May 3 (Bloomberg) -- The future of the U.K.’s 40-year-old oil and gas industry lies on a stretch of windswept bogland in the Shetland islands 200 kilometers (124 miles) north of Scotland.
Among those islands of 22,000 people living closer to Oslo than London, Total SA is spending 3.3 billion pounds ($5.1 billion) to build a plant to process gas from undeveloped fields 125 miles away in the North Atlantic. On the same coastal inlet, a BP Plc facility will take petroleum from a 4.5 billion-pound project.
Offshore fields in the deep waters west of Shetland are leading a revival in the U.K.’s oil and gas output, which has declined every year since 1999. As explorers invest a record 13 billion pounds this year, production is poised to rise as much as 33 percent to 2 million barrels a day over the four years, according to industry group Oil & Gas U.K.
“There is a lot of activity and this is expected to last until 2016 or 2017,” said Lindsay Wexelstein, an analyst at consultant Wood Mackenzie, which estimates $65 billion will be spent on U.K. projects betweeen 2012 and 2015. “Stable oil prices at the moment and government fiscal relief is giving confidence to investors.”
After oil and gas producers received a surprise tax increase in his 2011 budget, Chancellor George Osborne has used rebates to encourage investment. Oil prices that have averaged more than $100 a barrel for more than two years are encouraging projects delayed when prices slumped during the financial crisis.
The production increase will be a boon to the U.K. economy, where activity remains 2.6 percent below 2008’s peak, and help stem the country’s growing reliance on imported energy, which reached 36 percent of the total in 2011, according to goverment data.
“The North Sea will remain competitive with the right balance between risk and reward,” said Patrice de Vivies, senior vice president North Europe at Total, which benefitted from tax relief for its Laggan and Tormore project. The region is a “mature basin and a high cost environment.”
The Shetland project will help Paris-based Total become the U.K.’s biggest producer in 2015, when output is projected to reach 200,000 barrels of oil equivalent a day from 168,000 barrels in 2011.
Total gained 1.4 percent to 38.44 euros in Paris trading today. BP rose 1.1 percent.
BP, which holds top spot today, and partners Royal Dutch Shell Plc, Chevron Corp. and ConocoPhillips have agreed to invest more than $10 billion in west of Shetland projects including Clair Ridge, Schiehallion and Loyal. Chevron and partners are studying development of another project, called Rosebank ,in the region.
Outside of the Shetlands, GDF Suez SA and its partners will invest more than 1.5 billion pounds in the Cygnus field, the largest gas discovery in the southern North Sea in 25 years. Once on line it may supply about 5 percent of the U.K.’s gas production.
“We are seeing investment at record levels,” said Mike Tholen, economics director at Oil & Gas U.K. “We’re getting back to where we should be.”
Wood MacKenzie estimates that last year’s investment levels, when oil companies battled cost inflation and technically challenging projects, were equivalent to the boom in the mid-1970s. As a result, there may be a rise in production in the coming years, or at least a temporary halt in the decline, it said.
The spending won’t last unless more and bigger fields are discovered.
“The exploration success rate was at an all-time low in 2012,” Wexelstein said. “There haven’t been any big discoveries announced since the start of the year.”
In about five years, after the burst of new start-ups and lacking big finds, all of the U.K.’s biggest operators are set to begin a steady decline.
The International Energy Agency is projecting a decline in non-OPEC oil production almost entirely due to dwindling North Sea fields, with the largest drop in the U.K.
By 2035, U.K. output is projected to slide to just 340,000 barrels a day, compared with 1.1 million barrels a day in 2011 and a peak of 2.9 million barrels of oil a day in 1999, the IEA said in its 2012 World Energy Outlook. Norwegian output will fall to 700,000 barrels a day from 2 million barrels a day in 2011 and 3.4 million barrels a day in 2001.
“Most U.K. producing fields are already in long-term decline and the fields that have been found in recent years are generally very small,” according to the IEA. Norwegian decline could be partly offset by increasing output from the Norwegian and Barents Seas and the Johan Sverdrup field in the central North Sea.
Total’s focus on the North Sea stems from a historic presence as well as a desire to offset developments in countries like Nigeria and Yemen, where security issues including theft and sabotage have led to production drops in the past year.
Half the explorer’s largest startups between 2012 and 2017 as measured by output will come from developed countries including Canada, Australia, Italy, Norway, the U.K. and U.S., according to Total’s head of upstream, Yves-Louis Darricarrere.
By connecting satellite fields to its Alwyn and Elgin-Franklin hubs in the U.K. North Sea, Total has made them equivalent to “elephants,” according to Darricarrere. He was referring to a term used for giant field discoveries.
Total started up the Alwyn platform in 1987 and Elgin-Franklin in 2001, regularly hooking up nearby discoveries to keep output flowing. The Islay field was started through Alwyn last year and the West Franklin Phase 2 could begin in 2014.
“Alwyn is an old lady of 26 years,” said Francois Lallemant, offshore installation manager at Alwyn North. Total is now investing to repair aging equipment on the platform to keep it going.
When Total decided to invest in Alwyn, it was for two decades, according to de Vivies. “Now we have 20 more years ahead of us,” he said.
The French company wants to apply the same strategy in the West of Shetlands.
“I am extremely confident that Laggan Tormore will become our third North Sea hub and that is why we are continuing exploration in the area,” Darricarrere said. Total has plans to link the Edradour field to Laggan and Tormore next year and could also tie in the Glenlivet discovery operated by Dong Energy A/S.
“We believe that out of the total potential recoverable resources in the U.K. North Sea, more than a quarter is left,” Wexelstein said. “There are still opportunities for companies to go after.”
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