Oil production from the North Sea has reached its pinnacle, and the entire region is changing, contends Roger D. Read, vice president, European research, Simmons & Co. International. "What has been a market dominated by large fields and major oil companies is transforming into a market consisting of smaller fields." Production in the U.K. sector peaked in 1999 at 2.72 million barrels per day. Simmons estimates 2001 production from the British sector will average 2.39 million barrels per day, and fall by 2005 to 1.78 million. The U.K. is fighting high depletion rates, declining field sizes and reduced drilling activity. Certainly, the giant oil fields are past their prime. Of the 10 largest fields discovered in the U.K. sector, all but one are nearly depleted, notes Read. Excluding Schiehallion, which contains 85% of its original estimated reserves, the other nine fields currently contain 10% of their original estimated reserves. Furthermore, the U.K. sector has become increasingly dependent on more numerous, but smaller, fields. In 1994, 77 fields each produced an average of 32,600 barrels per day. In 2000, 145 produced 17,700 barrels per day on average. And, drilling levels have declined during the last decade, especially exploration and appraisal drilling. E&A drilling in 2000 and 2001 (estimated) was 25% to 30% the 1990 level. Indeed, it appears that the U.K. portion of the North Sea is starting down the same path already taken by the Gulf of Mexico. As the U.S. Gulf matured, the major oil companies that had dominated activity since the inauguration of offshore drilling became increasingly disenchanted with the ever-smaller discoveries and rapidly depleting assets. Big oil companies didn't desert the Gulf, but the region lost its preeminent position in their portfolios. Into that void marched the independents. For small companies, the Gulf was prime ground for growing assets and creating value. Independents are particularly suited for smaller North Sea fields as well, thanks to their entrepreneurial cultures and their focus on results. And, small projects are significant to small companies. Companies that can enter the market at reasonable costs and that practice careful cost-control should fare well. Also, firms that specialize in enhancing production from aging fields and in chasing incremental barrels are likely to be winners, says Read. The potential for the region remains impressive. The U.K. government strongly believes new, innovative and smaller companies will be key to extending the life of its North Sea production. A recent study commissioned by PILOT, an industry-government task force, says the U.K.'s producing fields could hold remaining reserves of around 10 billion barrels of oil equivalent (BOE). Some 3.7 billion of this is deemed as incremental reserves that could be accessible with developing technology; the other 6.3 billion can be recovered with existing technologies. Already, independents have scored significant success in this regard. When U.S.-based Kerr-McGee Corp. took over Murchison Field in 1995, production had declined to less than 20,000 barrels per day. The company cut costs, introduced new operating practices and drilled 16 new wells. Production has stabilized and the field life has been extended by eight years, notes the U.K. Department of Trade & Industry. Additionally, when Calgary-based Talisman Energy Inc. took over Clyde Field in 1996, it too was producing less than 20,000 barrels per day. The company upgraded the water-handling system and embarked on a drilling and redevelopment program. It also hooked up Orion, a satellite field containing 20 million BOE, to the Clyde platform, extending its life to at least 2005. The North Sea is not an exact parallel to the U.S. Gulf, however. While independents were quite successful in reducing operating costs in the U.S. Gulf, they should not rely solely on this strategy in the North Sea, says Read. North Sea production costs are the highest for any region in the world-in 2000, they averaged $4.24 per BOE. The lofty costs result from several factors over which independents can exert little or no control: a harsh environment, high labor costs and intricate government regulations. Rather, independents must focus on projects where they can use existing infrastructure and where they can own controlling positions in the assets, he says. "The key is the ability to determine their own direction and not be at the mercy of others."

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