Anthony Hilton: The North Sea energy bubble hasn't burst just yet

In terms of what is important for the British economy, the most important announcement so far this year is nothing to do with global stock market turmoil, or even George Osborne’s belated discovery that we are not in such rude health as he told us we were at the time of the Autumn Statement.

Rather, it is the decision by Premier Oil to take a massive bet on the North Sea.

The oil price has plunged to its lowest for years. The North Sea is in rapid decline as a producer, and is one of the world’s more expensive places to operate.

Premier’s shares have been out of favour and it now has a market capitalisation of just £100 million.

The deal, announced last week, under which it will purchase the offshore oil and gas interests currently owned by E.On, will cost it £120 million. That takes a certain amount of courage.

The rest of us should be grateful, though, because we need that oil and gas. In just two months’ time, the Longannet coal-fired power station — one of the largest in Europe, on the Firth of Forth — will close, turning its lights out years earlier than expected because of the impact of carbon taxes and transmission charges.

It is part of an accelerating trend of coal-plant closure that will remove plant accounting for as much as 30% of UK generating capacity in very short order, with nothing much being built to take its place.

New power plants have to be built quickly, and that means a dash for gas. Renewables cannot fill the gap in time and are too unreliable; nuclear takes forever to build and anyway the country cannot afford another hideously expensive deal like the one into which the Government has entered to persuade the French to build at Hinkley Point in Somerset.

In the unlikely event that it is on time and on budget, that project will still cost more than Crossrail, the London 2012 Olympics and the rebuild of Heathrow Terminal 2 combined — and will produce energy at the equivalent cost in terms of oil at around $180 a barrel.

Nuclear is an argument for another day. The point is that if and when these gas-powered stations are built, they will need to get supplies from somewhere.

The Government appears to have fallen in love with fracking as the source of supply for the future but no one else seems to share its enthusiasm. The process uses vast amounts of water and pumps all sorts of chemicals into the ground at very high pressure.

Although lots of gas may be trapped in the rock formations, it is an open question how much might actually be released even if the environmental concerns are overcome and the process is allowed. Significantly, the major American players have been very slow to apply in the latest round of drilling licences — although they surely would have done so had they thought it was going to be easy.

The message of the Premier deal is that the Government would be better off seeking to manage the decline of the North Sea rather than putting its faith in shale. Many industry experts and geologists believe there is still a lot of gas out there — some waiting to be discovered, even more waiting to be tapped with the use of the much more advanced production technology that has been developed in recent years. All told, it seems a much more exploitable and proven resource than any gas pockets waiting to be fracked under Blackpool.

Note, too, that while the oil price has dropped almost out of sight, the hit on gas has been significantly less. The two are no longer yoked together as they once were.

A significant amount of North Sea production is currently in the hands of various private equity firms, all of which were happy to buy mature assets a few years ago and take on licence obligations to drill because they thought the cost would be more than offset by the healthy cash flows from existing production.

What cash flows, you might now ask. After the oil-price crash, most of these financial engineers are in dire straits and horrified at what they have got themselves into.

They are desperate to sell rather than honour their drilling promises, so we are getting to the point where there are some interesting bargains around.