Power struggle sees switch away from oil: Rising interest in gas is helping to maintain enthusiasm through tough times, says Martin Whitfield

Estimates of North Sea reserves and production tend to concentrate on oil, with the expectation that Britain will remain a net supplier into the next century. But it is the output of gas that will dominate activity in the next 10 years as production rises and new beds are developed. Many forecasters see a doubling of output by 1998/99.

The attractions of gas as a fuel for power generation are underlined by the fact that the National Grid Company has received applications to receive electricity for 27 new gas-fired stations. Prices for available gas have risen by as much as 50 per cent.

Moves within the European Community to liberalise the energy market could unleash a new centre of demand following the possible construction of a pipeline between Britain and the continental gas grids. A pipeline would also assist in the transfer of gas from Norwegian gas fields to Britain and beyond. Such expanding prospects have led to far greater interest in gas reserves and to the recovery of gas in associated oil fields. Many gas fields have been added to the 'probable' list of North Sea developments.

Neil Thomas, analyst with County NatWest WoodMac in Edinburgh, believes that British demand will be unable to cope with the potential volumes of gas on offer even given the rapid construction of power stations.

Gas accounts for more than half of the recoverable reserves in his company's summary of probable field development. For fields added to the list this year, the ratio is more like 2:1 in favour of gas, compared with the figure of 40 per cent for the North Sea as a whole.

The interest in gas is helping to maintain the industry's enthusiasm at a time when activity is continuing to slacken following the boom years of 1990/91. Capital expenditure, although falling from the peak, is still likely to be around pounds 5bn until 1995. Such a level of investment is a far cry from the collapse in activity which followed the dramatic fall in the oil price in the mid-1980s and could provide a steady workload throughout for the next few years.

The fall from the peak, however, has been enough to have had a severe impact on several contractors, service companies and fabrication yards. The industry estimates that 120 wells will be drilled this year, compared to 170 last year and 210 in 1990. A similar level of activity is predicted for 1993 as drilling is always the first casualty of any corporate belt-tightening. Rates for semi-submersible drilling rigs - the industry standard in the North Sea - have slumped from dollars 50,000 a day to dollars 25,000 a day within a matter of months. Some contractors are believed to have taken work on at a loss just to keep assets working.

Atlantic Drilling announced in the summer that it intended to withdraw from the rig market because of the low rates available. Two of its three semi-submersibles in the North Sea are stacked in Nigg Bay with no plans for work until 1994 at the earliest. Other contractors have moved their rigs to more favourable waters off Brazil and Trinidad.

Fabrication yards do not have the option of floating their business around the world's offshore oil fields but managements have been casting around to find work to replace construction contracts either completed or nearing completion.

The large volume of construction work involved in recent field development is tailing off. New developments tend to use more of the existing infrastructure with subsea structures linking to existing platforms.

Observers expect further redundancies on top of the 1,300 announced by McDermott's yard at Ardersier. About 300,000 jobs are dependent on the North Sea oil and gas industry and it is responsible for about 20 per cent of engineering manufacturing.

A conference jointly organised next month by the Department of Trade and Industry, Grampian Regional Council, Aberdeen District Council and Grampian Enterprise is to attempt to concentrate minds on the export potential of the oil industry, especially its subsea technology and experience of new drilling methods.

Tim Eggar, Minister for Energy, will initiate a debate on cost competitiveness at a time when oil companies have greater options to tender for work throughout Europe.

Oil companies have seen operating costs per barrel of oil escalate from pounds l50 in 1980 to more than pounds 3.25. The largest increase came immediately after the Piper Alpha disaster as new safety equipment was installed but costs have failed to fall back sufficiently.

Coupled with high capital investment and relatively low production, many oil companies are suffering from cash-flow problems that are not expected to improve until the mid-1990s when output rises. Companies with newer developments will reap the benefit of lower operating costs associated with more technically advanced equipment. The expected price of development of new North Sea projects is about pounds 2.75 per barrel.

More established companies face either escalating costs or the heavy price of redevelopment.

Shell has taken the second option for its huge Brent field where pounds 2bn is being spent on upgrading to take advantage of a change in the balance of production between oil and gas. As the field matures - it has been on stream since 1975 - more gas is bring produced and will eventually overtake the output of oil.

The expected rise in production of both oil and gas in the mid-1990s will improve the industry's cash position with the prospect of further exploration and development being undertaken.

Mr Thomas predicts the period will be crucial the future of the British oil and gas sector.

'Oil companies tend to use their cash in the industry they know best. They will be looking for the best place to invest around the world. It could be the low-risk, low-reward, North Sea or it could be the CIS or South America.

'If the North Sea is looking attractive, it will be a question of either buying smaller companies and their acreages or going ahead with their own exploration and development,' he said.

One guide to future prospects could come later this year with the results of the 14th round of offshore licensing. Groups of licences have been offered in two groups in the main mature areas of existing fields and on areas on the margins of developed blocks.

Mr Eggar said recently that he had been encouraged with the initial response to the round and that successful exploration would establish new reserves that would ensure Britain being a major oil producer for at least 25 years.

A third stage in the round comes in November when truly frontier blocks will be on offer where no previous exploration activity has taken place and there is no existing infrastructure.

About 45 per cent of known reserves of oil and 33 per cent of gas have been exploited and the years of Britain's position as a significant energy producer continue to be extended.