Tuesday, September 16, 2014

Scotland's Oil and Natural Gas

While most people outside of the oil industry tend to think of the Middle East when they think of the world's oil producing nations, in fact, Scotland is a significant producer of both oil and natural gas.  Scotland is the largest producer of oil in the European Union, producing 674 million barrels of oil equivalent (BOE) in 2010 which was comprised of 455 million BOE of oil and 219 million BOE of natural gas from fields in the North Sea on the United Kingdom Continental Shelf (UKCS).  The total tax revenue generated by Scotland's share of the hydrocarbons produced in 2011 - 2012 was £10.6 billion.  In 2011, the oil and gas sector contributed around £25 billion or 17 percent to Scotland's GDP. 

Here is a table showing the largest oil producers in Europe in 2010 helping us put Scotland's production into perspective:


In total, Scotland produced 36 percent of Europe's total oil and natural gas produced in 2010.

Here is a map showing the continental shelf territorial boundary between Scotland (in dark blue) and the remainder of the United Kingdom:


Here is a map showing North Sea oil (in green) and natural gas fields (in red) and the pipeline infrastructure that is necessary to get the product to market:


According to research by Professor Alex Kemp and the University of Aberdeen, using the territorial boundaries on the map above, in 2011, 96 percent of total United Kingdom oil production and 52.4 percent of United Kingdom natural gas production took place in Scottish waters.

Let's look at some background information first.  This graph shows how the production of oil in the United Kingdom has risen and fallen since 1980:
  

U.K. production of oil peaked at 2.982 million BOPD in 1999 and has since fallen to its current  (2013) level of 916,000 BOPD, its lowest level in over three decades.

This graph shows how the production of natural gas in the United Kingdom has risen and fallen since 1980:


U.K. production of natural gas peaked at 3.826 TCF in 2000 and has since fallen to 1.359 TCF in 2013, its lowest level since 1981.

Despite being the largest overall producer of hydrocarbons in Europe, the United Kingdom became a net importer of fossil fuels in 2013, the first time that the nation has imported petroleum products since 1984.  Here is a graph showing the United Kingdom production and consumption curves for petroleum and other liquids:


The U.K.'s reliance on imported hydrocarbons will likely continue to grow as aging infrastructure and reservoirs catch up to the oil industry's efforts unless the oil industry invests massively.  The Energy Information Administration expects that U.K. oil production will continue to decline through 2015 because the of the maturity of the existing oil fields and because there are diminishing prospects for new, large discoveries.  According to the Oil and Gas Journal, the United Kingdom had 3.0 billion barrels of proven crude reserves in January 2014, a drop of 4.6 percent from the previous year.

Despite these rather gloomy projections, Professor Alex Kemp suggests that increases in investment could slow the declines, pushing production levels back up as shown on the blue line on this graph:


While proven crude reserves have declined, Kemp's research projects that between 15 and 24 billion barrels of oil equivalent can still be recovered from the United Kingdom Continental Shelf.  His estimates of Scotland's share of the future potential are as follows:

1.) Oil - 98.8 percent of 11.1 billion barrels of oil.

2.) Natural Gas - 60 percent of 5.3 billion barrels of oil equivalent.

In combination, 86.8 percent of total future potential hydrocarbon production would come from Scottish waters.  These reserves could have potential wholesale value of up to £1.5 trillion.  Cumulative Scottish North Sea receipts are estimated to be approximately £41 billion between 2012 - 2013 and 2017 - 2018 if prices for Brent Crude remain at $113 per barrel.

Scotland does have some additional onshore hydrocarbon upside as shown on this map:


Both the Midland Valley and the Tweed area have potential for Carboniferous dry shale natural gas.  Shale testing is still in early phases in the United Kingdom and an 18-month moratorium that was lifted in December 2012 has set the nation behind the United States when it comes to exploration and exploitation of shale gas.

Looking at the example of Norway, a nation that discovered hydrocarbons in their sector of the North Sea at around the same time as the United Kingdom, we find a nation that has managed to put away a "rainy day" sovereign wealth fund totalling $893 billion since 1990, the largest in the world.  While Scotland may still be sitting on a North Sea hydrocarbon goldmine, as we can see from the information in this posting, it is likely a bit on the late side if the leaders of an independent Scotland are relying on hydrocarbon revenues to provide the nation with the long-term economic independence that it is hoping for.