Dynamics of petroleum industry investment in the North Sea

Originally presented as the author's thesis, (M.S.) in the M.I.T. Alfred P. Sloan School of ManagementThis investigation has attempted to provide acurrent estimate of the oil potential of the northern North Sea from which estimates of exploration investment, development investment, and accruing cash-flows can be derived. Current proven reserves are estimated at 29.4 billion barrels oil equivalent, of which 22.6 billion barrels are oil. Of the 59 discoveries documented, 8 can be classed as true gas accumulations. Undiscovered potential for the area of study is estimated at 24.3 billion barrels, giving a most probable ultimate recoverable reserve of 53.7 billion barrels oil equivalent. Depending on minimum commercial field size, recoverable oil reserves should vary between 33.7 and 39.2 billion barrels. Current development of 14.8 billion barrels of recoverable oil involves an estimated capital investment of $16.8 billion dollars. Peak daily production is estimated to occur in 1981 at 4.12 million barrels daily. An additional 4.6 billion barrels of recoverable oil is in various stages of evaluation and will probably be developed, yielding a total of 19.4 billion barrels of reserves and a total peak production of 4.95 million barrels per day in 1981. Capital investment is estimated at $27 billion dollars for the total. In order to develop current plus discovered plus future discoveries, private industry is estimated to require between $56 and $70 billion dollars. Most of this investment, including approximately $6 billion additional outlay for exploration, is anticipated to occur between now and 1985. Peak production of 6.58 to 7.85 million barrels per day is estimated to occur around 1986, representing a total reserve development of approximately 34.4 to 38.4 billion barrels of oil. Private industry is anticipated to earn between $30 and $56 billion dollars whereas government take, assuming a lower discount rate, is estimated to run between $83 and $222 billion dollars. Critical to this analysis are assumptions about host-government tax policy and the world price of crude oil, especially as pertaining to "marginal" North Sea fields. Utilizing an econometric model developed by the Supply Analysis Group of the M.I.T. World Oil Project, investigation of discounted cash-flow profiles for various field sizes indicates that access to crude supply and development of subsequent discoveries appear to be the primary economic incentives for continuing to operate smaller fields after peak production is obtained. Tax policy and high operating costs relative to productive capacity tend to make small fields less attractive investments. Finally, it is patently obvious that very high per-well productivity is essential for viable development of North Sea fields under current economic, political, fiscal, and technical constraints