High Costs, High Stakes on the North Sea

Swept by waves up to 90 ft. high and wind gusts of hurricane velocity, Europe's North Sea is one of the world's most inhospitable places to look for oil and gas. Since drilling began there more than a decade ago, in a gamble by five nations to wrest black gold from Northern Europe's front yard, at least 21 lives have been lost in drownings and other mishaps. The North Sea has also been terribly unforgiving of mechanical mistakes. Supporting buoyancy tanks ruptured last year on a new gas-production platform, sending its legs crashing to the seabed--in the wrong place. All efforts to reposition the badly damaged platform have failed, and it will probably have to be blown up to avoid becoming a nuisance to shipping. Estimated cost of the job: $100 million.

Such setbacks help to make North Sea's economic climate as treacherous as its meteorology. Development costs, paced by outlays for labor and expensive equipment (see color), have in many cases doubled, or even tripled, in the past two years. Through 1980, costs could reach $35 billion for Britain and Norway alone, or $11 billion more than the U.S. spent to land a man on the moon. Major U.S. oil companies, including Chevron, Amoco, Exxon, Texaco and others are drilling in the North Sea. But rigs are now in surplus, and the pace of exploration is expected to slow. One Norwegian oilman says flatly that "the North Sea is not a bonanza."

Buried Treasure. But the oil exploiters are pressing ahead anyway, perhaps with less euphoria than in earlier years but with more experience, maturity and confidence. Though only a trickle of oil is being pumped now, oilmen expect crude to flow in ever increasing quantities from an undersea supply estimated at 40 billion bbl., two to four times the recoverable reserves from Alaska's North Slope. Some experts say the total could be 70 billion bbl.--roughly equal to the so-far proven reserves of Kuwait--or even 150 billion bbl.

Whatever the figure, the stakes are high. In Britain, North Sea oil stands for nothing less than national survival, or so politicians have maintained for a decade. It offers an opportunity for Britain to become not only self-sufficient in energy but also a modest exporter, probably in the 1980s, pumping oil revenues into its sick economy, wiping out its balance of payments deficit and reversing 30 years of economic decline. Critics say the oil will afford no such panacea; they assert that Britain's problems run deeper than any cure offered by the North Sea. But even they concede that the oil could bring an important economic pick-me-up.

For the Norwegians, already rich in money and energy supplies, North Sea oil means a chance to become richer still as the "blue-eyed Arabs of the North." By the 1980s, Norway could be producing 1.8 million bbl. daily--ten times its domestic needs--and exporting as much oil as Iraq and Libya do now. For the other North Sea participants--Denmark, The Netherlands and West Germany--the waters already promise abundant oil and natural gas. It was in Holland, in fact, that a giant onshore gas discovery in 1959 pointed rightly to further riches under the North Sea.

Oil began flowing to Britain in June, arriving by tanker from the Argyll field. Energy Secretary Anthony Wedgwood Benn, raising a flask of crude on high, called the event cause for "a day of national celebration." Next month oil should begin moving from Britain's promising Forties field through a 120-mile pipeline to Cruden Bay on Scotland's east coast. Some time during the next few weeks, crude will begin arriving at Teesside, England, through a 220-mile pipeline from the Ekofisk field in Norway's sector of the North Sea. The oil belongs to Norway but is being pumped ashore to Britain; a deep undersea trench has prevented construction of a pipeline from Ekofisk to the Norwegian mainland.

Expensive Barges. Even before oil begins flowing heavily, the North Sea's prospects are spurring radical changes in oil technology. When exploration began, the most important model of an underwater operation that oilmen could go by was the Gulf of Mexico, which has been dotted by U.S. drilling and production platforms for a generation. The North Sea soon turned into a stern teacher. Laying pipelines, for example, called for bigger, more sophisticated and more expensive barges than any ever used in the Gulf. Because choppy seas often prevent tanker loading, some method for temporarily storing great quantities of oil at sea was called for. The result: CONDEEP-- a giant concrete-reinforced production platform with huge storage tanks. A Norwegian innovation, two CONDEEPs have been put in place in the British sector; each cost $300 million and has a storage capacity of 900,000 bbl. The tow alone, 163 miles to one field and 225 miles to another, cost $2.7 million per unit -- the biggest and most expensive tugboat operation in history.

