The controversial Cambo oil field was left with a black hole in its budget after Shell pulled out its investment in the project. It has thrown the future of UK oil and gas exploration into doubt, and raises the question of what the rationale might be for continuing development in the North Sea.
Under national law and government policy, companies are obliged to extract all they economically can – the principle of Maximum Economic Recovery. But – economically maximum for whom?
For the UK as a whole, North Sea oil and gas has been borderline uneconomic for several years. Some years, the industry returns slightly more in taxes than it takes in tax breaks, other years, slightly less. It generates employment, but the number of jobs in the sector has fallen by about a third in just six years.
The overall economic equation has to be forward looking. UK oil output is a falling proportion of a shortly-to-be-falling global total, and extraction revenues will undeniably shrink. Meanwhile about 270 structures in the basin are already awaiting decommissioning, a number that will inevitably rise.
The UK will never be a major player in global terms, and, as a result, the existence of the North Sea industry doesn’t put a dent in prices for British consumers or increase energy security. In the first four days of this year’s gas price crunch, there were in fact record gas exports from the UK. Putting all this together you could well ask whether from a national perspective, the point of Maximum Economic Recovery has already been passed.
Shell laid the blame squarely on economic factors, suggesting that for the big majors too, the case for the North Sea doesn’t add up anymore.
The big multinationals always factor political risks into their decision-making, so the Scottish government’s coolness towards the project will probably have played a role. However, the private equity-backed Siccar Point continues to argue that Cambo makes economic sense and is looking for a new partner to plug the 30 per cent funding gap. But it will have quite a mountain to climb to persuade another company with technical prowess comparable to Shell’s that Cambo has a future.
The West of Shetland is a tough area to operate, with deep water and stormy seas. A new type of vessel is set to be used to receive oil from the seabed, store it and transfer it to tankers. If Shell saw the complexities as serious economic obstacles, any other global player will also struggle to make sense of the fundamentals.
Which leads us back to the question of what the North Sea oil site is for.
Oil from West of Shetland sites is heavy and thick, far thicker than ideal for making petrol, aviation fuel or other high-value products. This is one of the reasons why about 80 per cent of oil extracted from wells on the UK seabed never sees even a UK-based refinery – let alone a UK end user – but instead heads straight for export. Often its only connections with the UK are a licence to operate and a quick jaunt through a pipeline en route to the nearest export terminal. Meanwhile the vast majority of oil and petroleum products Britons need, we import.
So apart from the companies operating the oil wells – and the UK’s highest-producing oilfield owned by China – who really benefits?
Some have been demanding government intervention to keep Cambo afloat. In reality the UK regime is highly laissez-faire: if a company has the rights to a field and wants to develop it, then provided it meets safety and other criteria, it basically can; it’s up to the company. The government should intervene, but how exactly? By telling Shell to stay involved? Offering bigger tax breaks? Taking the project into public ownership?
Shell saw too many risks in Cambo and walked away – as big oil majors often do from projects shortly before the final investment decision is taken. It is a commercial decision based on commercial criteria, and should be respected as such. But it raises further questions about the UK’s relationship with its dwindling North Sea industry.