North Sea oil is booming again – for the minnows

Yesterday’s announcement by an oil exploration company of a big find under the North Sea coincides with a record response by bidders to an auction of drilling licences.

EnCore Oil, the lead company in a consortium drilling for oil east of Scotland, announced its Catcher well could contain up to 300 million barrels – a number that could rise “very significantly” after further exploration. The find bears comparison with the last big North Sea prospect, the one billion barrel Buzzard field, which was discovered in 2001.

Meanwhile, energy minister Charles Hendry announced that a record number of applications had been received for the 356 new UK licences to drill for North Sea oil. He would only reveal that the bidders were “large, medium and small players” along with a “good proportion of traditional players”. The winners will be announced later in the year.

All the positive news suggests that the North Sea – long thought to be in decline – is on the cusp of a new boom. Sadly, the reality is quite different.

Encore Oil may have enjoyed a 50 per cent increase in its share price, but oil production in the North Sea peaked long ago. In 1999, it produced 2.5bn barrels of oil. Today the figure is more like 500 million.

Oil & Gas UK, the industry’s trade association, estimates Britain has 24bn barrels of oil left to extract, although proven reserves are closer to 3.4bn. While far from insignificant, it pales in comparison to the 267bn barrels which are believed to make up Saudi Arabia’s reserves.

But the North Sea has one thing in its favour: the depth of the water. Although one of the most promising prospects – West Shetland – is in 1.2km of water, the southern gas basin off the Netherlands is just 30m below the sea’s surface. Encore Oil’s new Catcher find is under 100m of water – promising a far less risky extraction operation than BP’s doomed 1.5km-deep Macondo well which is currently spewing oil into the Gulf of Mexico.

It could take 20 years to extract the remaining 24bn barrels of oil under the UK continental shelf. But much of that could be in relatively small reservoirs, which while overlooked by giants such as BP, are highly attractive to minnows such as EnCore Oil. These companies buy drilling licences, bear the cost of exploring the seafloor and sell on the rights to extract oil when they make a valuable discovery.

Alan Booth, CEO of EnCore Oil told the Daily Mail: “There's probably quite a lot of oil left to be found and smaller companies are prepared to take bigger risks to find it.” ·