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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 ...

Mr. Webb said the current investment boom will quickly fade unless companies are encouraged to explore in the deeper waters west of the Shetland Island and in the more complex, high-pressure, high-temperature fields.

In fact, the sheer scale of the investment is an indication of the challenges the industry faces.

The record spending is occurring because companies “are progressing development projects in an era of higher oil prices, but also because they are pursuing much more technically challenging projects as well,” Lindsay Wexelstein, Edinburgh-based analyst for the global consultancy Wood Mackenzie Group.

With a new focus on capital discipline, international oil companies are shifting investment away from plays that offer substandard returns. California-based Chevron Corp. and Norway’s Statoil ASA have both recently shelved major projects in Britain’s offshore.

“Some of the projects that are being progressed at the moment are very marginal,” Ms. Wexelstein said.

“The cost escalation we’ve seen in U.K. North Sea really is putting pressure on these project economics.”

Fast-rising operating costs are “unsustainable and will result in yet more fields being shut-in and prematurely decommissioned if it is not addressed,” Oil & Gas UK says.

Indeed, while companies such as BP and Nexen are doubling-down in the offshore region, Calgary-based Talisman is beating a retreat.

Two years ago, Talisman sold a 49-per-cent interest in its U.K. North Sea assets to China Petrochemical Corp. (Sinopec), and shifted operating control to a joint venture subsidiary based in Aberdeen, which has interests in 42 fields. Talisman committed to spending $2.5-billion over five years on the joint venture, a deal that recently-appointed chairman Hal Kvisle called a “major burden” for the company.

The Calgary firm is now looking for a buyer for its remaining 51-per-cent interest, and its not the only company with British assets on the block.

Political uncertainty

With costs pressures and aging infrastructure, the political uncertainty arising from the independence referendum is one more challenge for operators in the North Sea.

The industry has – for the most part – been determined to stay out of the political debate. Nexen’s Mr. Kennedy said the company is “hugely interested, but hugely neutral” in the outcome of the September vote, but that it hasn’t affected any investment decisions.

Certainly, the politicians from each camp have argued their side would provide the best stewardship for the North Sea bounty.

The Scottish National Party have slammed London’s management, especially the series of tax increases since 2002 when oil prices began climbing. The SNP has vowed to create a savings fund, similar to the much-praised Norwegian fund that now has more than $900-billion in assets.

Whitehall’s Mr. Fallon said the British government is best positioned to manage the North Sea industry, given the need for a well-financed regulator and tax concessions to cover things such as unconventional development and decommissioning costs.

Scottish Energy Minister Fergus Ewing scoffed at that reasoning, saying smaller jurisdictions such as Norway and even Newfoundland and Labrador have shown themselves perfectly capable of managing an offshore industry.

“We hear a lot of political assertions [from London] that are contradicted by the facts,” Mr. Ewing said in an interview. “The U.K. has treated the North Sea industry like a cash cow to be milked in times of trouble.”

Oil & Gas UK’s Mr. Webb said the industry will have to work with whatever result emerges from the independence debate, where polls show a consistent but not commanding lead for the No vote. Whatever the result, the government that holds sway will face a big challenge to ensure that milch cow doesn’t run dry.

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