By Steve Gelsi

The North Sea has long held Western Europe's richest trove of hydrocarbons, but now 50 years after the first major discovery in the region, production has been in decline.

In a prime example of the challenge that aging oil fields present for energy giants, North Sea production is expected to drop by about 300,000 barrels a day in 2009 and 2010, a scenario that would put daily output below 4 million barrels.

Patrice de Vivies, senior vice president in charge of Northern Europe for Total SA , said the Paris-based oil major will manage to keep production about flat from the North Sea this year. De Vivies acknowledges the challenges posed by declining wells, but the region and the Arctic environs to the north may offer a way to slow down and even possibly reverse the trend.

"There is, of course, a decline, but there is still potential," de Vivies said in a phone interview with MarketWatch. "That's the way we see it. It will decline a little bit, but we will mange to develop new fields to slow down the declines."

Total and most other players in Big Oil now find themselves in hot pursuit of drilling in areas in some of the coldest and most forbidding places on the planet. With capital budgets reaching well into the tens of billions of dollars, Western oil giants continue to lay out plans for the North Sea, a region that traces its roots to the 1959 discoveries in the on-shore Groningen gas field in the Netherlands.

The surprisingly vast resource at Groningen a generation ago led oil companies to experiment with offshore exploration nearby.

BP is widely credited with making the North Sea's first major discovery in 1965, with larger-scale production taking off by the 1970s. Total first became involved in the region in 1962.

The platforms built for the North Sea's shallow continental shelf of 1,000 feet of water were revolutionary at the time, but they're considered quaint by the standards of today's monster rigs able to drill in water a mile deep.

After the 1973 oil embargo, the importance of the North Sea grew as a way to reduce imported oil from the Middle East, with healthy payoffs for years. But now with oil getting somewhat harder to find, exploration has turned further north.

While the U.S. shies away from developing some of its Arctic resources, Russia moved late last week to open up waters north of Siberia for exploration with major oil companies.

But there are no sure bets. Total's Victoria natural-gas prospects in the Norwegian Sea were initially thought to contain as much as 90 billion cubic meters of the fuel, but they're now believed to be closer to 20 billion to 60 billion, Norwegian officials said last month.

De Vivies said the company plans to continue work on Victoria.

In another recent deal in the icy north, Total said it was awarded a 40% interest and operatorship at production license PL 535 in the Barents Sea, with E&P Norge, Aker Exploration, Rocksource and North Energy each holding 20% stakes in the exploration license.

In August, Total said it's likely to move forward toward fresh production at its Hild site, which dates to a discovery 30 years ago. Total is the operator of Hild, with StatoilHydro holding a 21% stake and Norway's Petoro a 30% share.

De Vivies said the company is moving ahead with its first well at the Hild site, with production expected by 2014.

New advances in seismic imaging used to search for hydrocarbons deep underground have improved prospects for the discovery, which has been untapped thus far.

All told, Total counts 335,00 barrels of oil equivalent production a day in Norway in 2008, through shares in 35 fields on the Norwegian continental shelf.

"We intend to stay in the North Sea, and we are looking for other opportunities to grow in Norway," de Vivies said. "We could sell some non-core business to optimize our portfolio, but the strategy is to try to grow in North Sea."

He touted new techniques for searching and extracting hydrocarbons as fueling new efforts. "People tend to think that the North Sea is finished, but not at all," he said. "It is true that globally the traditional oil and gas resources are declining, but what we see there is a lot of potential. We see objects that we didn't see before because of the better technology."

Still, some of the assets in the North Sea have been getting passed around lately as the cost of developing new resources climbs. Italian integrated-energy company Eni has put a package of North Sea interests on the block, including interests in 30 fields, while others have drawn interest from Sumitomo, according to reports.

BP set the tone with a high-profile deal in 2003, when it sold its Forties field to Apache Corp., the U.S. independent producer.

Jeff Friedman, senior market strategist for Lind-Waldock, a futures broker within MF Global, said declining oil fields in the North Sea and elsewhere are already baked into current oil prices, but further development of the region could help the long-term picture in energy markets.

Some of the operators are selling out older fields to overseas sovereign funds, which have the ability to bring more capital to bear to maintain production, he said.

"Long term, it would be very good for the energy market as a whole," said Friedman, who held out the possibility that inflation and other changing economics could raise the stakes for North Sea oil when prices break through $100 a barrel again in the next couple of years. The energy market could absorb triple-digit prices without a significant drop in demand, Friedman said.

North Sea production is expected to fall by about 300,000 barrels a day both in 2009 and 2010, according to September estimates from the U.S. Energy Information Administration. Still, the total production of the region will remain at about 4 million barrels a day, comprising a significant chunk of the world's average production of about 85 million barrels a day.

Many of the new U.K. discoveries average between 15 million and 26 million barrels of oil equivalent, too small for some oil majors.

Christophe de Margerie, the chief executive of Total, has been vocal about hefty price tags sought by oil-service giants in the North Sea as well as onerous production taxes, as companies scaled back spending plans in the face of the global recession and a supply glut in recent months.

"We have plenty still to do as majors in the North Sea, but not at any price," de Margerie said last month at the Offshore Europe conference in Aberdeen, Scotland. The French giant's management met last month with U.K. Secretary of State for Energy Lord Hunt to complain about taxes hurting the region's growth prospects.

There are potentially 15 billion to 25 billion barrels of reserves yet to be produced from the North Sea, according to U.K. government figures cited in recent reports. Much of it lies in areas that carry higher costs for tapping into high-pressure, high-temperature reservoirs in deep water.

 
Total Eyes Shetland Islands

Marking the vast open water between the U.K. and Norway, the Shetland Islands remains a point of interest for Total, which plans to continue its nearby Laggan-Tormore project and which on Sept. 9 took an operating stake in the Tobermory discovery, also near the Shetland Islands.

Total paid an undisclosed sum to Mobil North Sea LLC, Marathon Oil and Anadarko North Sea Holding Co. for a 44% stake in Tobermory. Total E&P U.K. will become the operator of the license.

Among other projects brewing in the North Sea, Exxon Mobil Corp. said it would resume drilling at Beryl, with plans to hire 80 people and spend around $200 million. The Beryl area fields are expected to achieve total cumulative production of 1 billion barrels in 2009, 33 years after production began.

Even as the fortunes of the North Sea may decline for oil and gas over time, the region also promises to offer value as a future storage area for carbon-dioxide emissions. U.K. is hosting the Carbon Sequestration Leadership Forum on Oct. 13, as discussion ramps up around multilateral climate-change talks in Copenhagen later this year.

Still, the problem of dwindling reserves remains for the world's energy giants as economic activity picks up in 2010 and beyond, and demand for fossil fuel to power industrial activity increases once again. Overall, Big Oil "will struggle to grow production to 2020," Credit Suisse analyst Chris Neale said in a recent note.

Natural gas will increase to more than 50% of production by 2015. "The sector is shifting to longer-life, lower-return production from LNG, heavy oil and non-conventionals," Neale said. "Pressure to sanction identified growth projects will soon intensify, we think."

Neale said in effect, oil companies are "running to stand still" as they move to make up for declines in production.

And the search for fresh prospects will move further north. In a possible boost for oil companies, Norway's victorious center-right electoral coalition plans to open the Lofoten and Vesteraalen pristine offshore areas above the Arctic Circle to oil activity in coming months.

Steve Gelsi; 415-439-6400; AskNewswires@dowjones.com