession, etc). In the years following the 1973 price rise, world oil consumption fell by about 2mn b/d, and following the 1979-80 price rise, it fell by about 6mn b/d (see graph 1). In particular, with the fall in demand after the second price jump, there was a strong downward pressure on price. In order to defend the price of oil, OPEC started to reduce supply by cutting its production.
The total cut amounted to about 14mn b/d for the ‘core members’ of the Organisation in the first half of the 1980s (see graph 2). (In this discussion, the term ‘core members’ includes Algeria, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the UAE and Venezuela). This was a significant loss of market share for OPEC, but allowed the Organisation to maintain the price in the $27-28/B range.
At the same time, however, the areas outside OPEC benefited from the high price and increased their production by about 6mn b/d. This exerted additional downward pressure on price and caused severe stress for OPEC. The North Sea was the main ‘culprit’ – a thorn in the side of OPEC with an increase of 1.5mn b/d (see graph 3) in production (UK: approximately 1mn b/d, Norway: approximately 0.5mn b/d). Ultimately, however, the price defence by OPEC was not sustainable, and the Organisation ended its production policy and began to sell its oil on netback pricing formula and the price of oil collapsed to less than $10/B in 1986. This caused a major crisis in all oil producing areas of the world. Companies were forced to cut their operations and there were massive staff redundancies in the global oil industry.
CONTRASTING POLICIES AND output PROFILES: NORWAY & THE UK
The North Sea provides an interesting example of two contrasting government policies for managing their hydrocarbon resources, and shows the impact of those policies on the countries’ oil production.
The UK government followed a ‘free market’ policy and ‘hands off’ approach that allowed almost open access to the investors in North Sea oil and gas. On the other hand the government in Norway followed a more regulated policy and a close control on the investments and operations.
These differences reflected partly the different politics of the parties in power – conservative (Mrs Thatcher) and socialist (Mrs Bruntland). However, the Norwegian oil policy also reflected the country’s low population, a much smaller economy and the need to maintain stability and avoid high inflation and ‘Dutch Disease’.
As a result of these contrasting policies, field operations and oil production grew rapidly in the UK, but only at a moderate rate in Norway (compare production profiles in Figure 4). More importantly, as a consequence of the two contrasting government policies, oil production fell in the UK in response to the 1986 collapse of the price of oil, but continued its growth in Norway.
In the UK, production declined by 33% from 2.6mn b/d in 1986 to 1.7mn b/d in 1989. In Norway, crude oil production increased by 79% from 0.8mn b/d in 1986 to 1.5mn b/d in 1989.
With improvement in the price of oil, investment was gradually resumed in the UK sector and its oil production began to increase from around 1993. It reached its maximum rate of 2.73mn b/d in 1999. On the other hand, the Norwegian production, though lower, was not interrupted by the 1986 oil price collapse. In fact it grew more rapidly and overtook the UK production in the early 1990s. It reached its maximum rate of 3.25mn b/d (higher than the UK maximum) in 2001.
IS IT THE END FOR NORTH SEA OIL?
The historical production profiles in graph 4 clearly show that oil production in the North Sea reached a peak followed by a short plateau and then began to decline.
The details of the two countries’ profiles differ, but the overall shapes are very suggestive of a bell-shaped (Hubbert) curve and remind us of the pioneering work by Dr King-Hubbert who in 1956 correctly predicted that the US oil production will reach its maximum (peak) around 1970. His main assumption was that the US oil resources were finite, thus production gradually rises until it reaches a maximum and then begins to decline – a bell-shaped curve.
However, the curves in graph 4 also suggest that although production is declining, the slope of the declining limb of the ‘bell curve’ is smaller than the slope in its rising limb.
The ‘bell curve’ is not exactly symmetrical. This phenomenon has also been observed in other oil provinces of the world. New technologies, entrepreneurial spirit, continued investment and aggressive management result in new exploration concepts even in mature areas and also result in extracting more from the oil in place in the subsurface. The North Sea has witnessed many such success stories.
