Is the UK's oil and gas industry worth fighting for?

North Sea Oli Platform
By Jeremy Cresswell, CA magazine

11 November 2015

Rather than dreaming about a rise in prices, oil and gas organisations need to deal with present realities and adapt to survive, argues Jeremy Cresswell.

Rough times in the North Sea? Ask anyone in the significant UK oil and gas centres and the answer is a resounding yes, with a current estimate that more than 65,000 jobs have evaporated UK-wide.

The industry doesn't believe that the oil price slump will end any time soon either. Analyst firm Wood Mackenzie forecasts that around 140 UKCS fields will cease over the next five years, even if oil prices return to $85 a barrel. And yet Offshore Europe 2015, the industry’s conference and exhibition, was the second best attended on record.

There was also an acceptance among delegates that the time had come to roll up the sleeves and build the next future on present realities, not on the dream that there might shortly be a return to price levels of $100 and more.

There are an estimated 20bn or so barrels still to extract, so long as the UK North Sea can be made competitive despite its high cost base.

Efficiency Task Force (ETF)

Offshore Europe was also the venue for the launch of the ETF, set up by trade body Oil & Gas UK (OGUK). The latest in a number of steps taken to tackle the UK industry’s problems, the ETF is led by John Pearson, whose day job is as group president Northern Europe and CIS (Commonwealth of Independent States) at Amec Foster Wheeler. He is also a co-chair of OGUK.

There are three main strands to the ETF’s mission:

  1. Co-operation, culture and behaviours: To deliver the behavioural change this sector needs to survive.
  2. Standardisation: Simplifying the way business is done.
  3. Business process: An area where significant savings are achievable.

This mission is about achieving cohesion. The alternative is likely to see operators seeking to place unacceptable pressure on the supply chain, as happened during the last major downturn, with a number of prominent contractors lashing out in turn at the operators.

Pearson says: “Fundamentally, the problem isn’t the oil price. We did this to ourselves; nobody forced us to be like this. Is it fixable? Absolutely, without a shadow of a doubt it’s fixable. Look at other industries; we’re not the first that has had a moment like this."

“We collaborate a lot more than people think but we need to take that to a completely different level. The key people do understand, including I would say, DECC [Department of Energy and Climate Change], OGA [the Oil and Gas Authority] and HM Treasury. They get it now in a way that I’ve never seen before. What we have to do is translate that into practical actions. But it’s going to need serious action.”

Investing in oil and gas

Even though a large part of UK oil production is currently loss-making, the North Sea is still seen as a place to invest. That is important for the supply chain, even if other, mostly less impacted, oil provinces now present better opportunities.

According to Rob Turner, director of energy told an industry forum on 6 October that there was evidence the industry was taking a creative approach to reviving the market for upstream assets.

But Turner also warned that the oil and gas industry was afflicted by persistent pessimism, largely due to unresolved price and cost pressures. Nonetheless, the ingredients were in place for investment from private equity, banks and even hedge funds.

“There are deals on the table and a heck of a lot of capital pointing at the North Sea,” he said. “I do think there’s momentum and there’s immensely busy times for the North Sea... there’s a lot of innovation and creativity that will unlock investment.”

Adjusting to new market dynamics

Nick Dalgarno, co-head of eastern hemisphere corporate advisory at Simmons & Company International, points out that M&A deal activity had been much reduced by the oil price collapse, with transactions also taking longer to complete.

“There has been a 10-month hiatus, as sellers and buyers have adjusted to the new market dynamics,” says Dalgarno.

"Uncertainty over bank lending parameters has also fed into the slower deal pipeline making it harder to gauge the degree of leverage that can be applied in deals.

“In an industry desperate to reduce costs and increase productivity, operators are far more receptive to new approaches from the service sector. Companies will be actively seeking to acquire competitive advantage and market share through the quality and depth of their technology offering.

Maximising the potential value of the North Sea

Meanwhile, Deloitte’s survey of oil and gas operators and services companies has found that a lack of effective supply chain collaboration means everyone is missing out on maximising the remaining potential value of the North Sea.

In the survey, 74 per cent of respondents said collaboration was an integral part of their day-to-day business but only 27 per cent reported that the majority of their efforts resulted in a successful outcome.

Cost reduction was found to be the main driver for collaboration today, with nearly a third (31 per cent) of company respondents in agreement; 90 per cent said that supply chain collaboration is set to play a greater role in their company’s success.

Nick Clark, a director in Deloitte’s consulting team and contributor to the research, says: “While it’s encouraging that collaboration is seen by the industry as an important tool...there’s clearly work to be done, and fast, given the current tough environment.”

Craig Shanaghey, director of operations for late life and decommissioning at Amec Foster Wheeler (AFW), says his company began working the problem when the oil price was $125 per barrel. The slump has served to sharpen focus and accelerate the work, he adds.

“Although we are seeing the short-term focus being on transactional cost-cutting and efficiency, not value, AFW intends to be ‘ahead of the game’ and deliver a transformational solution to the market. These solutions need to challenge the traditional boundaries in terms of the supply chain, how we engage with our traditional customers and our financial model.”

Is the North Sea worth fighting for?

Speaking at Offshore Europe, Bernard Looney, BP’s COO, production, said that oil and gas is still a growth industry worldwide and that demand will be a third higher in 2035 than today, with 1.6bn more people needing energy.

The North Sea is still important as a global asset, he said, not least the supply chain that already works around the globe.

“In Aberdeen we have a highly skilled experienced workforce, the envy of the world. The North Sea has extensive infrastructure in place and reservoirs,” said Looney.

“Many people ask: ‘Is the North Sea worth fighting for?’ For us, absolutely it is. We’ve come through periods of low oil price before...our industry has always found a way.”

This article has been produced in association with Maclay Murray & Spens LLP (MMS).

The full version of this article appears in the November edition of The CA.

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