Nowhere, though, has the North Sea's impact been more evident than on the political and social landscape. Scotland has turned into a tartan Texas--with an ego to match. Scotland wants the oil landing on its shores for itself, and the issue has reopened an old wound: Scottish nationalism (see box).

Some 7,000 foreigners, mostly Americans and French, have moved to the ancient 8th Century port city of Stavanger since it became the center of Norway's oil industry. Housing is in short supply, and high-rise apartment buildings are going up to accommodate a metropolitan population growing at 2% to 3% a year; it now stands at 150,000. Wages are high--for some skills twice those in the U.S.--but so are prices. Scotch costs $3.50 a shot, discouraging noisy sprees by roustabouts and divers and keeping Stavanger almost as quiet and staid as ever. Because of Norwegian taxes, a Toyota shipped from Japan costs $9,500, as much as a fully equipped Cadillac in the U.S. Cigarettes are $1.50 a pack, and groceries are double U.S. prices. Don Greenlee, 47, a Texan production superintendent for Phillips at Ekofisk, takes the prices in stride. Says he: "It costs more to live here, but there are not as many things to spend your money on. Financially, we probably make out a bit better."

Costly Dip. With so much riding on North Sea oil, each government is moving to make sure it gets its share of the riches. Britain has been plagued as much as any other European nation by the quintupled price of Middle Eastern crude, on which it is so dependent. Yet, ironically, it now has a stake in high world oil prices. Britain's North Sea oil is about 15 times more expensive to develop than Middle Eastern crude, so even a dip of a dollar or two in the world oil price, to $11 or $12 per bbl., could render the oil from some fields unprofitable. Says Oil Expert John Lichtblau: "It's no wonder that the industry joke at the moment has Harold Wilson joining Britain to OPEC and asking for a rise in the price of oil."

A drop in the world price is not likely; on the contrary, OPEC will probably raise prices another 12% this week at a meeting in Vienna. But Britain is taking steps to secure all the supplies it can, fast. Earlier this year, the government said it would set up the British National Oil Corp. to compete with private companies in exploration, production and refining. Presumably, it will move into marginal fields now avoided as uneconomic by private companies. Currently, anything smaller than 100,000-bbl.-per-day production capacity is regarded by most companies as not worth their commercial effort.

Britain has also proposed buying a 51% government interest, or "participation," in private companies' ventures in the North Sea. Supposedly, this would eventually steer half the oil revenues and profits to the nation's treasury. But oilmen, and even a few government officials, see little point to participation. Britain can get its proper share of the spoils through tax and conservation laws already on the books, or headed for passage, without buying control.

Norway's policy has been to tap its oil wealth slowly, so as not to bring in gushers of money all at once and disrupt the economy. Unlike Britain, though, Norway has firmly made up its mind as to what role the government should play. Through Statoil, the state oil company, Norway controls most of its oil industry. It buys up to 75% interests in production ventures; Statoil and Mobil along with other oil companies are partners in Statfjord, Norway's biggest oilfield yet (3 billion bbl. in reserves). Headed by Arve Johnsen, a 41-year-old economist and lawyer, Statoil aims to become a fully integrated company, exploring, drilling, producing and refining oil. It already owns participation rights in 38 exploration areas, or "blocks," off Norway's coast.

Newer Frontier. There is little doubt among oilmen now that the North Sea will pay off for its biggest gamblers, although just how much remains to be seen. For whatever oil it has left over for export, Britain should find a ready market in Western Europe; about one-fifth of Europe's energy may eventually come from the North Sea. Norway is already feeling pressure to speed up development from industrialists eager to spur the economy, and it probably will do so in the chillier, deeper and more treacherous waters above the 62nd parallel where even richer oil deposits may lie. Already there is preliminary exploration activity far from the North Sea--running off the Irish coast, even north into Greenland. Still a frontier itself, the North Sea is already serving as a steppingstone to another.

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