The Buzzard Field was discovered in 2001 and its reserves at the time were estimated at about 0.5bn barrels. By 2010, its reserves were revised upwards to 0.8bn barrels. Avaldness Field was discovered in 2010 with reserves estimated at about 0.4bn barrels, but with upward revisions they could be nearly 2bn barrels. The Schiehallion and Loyal Fields went onstream in 1988 and had produced about 400mn barrels by 2011 when about 450mn barrels were added to the reserves estimates and the fields’ life is expected to extend to 2030. The Forties Field has been in production since 1975 and was planned to be decommissioned by 2012. However, new investment and field work have increased the reserves, adding nearly two decades to the expected life of the field.
Notable increase in reserves has also been experienced for other old fields such as Oseberg, Ula, Ekofisk and Varg. Many other old fields that were expected to be decommissioned by the late 2000s are still producing and their decommissioning has been postponed to future years. In addition, the use of advanced technologies has allowed the development of many small fields that were previously considered to be un-commercial.
Thus production in the North Sea is not going to end soon, although one cannot expect a return to the ‘glory days’ of more than 5mn b/d. Oil and gas production will continue into the next decade and beyond, though at much lower rates. The rate of production, however, will depend on the level of future investment and field operations. Briefly stated, there is still life ahead for the North Sea!
The historical oil production profiles of Norway and the UK (see graph 4) suggest that the areas under the two curves are broadly comparable. In other words, their ultimate reserves are of similar size. In an exercise, the cumulative oil ‘discoveries’ for the two countries were computed for the period of 1970 to 2013. These are the sums of the annual production and that year’s reported remaining reserves. The intention was to see if the resulting graphs give suggestions of ‘creaming curves’, that the annual additions become gradually smaller over the years and the cumulative plot approaches a horizontal plateau (an asymptotic value – the ultimate reserves). The results are shown in graph 5. It is interesting that although the two curves differ greatly over the period before the mid-1990s, they become very similar in the following years, suggesting comparable sizes for the ultimate recoverable reserves in the Norwegian and the UK sectors. This is indeed remarkable.
However, a closer examination shows that although the slopes of the cumulative curves have decreased in recent years, they are not yet horizontal. In fact they are suggestive of a trend continuing to rise in the coming years. Interestingly, the curve for Norway is slightly above that for the UK, ie its ultimate reserves are greater. The Norwegian curve of cumulative discoveries also has a higher slope, indicating a greater prospect of growth in oil reserves for the Norwegian sector.
So again briefly stated, as gleaned from this exercise, there is still life ahead for the North Sea oil!
A similar exercise was carried out for natural gas. The historical production profiles and the cumulative ‘discoveries’ are shown in graphs 6 and 7. They show a clear declining curve for gas production in the UK but a still rising curve for Norway. The cumulative discovery curves show flattening for the UK but a rising trend for Norway. Indeed these are obvious considering the many recent large discoveries of natural gas in the Norwegian sector.
Once more considering natural gas, this exercise shows that there is still life ahead for North Sea gas, especially in the Norwegian sector!
A note of caution: It is important to emphasize that the above conclusions are very approximate due to the inherent limitations in this exercise, but are intended to generate debate and encourage more studies. The country data of reserves and production cover areas beyond the North Sea proper – the ‘North Sea senso stricto’. They include the Atlantic margins and the northern seas towards the Arctic. However, the distortion is not yet significant since the current production data is mostly from the North Sea proper. Gradually, however, the contributions from those regions will grow in volume. Ideally, the above exercise should be conducted separately for each region.
Similar limitations in accuracy and approximations have also been observed for the US when simplified exercises were carried out for total United States and then separately for the continental US or the lower 48 states or including the shallow offshore, the deep offshore or Alaska.
In spite of the limitations, the above conclusions from this exercise for the North Sea are instructive. Lastly, it is tempting to expect that new technologies could still lead to ‘pleasant surprises’ for the North Sea as have been experienced for the US.
*Dr Manouchehr Takin is an international oil and energy expert with the CGES in London. Personal contact: +44 (0) 7896 809 365, [email protected]