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Last Updated: Monday, 17 May, 2004, 15:45 GMT 16:45 UK
Oil price boost for North Sea

Sandy Murray
BBC News Online Scotland

The North Sea oil industry could benefit from new highs in the price of oil.

The past week has seen oil hovering close to $40 a barrel, bad news for motorists, for industries which make heavy use of fuel, and for the economy more generally as costs go up.

Oil rig
Existing North Sea installations could find their lives extended

But for regions producing oil, higher prices represent good news.

It could be particularly good for marginal fields in the North Sea, with more of them becoming viable as the value of the oil they contain increases.

Some analysts have insisted that the industry can respond to rising prices much more quickly than is often assumed.

John Roberts, an energy security specialist with Platts Energy Services, suggested that additional production could come on stream rapidly.

Firmer prices

Mr Roberts said: "One reason is that, with prices that are nudging around the $40 mark, that's way above anybody's standard calculation of $20-25 a barrel.

"Exploration costs, maintenance costs, resuscitation costs can now be much more flexible because I think we can assume we're not going to be going back to $20-25; we might, if we're lucky, be going back to around $30 oil."

Oil prices have fluctuated regularly, with increasing political tension often causing a short-term upward spike.

The fact that the price is going up is a reflection of the fact that there is a lot more oil available but that it's more expensive to produce
John Roberts
Platts Energy Services
But there are signs that this could be a longer-term trend towards firmer energy prices.

One year spot oil, traders' best guess about where prices will be in 12 months time, has risen to 15% above its previous peak.

Jeremy Batstone, an economic analyst with the Fyshe Group, highlighted a widespread assumption that dearer oil is here to stay.

He said: "The fact that forward prices are hitting these new highs illustrates that this spike is perceived by the markets to be more structural than the periodic upward moves that have taken place within the past 15 years.

"Put another way, the market thinks that this move in oil is different."

Untapped reserves

An underlying fear for all users of oil is that some day demand will outstrip supply, that effectively the oil will start to run out.

Oil continues to be pumped through facilities such as Grangemouth
John Roberts thinks this is a misunderstanding of how the market works and a failure to realise the extent of the reserves in more difficult geological conditions such as oil sands which could be tapped if the price is right.

"The fact that the price is going up," he said, "is a reflection of the fact that there is a lot more oil available but that it's more expensive to produce.

"For example, Canada is now bringing its oil sands on line, which means its reserves going up from 5bn barrels to 179bn barrels.

"They've come to the conclusion that all their oil sands are now viable and at anything like current prices there's going to be a lot more money going into a lot more projects."

Major producers

However much production from Canada or indeed from the North Sea is increased, it is unlikely to have a measurable effect on the world price of oil.

More likely to curb the soaring price level would be a move by the major producers within the oil organisation Opec to turn on the taps.

But even they have been playing down their influence.

The Algerian energy minister Chakib Khelil warned: "I have always said that Opec has always satisfied the needs of the international market and that price rises on the world market are not at all due to a shortfall in supply."

Oil well
The sun may not yet be setting on UK oil production

If the Opec producers are being honest about their inability to curb rising prices, this increases the likelihood of producers in the North Sea seeing profits to be had in squeezing more oil out of the seabed.

John Roberts said: "What do we normally consider the companies' reckon? Something like $10-12 for the total costs of exploration, production and getting it to market.

"And yet we have oil prices three or four times that.

"You could double the total cost of production and still have a lot of room to spare."

The UK may be, in the industry jargon, a mature region for oil production, but there could be life in the old dog yet.

Oil prices hit fresh record highs
17 May 04  |  Business
UK oil flow to become a trickle
22 Apr 04  |  Scotland
Norway prepares for dry North Sea
14 Apr 04  |  Business
Oil firm's lucky North Sea strike
23 Mar 04  |  Scotland

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