Despite a recent spike in oil prices, energy industry chiefs warn that infrastructure investment in the North Sea will not jump in tandem.
Scaring investors away is market volatility, they say.
Bosses from the oil and gas sector gathered last week in the Scottish coastal city of Aberdeen for an industry conference that delivered little optimism regarding the outlook for North Sea development.
Oil & Gas UK, an organization representing Britain’s offshore energy industry, hosted the Aberdeen gathering amid a sharp domestic downturn that has curbed business investment across the country.
“Businesses have already found 2009 a turbulent, tough year and the UK offshore oil and gas industry is no more immune to these pressures than the rest of the economy,” Oil & Gas UK said in a statement. “There is growing concern that the rapid fall in oil prices and the freezing of capital markets will impair investment and suppress production in the North Sea, with wider implications for companies and employment across the supply chain.”
Oil prices, despite a solid rally in recent months, languish more than 50 percent beneath record highs struck one year ago.
“Even the short term, recovery in oil prices of the last two or three months is way too early to positively impact people’s decision [to invest] in the long term,” Bob Keiller, chief executive of energy industry services provider PSN, said.
“The volatility [of oil prices] has affected the confidence in investments,” added Keiller in Aberdeen, a city whose wealth has ballooned since the discovery of oil in the neighboring North Sea during the 1970s.
According to Oil & Gas UK, expenditure on North Sea exploration was down 70 percent at the start of this year compared to a year earlier.
Investment that totaled £5 billion (US$8.1 billion) last year could fall to £2.5 billion this year, the industry body said.
Malcolm Webb, president of Oil & Gas UK, said that erosion in capital expenditure for North Sea exploration had begun in 2006, when oil prices were far below current levels.
“Our statistical review shows that UK [oil] production has dropped 38 percent since 2000 to 2008. When I listen to people discuss what I call the ‘seductive run up’ in oil price, I am worried that this is masking a much less talked about fact — gas prices. They continue to fall. When you assume that 50 percent of North Sea production is gas, the average North Sea realization today is still around US$40 per barrel of oil equivalent,” he said.
Soaring costs of exploration have hampered the industry, one expert said.
“Between 2004 and 2008 the cost of operations has more or less doubled,” said Alex Kemp, professor of petroleum economics at the University of Aberdeen Business School.
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