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An aerial view of Nexen’s Golden Eagle offshore drilling platform in the North Sea about 70 kilometres northeast of Aberdeen, Scotland. (NEXEN)
An aerial view of Nexen’s Golden Eagle offshore drilling platform in the North Sea about 70 kilometres northeast of Aberdeen, Scotland. (NEXEN)

Twilight in the North Sea: The push to revive a fading oil source Add to ...

This former fishing town on Scotland’s east coast likes to boast that it’s the “Energy Capital of Europe.” It’s a claim threatened by mounting challenges in the prolific offshore oil fields of the North Sea.

Aberdeen has an ancient air with its centuries-old architecture and silver-hued, granite buildings, but today is humming as a key centre in the modern oil business. Its busy docklands echo with repair work while a small convoy of supply vessels sit anchored off its sandy beach waiting to secure a berth in the harbour.

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Some 70 kilometres off the coast lies Golden Eagle, a $3.3-billion project operated by Calgary-based Nexen Energy ULC that will produce 70,000 barrels of oil a day for a Nexen-led consortium.

Nexen – now owned by China’s CNOOC Ltd. – is in the vanguard of an investment boom in the North Sea, as global energy companies spend record amounts of capital to squeeze more oil and gas from the mature offshore fields that have long been a boon to the British, and indeed global, economy. Over the previous year and this, the industry is expected to invest a staggering $45.6-billion, mostly on developing new fields and rehabilitating old ones.

After years of struggling with the giant Buzzard field, Nexen now has that property producing efficiently and is in the process of commissioning Golden Eagle. The project is both on budget and on schedule, managing director Archie Kennedy said in an interview.

“The bottom line is certainly we at NexenCNOOC see the North Sea as attractive, and we are continuing to invest both in projects and in exploration,” said Mr. Kennedy, a soft-spoken Scot who joined the company in early 2012 to lead its North Sea operations.

But despite the current buzz, there are big questions about the future of Britain’s North Sea oil industry.

Production has plunged in the past decade to 1.4 million barrels a day from 3.5 million. Per-barrel operating costs have soared more than fourfold, to £18 ($32) from £4 a decade ago. And while companies are spending heavily on development, exploration drilling has declined to the lowest rate of activity over the past three years since production began on the U.K. continental shelf (UKCS) in the early 1970s. Just 15 exploration wells were completed last year.

There’s also political risk. The Scottish independence referendum scheduled for September has thrown uncertainty into the equation as opposing politicians in London and Edinburgh trade warnings about impacts on the sector if the vote does not go their way.

Reviving North Sea production

Without dramatic efforts to reverse course, production from the UKCS will continue to fall. That would gut a sector that employs 450,000 people in Britain, supports a homegrown, globally active service industry, and paid the equivalent of $11.7-billion in direct taxes last year.

It would also deprive the world of an important source of non-OPEC oil at a time when growing Asian demand and ongoing conflict in the Middle East will keep pressure on prices for the foreseeable future. Norway’s aging North Sea fields have also seen a steep drop in production – to 1.4 million barrels a day in 2013 from 3.4 million in 2001.

Several Calgary-based companies – Nexen, Suncor Energy Inc., Talisman Energy Inc. and Canadian Natural Resources Ltd. (CNRL) – have significant investments in the U.K. North Sea, and the profitability of those investments rests in part on the ability of government and industry to work together.

After being blamed for driving away investment by raising taxes, the Conservative government of Prime Minister David Cameron is now working hard to revive the sector, even as it fends off challenges from Scottish nationalists who accuse London of mismanaging the resource. Last year, the government appointed industry doyen Sir Ian Wood to study and make recommendations on how to maximize recovery. It is now conducting a fiscal review with an eye to a creating a more stable and competitive tax regime.

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