Total Says New Discoveries Can Beat North Sea Field Decline

By Tara Patel

June 1 (Bloomberg) -- Total SA, Europe’s third-largest oil company, is calculating investment in North Sea fields will make it the U.K.’s biggest oil and gas operator within three years, challenging top-ranked BP Plc on its home turf.

“Our strategy is more aggressive than other companies,” Roland Festor, managing director of Total E&P U.K. Ltd., said in an interview May 28 in Aberdeen, Scotland. “We don’t have a strategy to grow by acquisitions but by exploration in our hubs.”

The fourth-largest producer in the U.K. is aiming to drive its costs in the region down, reducing spending by about one quarter this year as it pushes ahead with North Sea expansion even amid a recession which has hurt demand for crude oil and natural gas.

Total has lowered its spending cap for development of the Laggan and Tormore fields west of the Shetland Islands by at least 10 percent to 1.8 billion pounds ($2.9 billion) as part of a drive to save money. It remains committed to investment amid a natural long-term decline in output from the North Sea.

“We had a pre-crisis budget of 2 billion pounds and now have to get it down,” Festor said, adding the company is taking bids on work for the project, which could start pumping natural gas in 2014, later than planned. Total had said in February it could spend as much as 2.5 billion pounds developing the area and expected first gas output by mid-2013.

Output Trends

Once the world’s fourth-largest oil and gas producer, the U.K. has been in decline since 1999 and is now seeking ways to keep companies from abandoning the North Sea, where costs for exploration and production are among the highest in the world.

While BP’s development spending in the North Sea rose 13 percent to $907 million in 2008, its output of liquids fell 14 percent and gas by 1 percent over the period. The London-based company, still the biggest producer in the U.K., made two discoveries at South West Foinaven and Kinnoull, and said in its annual report in March it is now concentrating on “in-field drilling and selected new field developments” in the area.

Royal Dutch Shell Plc, another major operator in the region, sold some U.K. assets last year, including its share of the South Cormorant, Cormorant North, Tern, Eider, Kestrel and Pelican licenses, non-operated interests in the Hudson license and interests in the Brent System and Sullom Voe terminal. It also divested its share in the Dunlin Cluster in the North Sea, according to its annual report released March 17.

Recession Effect

Oil production from mature fields declines naturally at rates that depend on their size, location and whether investment is made to counter the process, such as by drilling new wells.

North Sea fields have some of the highest natural decline rates while those on the Middle East have the lowest, according to the Paris-based International Energy Agency’s 2008 World Energy Outlook. North Sea fields have declined on average by 11.5 percent a year since peak compared with a rate of 3 percent in the Middle East, the report said.

This is one reason European oil supply is expected to fall to 2.2 million barrels of oil per day in 2030 from 4.9 million barrels of oil per day last year, the IEA said.

Lower spending on exploration and production due to the economic slowdown has hit the North Sea particularly hard where “exploration drilling fell by 78 percent in the first quarter of 2009 almost twice as fast as the overall drop in drilling,” according to a separate IEA report published this month for a meeting of the Group of Eight industrialized nations. “For the industry as a whole there is a risk that decline rates could rise as a result of capital spending cuts.”

New Wells

Hoping to buck the trend, Total said its U.K. operated production this year is likely to rise to 274,000 barrels of oil equivalent a day from 267,000 last year.

Nevertheless, the French company has lowered investment in the U.K. this year and is cutting back spending on projects such as new offices in Aberdeen, Festor said. “We’ve postponed everything not linked to production.”

Total produced about 10 percent of the U.K.’s oil and gas between 2004 and 2008, and its output from the region accounts for 9 percent of the company’s daily production. The U.K. is the third-largest contributor to Total’s output after Norway and Nigeria, according to a company presentation in February.

To raise output, company executives said plans are moving forward for new wells at the Elgin and Franklin fields, about 240 kilometers (149 miles) from Aberdeen, and the new Laggan- Tormore development west of Shetlands.

Longer Life

Elgin Franklin, which began producing oil and natural gas in 2001 and delivers about 7 percent of U.K. overall output, is the deepest producing field in the North Sea and the largest so-called high pressure, high temperature development in the world.

Capable of daily production of about 220,000 barrels of oil equivalent, Elgin Franklin was initially expected to contain about 700 million barrels of oil equivalent and last for about 25 years. This estimate has been increased to about 1 billion barrels a day with a field life of 30 years as new wells have been added.

Maintaining current production will be possible “until at least the middle of next year,” said Thierry Bourgeois, Operations and Geosciences Director at Total E&P U.K., during a press visit to the platform.

New discoveries at the West Franklin part of the development as well as at the nearby Kessog and Corfe prospects could extend Elgin Franklin’s production life, Bourgeois said.

Pressure, Temperature

“We are relatively optimistic,” Festor said of continuing tests at Kessog, in which Total acquired an interest from BP and would become operator if the development goes through. “By the end of the year we will have a good idea and then will decide.”

Festor said Total has developed an expertise it wants to export for high-pressure, high-temperature wells worldwide from working at Elgin Franklin.

Further north, Total has extended the life of the Alwyn field over the past two decades through satellite discoveries, the latest being last year’s addition of output from the Jura field, and plans to add a discovery at Islay to the hub.

Located in a far harsher and more remote area of the North Sea, Laggan and Tormore are “the future of Total U.K.,” Festor said.

The fields are 140 kilometers west of Shetland, requiring underwater pipelines to transport natural gas to a planned processing plant at Sullom Voe Terminal and another connection to the existing Frigg U.K. pipeline to St. Fergus.

To contact the reporter on this story: Tara Patel in Paris On tpatel2@bloomberg.net